Transfers of Control and the Quest for Efficiency: Can Delaware Law Encourage Efficient Transactions While Chilling Inefficient Ones?

At first glance, few corporate law principles seem to be better established than the widely prevailing rule that a controlling shareholder may receive a control premium for its shares. From a comparative law perspective, however, this consensus may seem surprising, because the United States stands virtually alone in failing to accord minority shareholders any presumptive right to share in a control premium. Yet, from an economic perspective, the permissive U.S. rule is not surprising because economists generally agree that economic efficiency is promoted by privately negotiated control transfers at premiums not offered to minority shareholders. The puzzling fact that this presumptively efficient rule is accepted only in the United States is compounded by a further puzzle: the rule is only followed some of the time. A number of amorphous exceptions to the general rule exist, which seem chiefly to apply when the percentage of shares held by the control seller is low. Close students of U.S. corporate law have suggested a possible explanation: because both efficient and inefficient control transfers are possible, the standard exceptions to the general rule may have been tailored to exclude precisely those transactions most likely to be inefficient transfers in which the control acquirer intends to exploit the private benefits of control. Professor Einer Elhauge, the leading exponent of this provocative theory, calls this interpretation of the case law, as will this article, the triggering thesis