Professor Bainbridge...on law, politics, religion, culture & food

Unocal at 20 at UVa

I'm at my alma mater (Virginia) today to present my paper Unocal at 20: Director Primacy in Corporate Takeovers to a faculty workshop. (Given how long this paper has been in press, I probably ought to change the name to Unocal at 21.)

Abstract: In Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court made clear that the board of directors of a target corporation "is not a passive instrumentality" in the face of an unsolicited tender offer or other takeover bid. To the contrary, so long as the target board's actions are neither coercive nor preclusive, the target's board remains "the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders."

Unocal is almost universally condemned in the academic corporate law literature. Building on his director primacy model of corporate governance and law, however, Bainbridge offers a defense of Unocal in this article. Bainbridge argues that Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: On the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making. On the other hand, because directors are obligated to maximize shareholder wealth, there must mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out those cases in which directors have abused their authority from those in which directors have not.

Back when I was in law school here, the business faculty was mainly Chicago School law and econ types who inclined towards the Henry Manne, Frank Easterbrook & Dan Fischel, Ron Gilson view that takeovers were a critical accountability mechanism and that takeover defenses therefore should have little or no validity. It'll be interesting to see how the current faculty reacts to my argument that takeover defenses differ only in degree and not in kind from any other conflicted interest transaction and therefore should be regulated in much the same fashion as any other conflicted interest transaction.