Regulating post-bid embedded defenses

"This article argues that courts should not adopt a rule of strict shareholder choice that requires managers to obtain shareholder consent for any defensive action taken after a hostile bid has been made because even ostensibly non-coercive bids can threaten the target's value unless managers have the ability to take quick unilateral action. A hostile bid is particularly likely to threaten the target's value when it undermines the target's ability to enter into value-enhancing long-run implicit contracts with third parties in the shadow of the bid. This threat is well-illustrated by the Oracle-PeopleSoft contest in which Oracle's bid threatened PeopleSoft's ability to enter into long-run relational contracts with new customers who were worried that Oracle would breach PeopleSoft's implicit contract regarding the quality of long-run product support and customer service. PeopleSoft's managers were able to assuage customers, and enhance firm value, by adopting a Customer Assurance Program (CAP) designed to deter Oracle from reducing future quality. PeopleSoft would have been hurt by a shareholder vote requirement because PeopleSoft's shareholders could not have adopted the CAP sufficiently quickly to preserve the firm. Shareholder choice proponents cannot remedy the over-regulation problem by amending strict shareholder choice to grant managers authority to adopt some post-bid defenses because enlarging the zone of defenses that strict shareholder choice weakly regulates would increase managers' ability to substitute into these weakly regulated defenses that may be more costly for the firm than are traditional takeover defenses"--John M. Olin Center for Law, Economics, and Business web site.