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

Thompson’s Top 10 List: Pimping my Articles

The ballot for Bob Thompson’s annual list of the 10 came yesterday. As we say out here in Hollywood this time of year, FOR YOUR CONSIDERATION:

On the ballot, you’ll find:

# 5: Bainbridge, Stephen M. Unocal at 20: director primacy in corporate takeovers. 31 Del. J. Corp. L. 769-863 (2006). SSRN link. 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.

At # 378: Bainbridge, Stephen M. Much ado about little? Directors’ fiduciary duties in the vicinity of insolvency. 1 J. Bus. & Tech. L. 335-369 (2007). SSRN link.  Abstract:

Where the contract between a corporation and one of its creditors is silent on some question, should the law invoke fiduciary duties as a gap filler? In general, the law has declined to do so. There is some precedent, however, for the proposition that directors of a corporation owe fiduciary duties to bondholders and other creditors once the firm is in the vicinity of insolvency.

Courts embracing the zone of insolvency doctrine have characterized the duties of directors as running to the corporate entity rather than any individual constituency. This approach is incoherent in practice and insupportable in theory. Courts should focus on whether the board has an obligation to give sole concern to the interests of a specific constituency of the corporation.

Concern that shareholders will gamble with the creditors’ money is the principal argument for imposing a duty on the board running to creditors when the corporation is in the vicinity of insolvency. On close examination, however, this argument proves unpersuasive. It is director and manager opportunism, rather than strategic behavior by shareholders that is the real concern. Because bondholders and other creditors are better able to protect themselves against that risk than are shareholders, there is no justification for imposing such a duty.

This article also argues that the zone debate is much ado about very little. The only cases in which the zone of insolvency debate matters are those to which the business judgment rule does not apply, shareholder and creditor interests conflict, and a recovery could go to directly to those who have standing to sue. In those cases, as this Article explains, there is a strong policy argument that creditors should be limited to whatever rights the contract provides or might be inferred from the implied covenant of good faith.

I’m a bit partial to the former, mainly because it’s more controversial because my take is out of step with academic conventional wisdom.