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Optimal Defaults for Corporate Law Evolution

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  • Bebchuk, Lucian Arye
  • Hamdani, Assaf

Abstract

Public corporations live in a dynamic and ever-changing business environment. This Paper examines how courts and legislators should choose default arrangements in the corporate area to address new circumstances. We show that the interests of the shareholders of existing companies would not be served by adopting those default arrangements that public officials view as most likely to be value enhancing. Because any charter amendment requires the board’s initiative, opting out of an inefficient default arrangement is much more likely to occur when management disfavours the arrangement than management supports it. We develop a ‘reversible defaults’ approach that takes into account this asymmetry. When public officials must choose between two or more default arrangements and face significant uncertainty as to which one would best serve shareholders, they should err in favour of the arrangement that is less favourable to managers. Such an approach, we show, would make it most likely that companies would be ultimately governed by the arrangement that would maximize shareholder value. Evaluating some of the main choices that state corporate law has made in the past two decades in light of our proposed approach, we endorse some but question others. The arrangements we examine include those developed with respect to director liability, state antitakeover statutes, and the range of permitted defensive tactics.

Suggested Citation

  • Bebchuk, Lucian Arye & Hamdani, Assaf, 2002. "Optimal Defaults for Corporate Law Evolution," CEPR Discussion Papers 3140, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3140
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    Cited by:

    1. Yair Listokin, 2010. "If you Give Shareholders Power, do they Use it? An Empirical Analysis," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(1), pages 38-53, March.
    2. Sokolyk, Tatyana, 2011. "The effects of antitakeover provisions on acquisition targets," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 612-627, June.

    More about this item

    Keywords

    antitakeover statutes; default rules; directors; interpretation; managers; poison pill; shareholders; staggered boards; takeovers;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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