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96 Yale L.J. 295 (1986-1987)
Takeover Defense Tactics: A Comment on Two Models

handle is hein.journals/ylr96 and id is 313 raw text is: Comment Takeover Defense Tactics: A Comment on Two Models* Jeffrey N. Gordont and Lewis A. Kornhauserjf One of the most important debates of current corporate law practice and scholarship is about the appropriate role of target management con- fronted with a takeover bid. The controversy turns on the identification of a criterion for evaluating takeovers and target management defensive tac- tics. An influential body of opinion contends that maximization of share- holder wealth is the appropriate criterion because, first, traditional notions of fiduciary duty generally require managers to act in the shareholders' interest, and, second, shareholder wealth maximization is seen as the best available proxy for social wealth maximization.' On this view, takeovers * 0 Copyright 1986 by Jeffrey N. Gordon and Lewis A. Kornhauser. t Associate Professor of Law, New York University. --[ Professor of Law, New York University. We have had useful comments on a previous draft from William Carney, John Coffee, and Roberta Romano. The authors also gratefully acknowledge the generous financial support of the Filomen d'Agostino and Max E. Greenberg Research Fund of New York University School of Law. 1. Shareholder wealth maximization is not identical to social wealth maximization. First, a take- over can redistribute wealth in favor of shareholders without increasing the economic output of the firm. One example is a transaction that increases shareholder wealth solely through downward rene- gotiation of employee contracts. See Coffee, Shareholders Versus Managers: The Strain in the Corpo- rate Web, 85 MICH. L. REV. (forthcoming 1986). Another example is a leveraged acquisition that increases shareholder wealth through a transfer from bondholders, rather than through management efficiencies. Second, a takeover can result in events that may impose externalities. Obvious examples of such events include the shutdown of an acquired firm's headquarters and the layoff of workers, which may severely affect surrounding communities. Shareholder wealth may increase through such efficien- cies, but total social wealth might not also increase. Nevertheless, shareholder wealth maximization remains a useful proxy for social wealth maximiza- tion. First, a transaction or set of transactions that does not satisfy the shareholder criterion is highly unlikely to satisfy the social criterion, so that shareholder criterion wealth maximization becomes a necessary if not sufficient condition in the general evaluation of takeovers. Second, the shareholder criterion is subject to comparatively easy quantitative measurement through analysis of stock price movements. But cf. Gordon & Kornhauser, Efficient Markets, Costly Information, and Securities Research, 60 N.Y.U. L. REv. 761, 775-86, 825-30 (1985) (questioning models that serve as basis for stock price studies).

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