Using Auction Theory to Inform Takeover Regulation

This paper focuses on certain mechanisms that govern the sale of corporate assets. Under Delaware law, when a potential acquirer makes a serious bid for a target, the target's Board of Directors is required to act as would "auctioneers charged with getting the best price for the stock- holders at a sale of the company." The Delaware courts' preference for auctions follows from two premises. First, a firm's managers should maximize the value of their shareholders' investment in the company. Second, auctions maximize shareholder returns. The two premises together imply that a target's board should conduct an auction when at least two firms would bid sums that are nontrivially above the target's prebid market price.Auctions; Takeovers

Optimal Penalties in Contracts

Contract law's liquidated damage rules prevent enforcement of contractual damage measures that require the promisor, if it breaches, to transfer to the promisee a sum that exceeds the net gain the promisee expected to make from performance; but these rules permit the promisor to transfer less than the promisee's expectation. We define a contractual damage multiplier as any number between zero and infinity by which the promisee's expected gain -- its expectation interest -- is multiplied. Multipliers of one or less thus comply with the liquidated damage rules while multipliers that exceed one do not; the high multipliers are unenforceable penalties. This paper shows that multipliers of any size can be efficient or inefficient, depending on the parties' purposes in creating them. For example, a multiplier that exceeds one will decrease welfare if used by a seller with market power to deter entry; but will increase welfare if used by parties to induce efficient relation specific investment. As a consequence, a court should inquire, not into the size of the multiplier, but into the purpose the multiplier serves for the parties.

Optimality and the Cutoff of Defenses Against Financers of Consumer Sales

When a consumer pays in cash or by check and the seller performs improperly, the consumer must initiate a lawsuit in order to recover his payments, and he cannot recover them or damages until the suit is concluded. Courts and commentators seem untroubled by these disadvantages which attend cash purchases, apparently for two reasons: First, people who pay cash present unsympathetic cases; they have money, and its presence is usually associated with an ability to take care of oneself. Second, cash sales are cheaper than credit sales because the investment income forgone as the result of a cash payment will usually be less than the cost of credit. Buyers who purchase on credit are, of course, disadvantaged by having to pay credit costs, but in the event of improper seller performance they can withhold further installment payments; they therefore have a weapon to induce performance, they need not initiate law suits, and they can retain at least part of the price during the duration of an action. When, however, a credit purchaser has his note transferred to a finance company, or he waives sales defenses he may have against the seller as against a third party who has financed the sale, or he uses a bank credit card to make the purchase, state law often provides that if the seller breaches, the buyer must continue to make payments to the finance company or bank, and must proceed against the seller. The intervention of a third party, called here the financer, thus visits on the credit buyer the same disadvantages which attend cash purchases and it does this for those consumers who lack the resources to pay cash and who must nevertheless continue to bear the higher costs associated with credit buying

Products liability, corporate structure, and bankruptcy: Toxic substances and the remote risk leadership

This paper addresses the interaction of three seemingly unrelated issues. Each is important in its own right; their interaction poses of overwhelming magnitude for our legal system. The three are: (1) In products liability law, should firms be made to bear risks are difficult to foresee? If no one knew that widgets cause scrofula, they do, should widget manufacturers be liable to scrofula victims? Corporate law, to what extent should limited liability isolate firm from products liability victims? Can company X create a subsidiary produce dangerous products and escape liability for the resultant injuries? (3) In bankruptcy law, at least since 1979, can persons exposed to substances assert claims in the manufacturer's bankruptcy if injuries had not materialized by then? If Smith purchases a drug company X in 1980, company X files a bankruptcy petition in 1981, the drug sometimes causes injury to users years after ingestion, far healthy Smith assert a claim in X'

Regulating for Rationality

Traditional consumer protection law employs various disclosure requirements to respond to market imperfections that result when consumers are misinformed or unsophisticated. This regulation assumes that consumers can rationally act on the information that disclosure seeks to produce. Experimental results in psychology and behavioral economics question this rationality premise. The numerous reasoning defects consumers exhibit in these experiments would vitiate disclosure solutions if those defects also presented in markets. To assume that consumers behave as badly in markets as they do in the lab implies new regulatory responses. This Article sets out the novel and difficult challenges that such regulating for rationality -intervening to cure or to overcome cognitive error- poses for regulators