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Faculty Scholarship at Penn Law

Law and Economics

Management Discretion Rule

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Corporate Policy And The Coherence Of Delaware Takeover Law, Richard E. Kihlstrom, Michael L. Wachter Jan 2003

Corporate Policy And The Coherence Of Delaware Takeover Law, Richard E. Kihlstrom, Michael L. Wachter

Faculty Scholarship at Penn Law

This Article presents a model that can be used to explain key elements of Delaware takeover law. By incorporating corporate policy as a key variable in the model, Delaware law’s management discretion rule can be shown to be best suited for maximizing the value of the corporation and the shareholders’ interest under a set of reasonable assumptions. By allowing for occasional market mispricing and the agency costs associated with managing to the market, we demonstrate that a shareholder choice regime would likely lead to suboptimal investment decisions. In our model, managers are assumed to have better information regarding alternative ...