05.10b Hansmann: Why Are Companies Organized As Generic Corporations? One good talk at the American Law and Economics Association conference was Henry Hansmann's Presidential Address. Knowing the rotten acoustics in Northwestern Law School's Atrium from a past ALEA conference, I made sure to sit only eight feet from the podium this time. Thus, I learned at least these two things:

1. Customized organizational forms are like real estate covenants: they allow for special desires, but they have the disadvantage of being hard to change if you make a mistake or if conditions change. Default rules are like Zoning: they give pretty good protections, even though not tailored to your particular situation, and they are easier to change. Thus, choosing a generic Delaware corporate charter, you are really saying you trust the Delaware courts to maintain good default rules. (This argument would apply to contracts generally-- do less writing, and you are trusting the courts. Charters are intended to last a long time, though, which makes the Change argument particularly important.

2. That Delaware law allows poison pills, staggered boards, etc. is not important in itself. It is only important when combined with everything else Delaware law does-- and, in particular, the definition of "fiduciary duty" for directors. Suppose Delaware law allowed corporate boards to activate poison pills that would absolutely prevent hostile takeovers. Does that mean a Delaware corporation is safe from hostile takeover? No-- because the Delaware courts could also say that a board member who activates a pill that prevents a takeover that offers a price higher than the current market price of the stock is violating his fiduciary duty. Such a legal rule would force boards to allow hostile takeovers. [in full at 04.05.10b.htm]

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