Empirical studies of acquisitions consistently find
that public company bidders often overpay for targets,
imposing significant losses on bidder shareholders.
Numerous studies have connected bidder overpayment
with managerial agency costs and behavioral biases that
reflect management self-interest. For purposes of
corporate law, these concerns implicate the behavior of
fiduciaries—the officers and directors of the acquiring
entity—and raise questions about whether those
fiduciaries are fulfilling their duty of loyalty. To address
comparable sell-side concerns, the Delaware courts
developed an intermediate standard of review known as
enhanced scrutiny. There has been little exploration,
however, of whether the rationales for applying
enhanced scrutiny to the actions of sell-side fiduciaries
extend to comparable fiduciaries on the buy-side.
This Article addresses this long-neglected question.
Drawing upon the history of Delaware jurisprudence on
enhanced scrutiny, it argues that enhanced scrutiny
should extend to the decisions of buy-side fiduciaries.
The Article also recognizes that, although doctrinally
coherent, applying enhanced scrutiny to buy-side
decisions would open the door to well-documented
stockholder litigation pathologies that have undermined
the effectiveness of enhanced scrutiny for sell-side
decisions. To address these pathologies, the Delaware
courts have recently encouraged the use of fully informed
stockholder votes on the sell-side to lessen litigation risk.
This Article reasons that a primary argument in favor of
extending enhanced scrutiny to buy-side decisions rests
not on the ability of the litigation itself to generate
superior outcomes, but rather as an inducement to more
frequent buy-side votes. This argument builds on recent
empirical literature which finds that stockholder voting
can provide an important counterbalance against the
self-interest and biases that lead to bidder overpayment.
Afsharipour, Afra and Laster, J. T.
"Enhanced Scrutiny on the Buy-Side,"
Georgia Law Review: Vol. 53:
2, Article 2.
Available at: https://digitalcommons.law.uga.edu/glr/vol53/iss2/2