Scholars have long recognized the importance of market forces as a tool for disciplining the management of public corporations and reducing agency costs. If managers loot or otherwise mismanage the firm, the firm’s stock price will suffer, raising its cost of capital and leaving managers exposed to the threat of a hostile takeover. In recent decades, changing patterns of stock ownership have threatened the viability of this market check on mismanagement. Institutional investors, and particularly index funds, own an increasing portion of publicly traded firms, and face substantial liquidity and other barriers to simply selling their positions. To the extent this phenomenon attenuates market reactions to mismanagement, stockholders will have to look elsewhere for protection.
More fundamentally, market discipline cannot effectively deter wrongdoing in final period transactions like mergers. Stockholders must look to legal remedies — such as fiduciary duty class actions or appraisal proceedings — for deterrence against managerial sloth or opportunism in connection with mergers. Historically, though, these remedies have been rendered ineffective by an agency problem (between stockholders and plaintiffs’ attorneys) every bit as problematic as the one (between stockholders and management) the remedies are intended to address. Recently, however, a new market has arisen with the potential to render these remedies more effective. If, instead of selling their shares, stockholders can sell their legal claims — as they are beginning to do in appraisal actions — agency costs in merger litigation can be reduced and managerial opportunism more effectively deterred.
M&A, Mergers and Acquisitions, Corporate Law, Corporate Governance, Law & Economics, Merger Litigation, Appraisal
70 Oklahoma Law Review 215 (2017)
Korsmo, Charles R., "Selling Stock and Selling Legal Claims: Alienability as a Constraint on Managerial Opportunism" (2017). Faculty Publications. 2091.