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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