The Power to Decide on Takeovers: Directors or Shareholders, What Difference Does it Make?

This Article analyzes the allocation of the power to decide on hostile takeovers as between directors and shareholders. In it I show who actually has power in a takeover and what factors are at work to grant that authority. Although directors are traditionally considered to be in charge of deciding the outcome of a hostile takeover of a Delaware corporation, shareholders nevertheless may have the power to reverse the outcome through a vote. Even though shareholders sometimes lack the power to determine the outcome of a takeover bid, the reason for that is not embedded in the takeover regime itself. Instead, rules, principles, and practices of corporate law that are external to the takeover regime act as barriers to shareholder power. These barriers, which I designate “corporate law collateral factors,” include staggered boards, limitations to director removability, the inability of shareholders either to call special meetings or to act by written consent, supermajority rules, proxy regimes, and conflict of interest regimes. This Article reports original empirical evidence on the number and market capitalization of Delaware companies that are affected by each corporate law collateral factor and argues that scholars and courts have overemphasized the importance of the takeover regime itself and underemphasized the corporate law collateral factors. Policymakers and interpreters should thus address all corporate law collateral factors within the body of takeover law, whether or not statutory. Given the importance of takeovers, it is strange not to consider them in the context of tailored rules that acknowledge the existence and impact of such factors. Leaving the corporate law collateral factors in a vacuum to general corporate law does a disservice to takeover players and stakeholders.