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82 Tenn. L. Rev. 791 (2014-2015)
A Theory of Shareholder Activism and Its Palce in Corporate Law

handle is hein.journals/tenn82 and id is 807 raw text is: 




A  THEORY OF SHAREHOLDER ACTIVISM AND ITS
               PLACE IN CORPORATE LAW

                      BERNARD   S. SHARFMAN*

    Offensive shareholder activism (more commonly  known   as hedge
fund activism) can  be understood as a corrective mechanism  in the
governance   of a  public  company.   The  legitimacy  of  offensive
shareholder  activism  as  a  corrective mechanism is based on
numerous  empirical studies that have found  this type of activism to
be  both  wealth   enhancing  for  shareholders  and   performance
enhancing  for the target companies. A non-empirical argument   can
also be made in support of offensive shareholder activism that focuses
on  the ability of the board  of directors to act as  an  impartial
arbitrator deciding  between   the advices  provided   by executive
management   and the activist hedge fund.
    Recognizing  the value of offensive shareholder activism in the
decision making  of a public company allows for the following theory
of shareholder activism: Shareholder activism is a valuable asset in
and  of itself if the purpose of such activism is to correct managerial
inefficiencies. This new theory is built on the foundation of Henry
Manne's  market for corporate control.
    The implications for corporate law are  significant. If corporate
law does not recognize offensive shareholder activism as a corrective
mechanism,  then the benefits of such activism in terms of enhancing
the  managerial   efficiency of public  companies  and   increasing
shareholder  wealth may  become  significantly reduced. To facilitate
this  recognition, this Article  provides  new   thinking  on  how
Delaware's  Unocal  test and Blasius standard  of review should  be
applied by the courts when  the Board  takes action to minimize the
influence of activist hedge funds. Under both standards of review it is
argued  that corporate law should always take a skeptical view of any
Board  action taken to directly or indirectly mitigate the influence of
this  type  of activism.  This  approach   is  not  about   shifting
decision-making  authority from  the Board  to activist hedge funds,
but simply  putting  limits on the Board's ability to use the legal
system  to thwart the influence of hedge fund activism  in a public
company's  decision-making process.


     * Bernard S. Sharfman is currently an adjunct professor of business law at
the George Mason University School of Business, an associate fellow of the R Street
Institute, a member of the Journal of Corporation Law's editorial advisory board,
and a  former Visiting Assistant Professor of Law at Case Western Reserve
University School of Law (Spring 2013 and 2014). Mr. Sharfman would like to thank
Michael Klausner for his helpful comments and suggestions. Mr. Sharfman is
dedicating this article to his wife, Susan Thea David, and his daughter, Amy David
Sharfman.

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