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The times they are a changin'. Vanguard firms of the 1980s takeover boom have announced associate layoffs and salary freezes because business is down. Bankruptcy and corporate reorganization are the hot new specialties as reflected in law school class size and law firm entrepreneurialism. Acquisition activity has fallen dramatically from the halcyon days of the 1980s. The gargantuan headline-grabbing hostile bid is now rare. In particular, the "boot-strap, bust-up" highly leveraged transaction that so engaged the passions of corporate managers and raiders now seems part of the history of corporate finance rather than its future.

Many forces have played a role in this reversal. Of particular moment is the contraction of the takeover finance market that fueled leveraged transactions. This contraction is itself a complicated event. The contributing elements include: the bankruptcy filing by Campeau and Federated Department Stores practically before the ink was dry on the deal documents, which suggested, correctly, that the financial projections undergirding this and many other recent highly leveraged transactions had been hopelessly optimistic; the savings and loan debacle, which triggered a regulatory clampdown on the provision of credit in leveraged deals; and the insider trading and market manipulation scan dals that eventually brought down junk bond meister Michael Milken and Drexel Burnham Lambert.

These changes in corporate finance have been paralleled by equally important shifts in the legal landscape surrounding mergers and acquisitions. Under their authority to regulate the internal governance of corporations, many states have adopted legislative measures that increasingly permit corporate managers unreviewable discretion to reject hostile takeovers. Of equal significance, state courts have interpreted fiduciary duty standards governing the behavior of directors to similar effect. These changes in legal standards may prove more enduring barriers to a resurgence of hostile takeovers than current constraints in the financial markets.

In this Article, I focus on one especially important moment of legal change: the decision of the Delaware Supreme Court in Paramount Communications, Inc. v. Time Inc., which allowed Time's management to block Paramount's fully financed premium cash bid for Time in favor of a management-backed combination with Warner Communications. In insisting on a high level of deference to management's business judgment in the face of a hostile takeover bid, our (nearly) supreme court of corporate law came close to explicitly sanctioning a "just say no" defense.


Business Organizations Law | Law | Law and Economics


This article originally appeared in 91 Colum. L. Rev. 1931 (1991). Reprinted by permission.