Responding to my comments in the Stanford Law Review, and to those of Lucian Bebchuk in the Harvard Law Review, Professors Easterbrook and Fischel have reiterated their preference for a rule of pure passivity by target management in response to a tender offer. Unlike my more limited rule barring defensive tactics designed to prevent the offer but not barring the facilitation of competitive bids, Easterbrook and Fischel would prohibit both. Because their response to the points that Bebchuk and I raised goes beyond their initial treatment of the subject, it is appropriate that I respond here by extending the arguments I originally presented.
As originally put, Easterbrook and Fischel argued that auctioneering was undesirable because of the sunk costs in information incurred by the original bidder. If a competitive bid was successful, the unsuccessful first bidder would be unable to recover these costs; the risk of this occurrence would reduce the incentive to invest in information in the first place. Therefore, monitoring would decrease and agency costs would increase.
I responded by noting that a first bidder could hedge its risk of lost information costs by buying a block of the target's stock that could be sold at a profit to a subsequent higher bidder. I also argued that any loss from a reduction in monitoring would be offset by the increased efficiency that would result from allocating "target assets to their most efficient user." Professors Easterbrook and Fischel now concede the existence of a hedge, but argue that the hedge is imperfect. In their view, even if first bidders both recover their sunk costs and earn a return on the investment, the increase in takeover prices associated with competitive bidding will nonetheless reduce the return on investment in information below what would have been earned in the absence of competitive bidding, with the same undesirable results: a reduction in monitoring and an increase in agency costs. In part I of this article, I argue that competitive bidding may increase rather than decrease the return on investment in information. If this is correct, then the choice between the two rules turns on their efficiency at resource allocation and on their susceptibility to abuse, points which I consider in parts II and III respectively.
Before turning to a more detailed examination of the matters on which Professors Easterbrook and Fischel and I disagree, it is important to emphasize the far more important area of agreement. Taken together, our respective articles demonstrate that there is no coherent justification for allowing target management to engage in defensive tactics that may deprive shareholders of the opportunity to tender their shares. Corporate managers must face up to the fact that such conduct benefits only themselves. State courts must recognize that the legal rules that facilitate this conduct, under the guise of deference to business judgment, do no more than sanction corporate treason.
Ronald J. Gilson,
Seeking Competitive Bids Versus Pure Passivity in Tender Offer Defense,
Stan. L. Rev.
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