M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Tuesday, November 17, 2009

Internal Poison Pills

Geis has an article, Internal Poison Pills, appearing in the current NYU Law Review that thinks about the relationship between majority and minority shareholders.  The article argues that a version of the shareholder rights plan can be used to constrain majority incentives for opportunism.  Presumably this is because fiduciary obligations of majorities aren't powerful enough ex ante to do the same work.

Abstract:  This Article offers a novel idea for governing the tension between majority and minority shareholders: an “internal poison pill.” Borrowing conceptually from the famous shareholder rights plans created in the 1980s to address bullying external bidders, I show how an analogous (though economically distinct) financial instrument might be used by shareholders to navigate the twin internal governance tensions of holdout and expropriation. Two key features of this proposal distinguish it from alternative reforms: (1) It focuses on a privately enacted solution with room for contextual customization; and (2) it uses embedded option theory to construct an intermediate legal entitlement (as opposed to an extreme property or liability rule) for both majority and minority shareholders. If successfully scoped and swallowed, these internal poison pills could facilitate efficient freezeouts, chill coercive ones, supplant the awkward remedy of appraisal, and, ultimately, increase the ex ante value of firms by mitigating agency problems between majority and minority shareholders.

-bjmq



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