Braking the Merger Momentum: Reforming Corporate Law Governing Mega-Mergers

Abstract

This paper articulates a legal reform that is designed to rein in the number of value-decreasing stock-for-stock mega-mergers--the signature transaction of the 1990s and the beginning years of the new millenium--by causing board members to question more critically a mega-merger proposal when they are asked to approve it and even to continue to reevaluate their approval of a merger until its closing. The Article first describes the current merger wave and highlights reports of emerging problems in mega-mergers and the relevant economic data indicating that a majority of the transactions are value-decreasing for shareholders both in the short and long term. It next examines why these transactions are occurring and why they have been little criticized, focusing on their economic and business justifications, the recognizable psychological tendencies (exacerbated in today's merger climate) affecting chief executives, board members and investors and motivating them to propose and approve the transactions, and the journalistic celebration of (and a general political silence on) the mega-mergers. The paper then analyzes the legal foundations of the mega-mergers and observes that merger jurisprudence developing from cases involving hostile takeovers encouraged (i) management to engage in (and boards to approve with little court review) stock-for-stock mega-mergers and (ii) the corporate law bar to reinforce contractual provisions in merger agreements intended to "tie the hands" of boards that enter into the mergers. Finally, the paper proposes a new intermediate standard of court review of board decisions approving stock-for-stock mega-mergers, which should produce a new standard of board conduct in these transactions, addresses several possible criticisms of the standard, and advocates additional nonlegal and legal reforms that would make the standard more effective.