My retirement from teaching lasted less than a year.
I am now teaching the mergers and acquisitions (M&A) course at the University of Pennsylvania's Carey Law School — something I haven't done before. In preparing for the class, I began to review the history of M&A in this country over the last 150 years, particularly focusing on its legal course since the 1980s. I was in for a surprise.
I started as a young corporate lawyer in New York during the heyday of the M&A craze in the mid-1980s. It was the era of the notorious swashbuckling corporate raiders and their target corporations' heated responses. Creative takeover defenses, designed by brilliant corporate lawyers and investment bankers — and sanctioned by the courts — acted to frustrate the asset-collecting ambitions of many a raider.
All of this helped spark the corporate governance revolution of the past 30 years, which has dramatically changed how we now view M&A and provides an interesting lesson for today's corporate directors.
In the 1970s and 1980s, the courts were highly deferential to corporate management and boards, which were generally dominated by managers. The thought was that shareholders with little information and sophistication were best protected in their investment by management, which was viewed as being made up of generally faithful fiduciaries. This explains the support courts gave to boards during the takeover battles of the era and the judicial support of various anti-takeover vehicles, such as poison pills. The idea was that the “raider” was trying to expropriate shareholder wealth at an inferior price.
Regrettably, these actions acted to insulate poor management from the marketplace, and with “captured” boards providing little oversight, executives faced little accountability to anyone other than themselves. Results at many blue-chip companies predictably fell and respected businesses such as GM, IBM and American Express found themselves in great difficulty.
The shareholders of these entities, though, were no longer the small retail investors of yesteryear but large institutional investors. To return managerial accountability and accompanying better results, they began to push hard against management-insulating anti-takeover mechanisms. And, more importantly, they began to demand independent, equity-holding boards that could effectively monitor management for shareholder wealth creation.
These institutions began to band together and use their votes to push hard for corporate change. The M&A market now had a strong set of players on the shareholder side who had the clout to force a more balanced look at mergers than before. Boards found themselves in a position of real accountability to those who elected them. The threat of replacement by an enraged shareholder base became a clear and present danger. That, combined with better board independence and composition, plus real director equity ownership, injected boards into the M&A process in a way not seen in many years.
Additionally, and equally as important, the courts' views on the subject changed dramatically. The rise of the institutional investor dashed the traditional view of the unsophisticated shareholder. In a well-known takeover-related ruling in the early 2000s, a prominent Delaware judge noted that, if investors were smart enough to know when to invest, they were smart enough to know when to exit that holding. Sophisticated and informed investors needed little protection from themselves.
Finally, the judiciary's view of the manager as the faithful fiduciary weakened significantly. The excessive executive compensation controversies of the past 30 years, combined with numerous incidents of executive overreaching, conflicts of interest and serious improprieties, diminished public and judicial trust in the probity of corporate leadership.
Judicial review of M&A transactions today is more nuanced, probative and balanced between shareholder and managerial prerogative than it was three decades ago. Shareholder involvement in the process is much more pronounced and important. Not only must legal and financial advisors take notice, but so must corporate directors themselves.