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"Just say no" is the current rallying cry of those seeking to give target management the unrestricted power to block hostile tender offers. Not surprisingly, the turn of phrase chosen by management leaves ambiguous the precise issue on which the debate should turn: To whom does management want the power to say no? As target management poses the issue, it wants to say no to a raider. The image is of stalwart management protecting shareholders against a marauding outsider. However, that image is seriously misleading. In fact, target management seeks the power to say no to its own shareholders.

The recent case of TW Services, Inc. v. SWT Acquisition Corp. illustrates the point. After 88% of the target stock had been tendered in response to a hostile offer, the target's chairman admitted that "I think the stockholders like the [tender offer] price." Thus, when target management blocked the offer by declining to redeem its poison pill, it was, in effect, saying no to 88% of the company's shareholders. So understood, demands of critics that management justify its right to tell shareholders no are not surprising. Normally we don't allow the agent's preferences to trump those of the principal.

My goal in this article is to sketch a critical history of the justifications proponents have offered for giving target management the power to tell shareholders no. This history reveals three categories of justifications: legal, paternalistic and social. It also reveals a dramatic shift in the nature of the categories. The focus has moved from claims that blocking an offer benefits shareholders, to the very different claim that management is warranted in blocking an offer even if doing so is detrimental to shareholders. To telegraph where I'm going, the simple fact is that none of the proffered justifications hold up to analysis, a point that bears emphasis at this stage of the debate when it has become commonplace for courts to set forth potential justifications in a veritable litany, without pausing to establish the plausibility of any single justification. That leaves for last what may be the most interesting question of all: What is the real explanation for management's tenacious campaign for the right to "just say no"?

To put the discussion of justifications in context and to simplify things just a little, assume a 100% cash offer at a premium, with an unconditional commitment to a second-step merger in which non-tendering shareholders would receive the same cash price – the type of offer that the Delaware Chancery Court has repeatedly found to be noncoercive In this setting, what would justify allowing management to tell shareholders no?


Business Administration, Management, and Operations | Business Organizations Law | Law