Regulating Post-Bid Embedded Defenses: Lessons from Oracle versus PeopleSoft
This article shows that courts should not adopt a rule of strict shareholder choice that requires managers to obtain shareholder consent for actions taken post-bid that could deter a hostile acquisition. Managers need to be able to act unilaterally to protect the target when a hostile bid threatens its value. Such threats require managerial action, unfettered by a shareholder approval requirement, when the target needs to be able to respond quickly. The conclusion that shareholders can benefit from granting managers unilateral authority to adopt some takeover defenses, even when shareholders are well-informed, is well-illustrated by the Oracle-PeopleSoft contest. PeopleSoft’s shareholders would have been worse off had their managers not been able to defend the firm from the threat posed by Oracle’s bid because PeopleSoft’s shareholders could not have acted sufficiently quickly to preserve the firm’s value. In addition, this article shows that shareholder choice proponents cannot remedy the over-regulation problem by amending the rule to grant managers authority to adopt some post-bid defenses. Such a rule would create a zone of weakly regulated low-cost defenses within a strict shareholder choice regime, thereby encouraging managers to employ substitute defenses that may be more costly for the firm than are traditional takeover defenses.