Protecting Nonshareholder Interests in the Market for Corporate Control: A Role for State Takeover Statutes
Part I of this Note describes a phenomenon of modern corporate activity first identified over fifty years ago as the “separation of ownership and control.” This separation gives rise to the need for a governing corporate norm; recognizing the normative aspect of this phenomenon has direct implications for the takeover debate.
Part II analyzes the problem of a target board’s fiduciary duty as the modern version of the fundamental normative issue of corporate law. It argues that the norm of shareholder wealth maximization, assumed as the starting point by those most in favor of an active and minimally regulated control market, is compelling in its simplicity but misleading in its characterization of the law. A view of fiduciary responsibility that includes consideration for nonshareholder interest, while conceptually more complex and practically more difficult, is more consistent with both the development of the law and the realities of corporate dynamics.
Part III analyzes and critiques the hostile takeover for its effect on nonshareholder interests. Although the socioeconomic effects of takeovers are unclear, there appears to be a genuine threat posed to nonshareholders in the form of a wealth transfer to shareholders. This occurs through the uncompensated imposition of high, unbargained-for risk levels on middle management, employees, creditors and local communities.
Finally, Part IV argues that the state can play a legitimate role in regulating the market for control to safeguard nonshareholder interests. By restoring the board of directors to a negotiating role in takeovers, business combination statutes, such as those in Delaware,” New York, and Wisconsin, can function as a means of protecting or compensating nonshareholders for the imposition of increased levels of risk.