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Director Primacy in Corporate Takeovers: Preliminary Reflections

Prepared for a Stanford Law Review symposium, this essay comments on an article by Harvard Professors Bebchuk, Coates, and Subramanian; namely, Lucian Ayre Bebchuk et al., The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 STAN. L. REV. (forthcoming). Bebchuk, Coates, and Subramanian's data demonstrate that (1) the incidence of staggered boards has increased substantially in the last two decades and (2) most, if not all, of this increase can be linked to the staggered board's utility as a takeover defense. In response, they offer a policy prescription "stated simply" as: "Courts should not allow managers to continue blocking a takeover bid after they lose one election conducted over an acquisition offer". It is this recommendation and the normative foundations on which it is premised, rather than the minutiae of their empirical analysis and theoretical models, which are the focus of this comment. Like much of modern academic commentary on corporate law, Bebchuk, Coates, and Subramanian's policy recommendation rests on the principle of shareholder primacy. In contrast, this comment argues that corporate law is better understood as a system of director primacy in which the board of directors is not a mere agent of the shareholders, but rather is a sort of Platonic guardian serving as the nexus of the various contracts making up the corporation. The comment concludes by proposing a director primacy-based standard for reviewing the tandem use of classified boards and poison pills as an alternative to Bebchuk, Coates, and Subramanian's proposed prophylactic bar on their use.