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94 Harv. L. Rev. 1161 (1980-1981)
The Proper Role of a Target's Management in Responding to a Tender Offer

handle is hein.journals/hlr94 and id is 1179 raw text is: VOLUME 94 APRIL 1981 NUMBER 6 HARVARD LAW REVIEW THE PROPER ROLE OF A TARGET'S MANAGEMENT IN RESPONDING TO A TENDER OFFER Frank H. Easterbrook* and Daniel R. Fischel** Under existing federal and state law, a corporation's managers can resist and often defeat a premium tender offer without liability to either the corporation's shareholders or the unsuccessful tender offeror. Professors Easterbrook and Fischel argue that resistance by a corporation's managers to premium tender offers, even if it triggers a bidding contest, ultimately decreases shareholder welfare. Shareholders would be better off, the authors claim, were such resistance all but proscribed. The authors consider, but find want- ing, a number of potential criticisms of their analysis; they conclude by proposing a rule of mangerial passivity capable of controlling resistance in actual cases. A cash tender offer typically presents shareholders of the target corporation with the opportunity to sell many if not all of their shares quickly and at a premium over the market price.' Notwithstanding the apparent benefit both to shareholders of the target and to the acquirer when such offers succeed, the target's management may oppose the offer, ar- guing that the premium is insufficient or that the corporation would be harmed by its new owners. To defeat the offer, management may file suits against the offeror, sell new shares to dilute the offeror's holdings, manufacture an antitrust prob- * Assistant Professor of Law, University of Chicago. ** Assistant Professor of Law, Northwestern University. The Authors thank Wal- ter J. Blum, Michael Bradley, Lea Brilmayer, Dennis W. Carlton, Peter Dodd, Richard A. Epstein, Mayer Freed, Leo Herzel, Gregg A. Jarrell, Edmund W. Kitch, Douglas M. Kraus, John H. Langbein, Douglas Laycock, Bernard D. Meltzer, Daniel Polsby, Richard A. Posner, Stephen Presser, David S. Ruder, Myron Scholes, Kenneth E. Scott, Stephen M. Shapiro, Matthew L. Spitzer, Robert S. Stillman, Harry Watson, and participants at the law and economics workshops of Harvard and the University of Chicago Law Schools for their helpful comments. The Law and Economics Pro- gram of the University of Chicago provided support for the writing of this Article; David Glazer furnished assistance in the research. I See, e.g., Panter v. Marshall Field & Co., 486 F. Supp. 1168 (N.D. Ill. ig8o), appeal docketed, No. 8o-1375 (7th Cir. Mar. 21, x98o). Marshall Field involved a shareholder's suit against management for defeating a tender offer with a premium exceeding ioo% of the price just prior to formulation of offer plans.

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