Working Paper: CEPR ID: DP3140
Authors: Lucian Arye Bebchuk; Assaf Hamdani
Abstract: Public corporations live in a dynamic and ever-changing business environment. This Paper examines how courts and legislators should choose default arrangements in the corporate area to address new circumstances. We show that the interests of the shareholders of existing companies would not be served by adopting those default arrangements that public officials view as most likely to be value enhancing. Because any charter amendment requires the board?s initiative, opting out of an inefficient default arrangement is much more likely to occur when management disfavours the arrangement than management supports it. We develop a ?reversible defaults? approach that takes into account this asymmetry. When public officials must choose between two or more default arrangements and face significant uncertainty as to which one would best serve shareholders, they should err in favour of the arrangement that is less favourable to managers. Such an approach, we show, would make it most likely that companies would be ultimately governed by the arrangement that would maximize shareholder value. Evaluating some of the main choices that state corporate law has made in the past two decades in light of our proposed approach, we endorse some but question others. The arrangements we examine include those developed with respect to director liability, state antitakeover statutes, and the range of permitted defensive tactics.
Keywords: antitakeover statutes; default rules; directors; interpretation; managers; poison pill; shareholders; staggered boards; takeovers
JEL Codes: G30; G34; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| default arrangements (Y20) | shareholder value (G34) |
| restrictive default arrangements (F33) | shareholder value (G34) |
| management's preferences (L21) | persistence of inefficient defaults (D15) |
| reversible default approach (G33) | likelihood of maximizing shareholder value (L21) |