Document Type

Article

Publication Date

1991

Disciplines

Business Organizations Law | Law

Abstract

During the 1980s, both sides of the hostile takeover controversy viewed proxy contests in terms that bordered on the mythical. Those made uneasy by the takeover phenomenon, especially management, held out proxy contests as an alternative, almost utopian mechanism through which a civilized debate about corporate strategy and structure could be held. As the Delaware Supreme Court put it, "[if the stockholders are displeased with the actions of their elected representatives [in blocking a hostile takeover], the powers of corporate democracy are at their disposal to turn the board out.” In contrast, those who believed that takeovers were necessary to displace inefficient management or otherwise change corporate policy dismissed the proxy contest as entirely ineffective. They argued that the costs of collective action arising from dispersed share ownership reduced to allegory the prospect that the proxy process could provide a viable means to correct management failure.

With the benefit of a little hindsight, both views have turned out to be wrong. Takeover proponents' dismissal of the proxy process ignored the dramatic growth in the holdings of institutional investors, and the resulting reduction in the costs associated with collective voting action. Moreover, takeover proponents' dismissal of the proxy process seemed to stem from a preference (in the case of financial economists, often a purely intellectual preference) for market-based, price-driven mechanisms over ones that created a meaningful, substantive debate over corporate policy. Indeed, financial scholars often appeared to view the institutional complexity and substantive, process-driven dynamics associated with proxy contests with unease. The inefficiency of proxy contests was often assumed rather than treated as a hypothesis subject to empirical test.

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