How I Learned to Stop Worrying and Love the Pill: Adaptive Responses to Takeover Law

Abstract

This Article explores the relationship between takeovers, legal doctrines, and private ordering. The authors first argue that the sanctioning of the poison pill and the "just say no" defense by Delaware courts was far less consequential than feared by its critics and hoped for by its proponents. Rather, market participants adapted to these legal developments by embracing two adaptive devices - greater board independence and increased incentive compensation - which had the effect of transforming the pill, a potentially pernicious governance tool, into a device that is plausibly in shareholders' interest. Interestingly, however (and, for critics of the pill, disconcertingly), market participants neither tried to change the law or to opt out of it. The authors then place these developments in a broader perspective. It draws a distinction between bilateral devices - which enjoy support from both stockholders and managers - and unilateral devices and argues that bilateral devices are more likely to be welfare enhancing, more stable, are privileged by Delaware law, and tend to further Delaware's status as leading domicile for public corporations. Greater board independence and increased incentive compensation are examples of such bilateral devices. The authors conclude by examining why Delaware courts embraced the poison pill (at the time, a largely unilateral device, albeit one with bilateral features) and how they should deal with the use of pills by companies with staggered boards.