Corporate Power in Civil Society

6. Why Contractarians Fail to Explain Judicial Behavior

Why Contractarians Fail to Explain Judicial Behavior The conceptual fissures latent in corporate law doctrine metamorphosed into full-blown doctrinal crisis beginning in 1985. We saw in Chapters 3 and 4 that contractarians’ criticisms of existing doctrine have considerable merit. But we have just seen that Delaware courts nonetheless resist adopting an economic approach to corporate governance disputes outright. Why they resist is a mystery to contractarians, but how such norm-based judicial behavior affects corporate performance seems self-evident to them. They believe that qualitative analyses of corporate disputes lead to inconsistent rulings and this, in turn, only works to management’s advantage and shareholders’ disadvantage. Corporate officers already operate on their long-standing positional interest in entrenchment. When they see Delaware courts upholding defenses against hostile bids and less frequently requiring auctions, corporate officers will conclude that they are less likely to have their defensive actions reviewed and possibly rescinded by Delaware courts than their efforts to maximize shareholder wealth at stakeholders ’ expense. Mark Loewenstein found in 1989 that up to that point the Delaware Supreme Court had never used the Unocal standard to declare a defensive action unreasonable in relation to any threat posed by a hostile bid.1 Two years later, Easterbrook and Fischel were hardly more sanguine. Examining the substantive outcomes of Delaware court rulings up to 1991, they concluded that “our premier corporate court” is “muddling through.” Muddling through . . . has the virtue of conserving judges’ information costs. It also creates an odd set of incentives for managers. If they adopt shark repellent provisions and so scare away bidders, they face no risk of liability [as in Unocal]. If, however, they sell the firm, they may be mulcted in damages for getting “only” 50 percent over market rather than the higher price the court supposes they might have had [they cite the Van Gorkom case]. If they commit themselves firmly (beyond the possibility of 6 131 argument to a corporate plan), they may block bids that entail a change of plans [as in Time-Warner]; if they are flexible and seek out handsome opportunities for investors, they may be deemed to have put the firm on the block and will be compelled to raffle it off [as in Revlon]. Even dedicated managers, faced with such choices, may be expected to adopt devices that save their skins at some expense to investors.2 Delaware court behavior is a major source of contention and controversy not only among contractarians but across the corporate judiciary and bar as a whole.We offer our own explanation for it beginning in Chapter 10.For now, we summarize where the corporate judiciary stands today in light of the decisions we reviewed by presenting a typology of general doctrinal options currently available to American state courts. • Courts can portray the publicly traded corporation as a market cluster , a power-neutral site of self-interested contracting. This nexus metaphor is incompatible with the fiduciary law tradition and any effort to impose mandatory rules on corporate officers. It leads either to shareholder contracting (in Revlon) or to stakeholder balancing (in the second Unocal requirement). • Courts can portray the corporation as a long-term economic enterprise that, for whatever reason, merits judicial protection in a market for corporate control. We will see that this endangered species or national landmark metaphor (implied in the Time-Warner decision) retains some linkage to the fiduciary law tradition, but one that is untenable in a global economy. • Courts can portray the corporation as a site of structured situations containing positions of trust and positions of dependence. This intermediary association metaphor (implied in all of the other decisions we reviewed) falls centrally within the fiduciary law tradition. Here courts endeavor to identify the structured situations that merit judicial monitoring while also trying to convince skeptics that normbased interventions into private governance disputes uniquely serve some public law interest. We pointed out earlier that contractarians define the terms of today’s debate over corporations and law. They want judges to cease using fiduciary rhetoric when describing management’s putative obligations to the corporation , its “artificial” or legally defined role as trustee of an entity. Instead contractarians want judges to transfer this rhetoric to management’s oblig132 | Why Contractarians Fail to Explain Judicial Behavior ations to maximize shareholder wealth, its “natural” or economically sounder role as agent of a principal.3 But for whatever reason, Delaware courts cling to one...