44 Bus. Law. 247 (1988-1989)
Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review; Gilson, Ronald J.; Kraakman, Reinier

handle is hein.journals/busl44 and id is 277 raw text is: Delaware's Intermediate Standard for Defensive
Tactics: Is There Substance to Proportionality
Review?
By Ronald J. Gilson* and Reinier Kraakman**
The courts have long struggled with a standard for reviewing management's
efforts to deter or defeat hostile takeovers. The usual standards of review in
corporate law, the business judgment rule and the intrinsic fairness test, do not
seem adequate when courts must evaluate defensive measures that implicate
both management's business acumen and its loyalty to shareholder interests.
Because evaluating a sale of the company is a complex business decision,
management's response to a takeover bid resembles the normal business deci-
sions that the business judgment rule largely insulates from judicial review.' At
the same time, however, a hostile takeover creates a potential conflict of interest,
no matter what response it evokes from management. Target managers who
approve an offer may be improperly influenced by post-transaction benefits;'
target managers who reject an offer may act largely to secure their own
*Mr. Gilson, a member of the California bar, is professor of law at Stanford Law School and senior
research fellow at the Hoover Institute.
**Mr. Kraakman is professor of law at Harvard Law School.
The authors thank Judy Hogan for her valuable research assistance and Joseph Grundfest, Leo
Herzel, William Klein, W. Loeber Landau, and Charles Murdock for their valuable comments on
an earlier version of this article.
The views expressed in this article are strictly those of the authors and do not represent those of
the American Law Institute, for whose Principles of Corporate Governance one of the authors is
serving as Reporter.
Editor's note: E. Norman Veasey of the Delaware bar served as reviewer for this article.
1. This argument has formed the core of Martin Lipton's tenacious defense of an undiluted
application of the business judgment rule to defensive conduct. See, e.g., Lipton, Takeover Bids in
the Target's Boardroom, 35 Bus. Law. 101 (1979); Lipton, Takeover Bids in the Target's
Boardroom: An Update After One Year, 36 Bus. Law. 1017 (1981); Lipton & Brownstein,
Takeover Responses and Directors' Responsibilities-An Update, 40 Bus. Law. 1403 (1985). More
recently, Upton has concluded that, if abusive tactics by bidders were curbed, most defensive tactics
would no longer be justified. See Lipton, Corporate Governance in the Age of Finance Corporatism,
136 U. Pa. L. Rev. 1 (1987).
2. The best example is a third-party leveraged buyout in which management participates. In
such a transaction, target management receives a substantial ownership interest in the company if
the buyout is completed. For example, in a sample of 28 companies given management buyout
proposals between 1979 and 1984, target management's ownership interest in the company at the
time of the proposal averaged 6.5%; in the 15 transactions consummated as buyouts, management's

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