The Firm and the Nature of Control: Toward a Theory of Takeover Law

Like much of life, corporate governance is about control. One of the most interesting and controversial subjects in corporate law concerns the market for corporate control - the buying and selling of companies. Should boards have the authority to fend off hostile takeover attempts, including the right to "just say no," or should target shareholders have the right to decide whether or not to sell the company to a willing buyer, overriding the board's objections? After nearly twenty years of doctrinal developments since the landmark Unocal case, the Delaware Supreme Court and the Delaware Chancery Court continue to struggle with the proper role of directors and shareholders in responding to a bid for the company. Lawyers, investment bankers, corporate executives, directors, shareholders, and legal scholars also remain unclear about the extent to which directors can impede the decision of shareholders to sell to a bidder. The Delaware Supreme Court's most recent takeover decision, Omnicare, Inc. v. NCS Healthcare, Inc., seems to confuse things only more. This Article offers a model of Delaware takeover law that explains how the leading Delaware Supreme Court takeover cases fit together. Instead of looking at takeover law through the lens of fiduciary duty, this Article's "control-based" approach to Delaware takeover law relies on the theory of the firm, as well as positive corporate law, to understand how control is allocated between the board and shareholders. At bottom, there are separate spheres of board (managerial) control and shareholder (residual) control. The takeover decision occurs at the intersection where board and shareholder control meet and in fact overlaps both spheres. One might think that shareholders have an absolute right to sell to a bidder, since alienability is a characteristic feature of ownership. However, the fact that a shareholder quite literally owns her shares is not enough to resolve the debate over defensive tactics, because the sale of the company can significantly impact the target's corporate strategy, over which the board exercises authority. According to the "control-based" model of takeover law, the extent to which target directors can adopt defensive tactics depends on whether the takeover attempt primarily implicates board control or shareholder control - in other words, on whether the bid raises matters of corporate policy and strategy sufficient to justify the board in blocking shareholders from selling. This general framework is then applied to explain how the leading Delaware takeover cases fit together and sheds light on two particularly important questions: first, what triggers Revlon; and second, can target boards "just say no"? The paper concludes with a blueprint for the future development of Delaware takeover law in a way that would ultimately lead to more shareholder choice and limits on defensive tactics.