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24 J.L. & Soc'y 124 (1997)
Hostile Takeovers, Corporate Law, and the Theory of the Firm

handle is hein.journals/jlsocty24 and id is 132 raw text is: JOURNAL OF LAW AND SOCIETY VOLUME 24, NUMBER 1, MARCH 1997 ISSN: 0263-323X, pp. 124-51 Hostile Takeovers, Corporate Law, and the Theory of the Firm SIMON DEAKIN* AND GILES SLINGER* INTRODUCTION The legal treatment of hostile takeovers' is a central issue in the contem- porary debate on corporate governance. In the 1980s, hostile takeovers came to be regarded a mechanism both for raising shareholder value and for enhancing the efficiency of the corporate system as a whole. Two main effects were imputed to hostile bids. First, the threat of an unwelcome bid served to improve the performance of incumbent managers and to align their interests more completely with those of shareholders. Secondly, hostile bids, even where they were not successful, tended to induce corporate restruc- turings which in turn freed up productive resources to be reallocated to more efficient uses elsewhere in the economy. In order to realize these ends, the fostering of an active market for corporate control was seen as one of the principal goals of company law. More recently, this view has been challenged by the 'stakeholder' model which sees hostile takeovers as occasions for the redistribution, rather than the generation, of wealth. The gains made by shareholders are said to accrue not from greater efficiency in the management of assets, but from income transfers made at the expense of the long-term employees, suppliers, and customers of the firm. The threat of such expropriation undermines co- operation within the productive process and thereby threatens long-run compet- itiveness. Views of this kind informed the adoption of 'stakeholder' or 'constituency statutes' in many United States jurisdictions in the late 1980s and early 1990s but, as yet, have had little impact on the British debate. The legal framework of corporate law - broadly conceived to include not just company law but also elements of labour law, commercial law, and the law of taxation - is more immediately concerned with the definition of the property rights and income streams of those with interests in or against the business enterprise, than with considerations of economic efficiency. Economic *ESRC Centre for Business Research, Department of Applied Economics, University of Cambridge, Sidgvick Avenue, Cambridge CB3 9DE, England The support of the Economic and Social Research Council (ESRC) is gratefully acknowledged. The work on which this paper is based formed part of the Corporate Governance Programme of the ESRC Centre for Business Research. 124 C Blackwell Publishers Ltd 1997, 108 Cowley Road, Oxford OX4 IJF, UK and 238 Main Street, Cambridge, MA 02142, USA

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