Saturday, June 9, 2018
This week, I plug my new article, Shareholder Divorce Court, available here on SSRN and forthcoming in the Journal of Corporation Law. Here is the abstract:
Historically, shareholder power within the corporate form has been tightly constrained on the assumption that dispersed shareholders are too inexpert, and insufficiently invested in the business, to contribute positively to governance. In recent years, however, the nature of shareholding has changed. Whereas in the mid-twentieth century, most stock was held by individuals, today, most publicly traded stock is held by large institutions with significant stakes. Corporate law has responded to the increasing sophistication of the shareholder base by expanding shareholder power, but doing so has created a new problem: shareholders have heterogeneous preferences, and when they conflict, the majority may exploit the minority.
The problems are particularly acute when it comes to mergers and acquisitions. Large shareholders may have a variety of investments, and thus be conflicted in their preferences when it comes to merger terms. Their greater influence within the corporate form may influence directors. In this scenario, minority shareholders are left without an effective advocate for their interests, and therefore may be coerced into suboptimal transactions.
This Article proposes that if corporate law is retooled to grant shareholders more power, it should also facilitate “divorce,” namely, provide a mechanism for price discrimination among shareholders with different interests. In particular, states can look to an old solution: the right of appraisal. Appraisal permits a shareholder to petition a court for a judicial evaluation of the fair value of her shares. Before falling into disuse, appraisal was one of the earliest remedies for addressing conflicting shareholder preferences. In recent years, it has enjoyed a renaissance as a mechanism for deterring conflicted or unfavorable transactions. This Article argues that with some modification, appraisal could also be used to satisfy the divergent preferences of a heterogeneous shareholder base.
The project was inspired by the increasing concentration of ownership among a handful of institutional investors, as well as numerous examples of mergers that depended on the votes of shareholders who held stakes in both target and acquirer. I addressed the issue from the shareholder side in an earlier essay, Family Loyalty: Mutual Fund Voting and Fiduciary Obligation. The new paper is a more in-depth examination of the implications on the corporate governance side.