Tuesday, September 6, 2022

A fundamental question in corporate law is the nature of the stockholders’ ownership interest in the firm. Should a share of stock be viewed as a simple chattel, the value of which can be measured for all purposes by its trading price? Or should it be viewed as a partial claim on the firm as a whole, the value of which—for some purposes—cannot be determined without reference to the value of the entire firm to a single owner? This question arises in a number of contexts involving intra-corporate disputes, the most important of which is the merger. When examining whether a target board has satisfied its fiduciary duties, or when determining the “fair value” of the stockholders’ shares, a court must confront this fundamental question of the shareholders’ entitlement.

Delaware law has long entitled stockholders to a proportionate share of the value of the firm as a whole to a single owner and not simply the trading value of their fractionalized shares. This conception—the “single-owner” standard—was first articulated in the context of appraisal rights, and it has served for a century as the Atlas of Delaware’s corporate law, providing the theoretical foundation for its entire doctrinal universe, including landmark merger decisions like Unocal, Revlon, and the long line of their offspring. The single-owner standard provides the justification for allowing target boards to employ takeover defenses to fend off bids at a premium to the stock price and for the traditional measures of fair value in appraisal and breach of fiduciary duty actions.

While the single-owner standard is of long standing, it is hardly uncontroversial. Indeed, the policy reasoning behind the standard has remained frustratingly fuzzy for such a bedrock doctrine. Influential critics have disparaged the single-owner standard as the product of judicial misunderstandings of financial markets and unwarranted skepticism over the accuracy of market pricing. An alternative “market” approach, these critics argue, would better serve economic efficiency by avoiding managerial abuse of takeover defenses and facilitating the transfer of corporate assets to higher-value uses. The Delaware Supreme Court appears to have embraced at least some aspects of this critique in its recent appraisal decisions.

In this Article, we advance a new and powerful justification for the traditional single owner standard, rooted in dynamic considerations. Any standard that entitles dispersed stockholders to less than what a single owner would receive will force minority stockholders to discount the value of their shares relative to what their value would be to a single owner. The greater the discount, the higher the cost of capital for firms seeking to raise money in public markets, and the less efficient the financing of enterprise. In the absence of a single-owner standard, an entrepreneur seeking to raise capital would pay an enormous penalty for doing so through operating in a corporate form and issuing shares to minority stockholders and would face powerful incentives to remain private. Not only would this increase the cost of capital generally, but it would also imperil the information generating and capital-allocating efficiency of public markets and the ability of small investors to participate directly in the wealth creation of large-scale enterprise. As such, any move away from the single-owner standard threatens disastrous consequences.

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