Center for Contract and Economic Organization
Center for Law and Economic Studies
The courts have long struggled with a standard for reviewing management's efforts to deter or defeat hostile takeovers. The usual standards of review in corporate law, the business judgment rule and the intrinsic fairness test, do not seem adequate when courts must evaluate defensive measures that implicate both management's business acumen and its loyalty to shareholder interests. Because evaluating a sale of the company is a complex business decision, management's response to a takeover bid resembles the normal business decisions that the business judgment rule largely insulates from judicial review.1 At the same time, however, a hostile takeover creates a potential conflict of interest, no matter what response it evokes from management. Target managers who approve an offer may be improperly influenced by post-transaction benefits;2 target managers who reject an offer may act largely to secure their own positions. From this perspective, responding to a hostile takeover is an interested transaction that calls for judicial review under the intrinsic fairness test. Yet, invoking this rigorous standard would simply condemn moit defensive tactics without any justification beyond the standard itself.3
In this article, we examine the Delaware courts' most recent response to the tension between the intrinsic fairness standard and the business judgment standard in the takeover context: An intermediate standard of review mandating that management's defensive tactics must be "reasonable in relation to the threat posed"4 by a hostile offer. The evolutionary trajectory of this proportionality test is far from certain. Our goal here is neither to endorse proportionality review as the best approach to regulating defensive tactics nor to provide an exhaustive account of recent Delaware case law. Rather, taking Delaware's adoption of proportionality review as given, we seek to facilitate the informed development of this standard as rapidly, and with as little ambiguity, as possible.
Ronald J. Gilson & Reinier Kraakman,
Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?,
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2149