Optimal Defaults for Corporate Law Evolution

Lucian Bebchuk () and Assaf Hamdani

No 3140, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Public corporations live in a dynamic and ever-changing business environment. This Paper examines how courts and legislators should choose default arrangements in the corporate area to address new circumstances. We show that the interests of the shareholders of existing companies would not be served by adopting those default arrangements that public officials view as most likely to be value enhancing. Because any charter amendment requires the board?s initiative, opting out of an inefficient default arrangement is much more likely to occur when management disfavours the arrangement than management supports it. We develop a ?reversible defaults? approach that takes into account this asymmetry. When public officials must choose between two or more default arrangements and face significant uncertainty as to which one would best serve shareholders, they should err in favour of the arrangement that is less favourable to managers. Such an approach, we show, would make it most likely that companies would be ultimately governed by the arrangement that would maximize shareholder value. Evaluating some of the main choices that state corporate law has made in the past two decades in light of our proposed approach, we endorse some but question others. The arrangements we examine include those developed with respect to director liability, state antitakeover statutes, and the range of permitted defensive tactics.

Keywords: Shareholders; Managers; Directors; Default rules; Interpretation; Takeovers; Antitakeover statutes; Poison pill; Staggered boards (search for similar items in EconPapers)
JEL-codes: G30 G34 K22 (search for similar items in EconPapers)
Date: 2002-01
New Economics Papers: this item is included in nep-cfn and nep-law
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://cepr.org/publications/DP3140 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Optimal Defaults for Corporate Law Evolution (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3140

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3140

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().