Author: Michael Sirkin


Book Review: Bainbridge’s Directors as Auctioneers–A Concise Guide toRevlon-Land

Stephen M. Bainbridge, Directors as Auctioneers—A Concise Guide to Revlon-Land (2011).

“Motive” is a legal concept no longer reserved for criminal lawyers. Motive matters in M&A litigation, too, according to UCLA law professor Stephen Bainbridge in his e-book, Directors as Auctioneers—A Concise Guide to Revlon-Land.[1] This notion is not unique to Bainbridge, as Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery recently reaffirmed:

As Revlon itself made clear, the potential sale of a corporation has enormous implications for corporate managers and advisors, and a range of human motivations, including but by no means limited to greed, can inspire fiduciaries and their advisors to be less than faithful to their contextual duty to pursue the best value for the company’s stockholders.[2]

Yet, despite this apparent agreement about Revlon’s core principles, Bainbridge contends that the Court of Chancery has been misapplying them. Bainbridge specifically criticizes the line of Court of Chancery decisions that turn on the form of merger consideration rather than on the directors’ motivations and potential conflicts of interest.

Bainbridge begins the book with a guided tour through “Revlon-Land,” including Revlon’s history and policy foundations in the “veritable flood of academic writing” from the 1980s about the proper role of a target board in the context of an unsolicited takeover bid. Bainbridge identifies and analyzes the emergence of two leading policy proposals.

First, Bainbridge focuses on Professors Ronald Gilson and Lucian Bebchuk, who argued that a target board should be permitted to use takeover defenses only to achieve a higher-priced offer, and that defenses deployed by the target board to fend off the bidder and remain independent should be illegal. This is contrary to Delaware law.[3] Bainbridge dismisses this approach as unworkable because it would place the target board’s legal advisors in a quandary, paralyzed by the risk of trying to predict which takeover defenses would generate a topping bid and which would not. Consequently, rational companies desirous of the security that takeover defenses provide would erect them prophylactically on the proverbial clear day before receiving an unsolicited takeover bid, thereby choking the market for corporate control.

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Book Review: Macey’s Corporate Governance

Jonathan R. Macey, Corporate Governance: Promises Kept, Promises Broken (Princeton University Press) (2008).

I make the following three promises.  First, I promise to describe and defend the controlling premise upon which Macey bases his analysis of corporate governance.  Second, I promise to summarize and synthesize Macey’s conclusions.  Third, I promise to provide commentary and criticism on the book and its ideas.  These are my three promises, and I intend to keep them.  If I keep those promises, you and I should both consider this review successful.  If that seems like an intuitively fair way to evaluate this review, then you’ll agree with Macey’s mechanism for evaluating corporate governance and accept the unifying theme of this book.

“Corporate Governance is about promises.  I believe that it is more accurate to characterize corporate governance as being about promises than it is to characterize corporate governance as being about contracts.”

Macey’s controlling idea is that corporate governance is about promises.  He evaluates the institutions and mechanisms of corporate governance according to the degree to which they facilitate the making and keeping of promises by corporations to investors.  He chooses the “Promise Premise” instead of the more traditional nexus-of-contracts premise because “the idea of promise captures the primordial fact that trust rather than reliance on the prospect of enforcement is the focal point of a successful system of corporate governance.”  As Macey’s analysis reveals, investors rely largely on trust and reputational capital when they participate in the capital markets, and even those mechanisms that are designed to offer some degree of enforcement power fall short.

Macey’s “Promise Premise” works as the governing theme because it is intuitively appealing and allows for private ordering.  Intuitively, it seems fair that there is no one-size-fits-all set of metrics with which to evaluate corporate performance.  On a basic level, consider two companies, “Income” and “Growth.”  Income consistently pays dividends, operates in a stable industry with a sustainable capital structure, and attracts risk-averse investors.  Growth, meanwhile, retains its earnings, operates in emerging markets and developing industries and with high leverage, and attracts risk-hungry investors.  If in twenty years, Income has continued paying its quarterly dividend and retained its stable position in its stable industry, and Growth has survived some investments that didn’t pay off and hit it big in emerging markets, sending its volatile share price temporarily skyrocketing, which company has been more successful?  Both companies have been successful by doing what they set out to do.  But which company has been more effectively governed?  We won’t know if we look to board and management turnover, leverage, and share price whose management has performed better over the time period.  But applying Macey’s Promise Premise, we can evaluate the governance approaches of any company by measuring the degree to which they facilitate the keeping of the promises the company has made to its investors.  This approach therefore allows for useful governance comparisons between two companies that may have completely different agendas.

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