Bainbridge on Unocal

Steve Bainbridge will be giving the Pileggi lecture, where he gets to speak truth to power, as Anita Hill would say – in this case, to the Delaware bar and judiciary, the power in corporate law.  I was honored to give this talk a few years ago.

His article on Unocal looks interesting, and I plan to read it more carefully soon.  From what I can see at a glance, he’s surprisingly positive about the Unocal case, despite the mess that Unocal jurisprudence has become. My own take on Unocal, written a few years after the decision, was Takeover Defenses and the Corporate Contract, 78 Georgetown Law Journal 71 (1989).  There I take a structural approach, focusing on the need for clear judicial rules that lend themselves to contractibility through the charter.  Steve seems not well-disposed to this approach, but alas doesn’t cite my article, so I can’t tell what he would think if he were properly enlightened.

The Delaware supreme court has adopted structural-type rules in the years since Unocal, emphasizing the extent to which takeover defenses preserve a role for shareholder voting.  But its approach as applied resembles the sort of open-ended business-judgment-rule approach that I criticize in my earlier article. 

It may be, however, that the business judgment rule is the only feasible approach.  As Steve has often argued, it is simply not feasible for the court to second-guess business decisions. In the particular area of takeover defenses, Jennifer Arlen & Eric Talley, in Unregulable Defenses and the Perils of Shareholder Choice, 152 U. PA. L. REV. 577 (2003), make an excellent case for the proposition that trying to second-guess some decisions will just lead to even more inefficient board decision-making. 

I discuss all this in my current paper, Accountability and Responsibility in Corporate Governance.  I suggest that, in light of what’s become of Unocal, and the inherent problems with judicial review of takeover defenses, effective constraints on board power may have to come other than from takeovers, much as I sympathize with Henry Manne’s view of the market for control.  One possibility is contractual duties to distribute cash to the shareholders.  This leads me to wonder whether we would see more efficient governance if we didn't force entity-level tax on publicly held firms.