Adjudicating Corporate Auctions

Abstract

In light of recent developments in auction theory, this Article re-examines Delaware corporate law governing directors' actions when structuring the sale of a corporation. A foundational doctrine of Delaware law is that when the board of directors resolves to sell a corporation, it must obtain the highest price reasonably available. Auction theory posits that, in certain circumstances germane to corporate takeovers, revenues can be maximized through the use of ex ante precommitments to the rules of the auction. Delaware law, however, does not fully endorse directors' ability to make such precommitments, primarily out of the concern that the board will lock up a transaction for self-interested reasons. The Article's core claim is that current Delaware law is unduly averse to precommitment devices that set the rules of the game in corporate auctions. Such devices can help maximize shareholder value and do not create the positional conflict that animates much of corporate takeover jurisprudence. Courts should draw a distinction between ex ante precommitments, characterized by ambivalence concerning the identity of the winning bidders, versus midstream or ex post lock-ups, in which the board favors a known buyer.