Enhanced Scrutiny on the Buy-Side

Empirical studies of acquisitions consistently findthat public company bidders often overpay for targets,imposing significant losses on bidder shareholders.Numerous studies have connected bidder overpaymentwith managerial agency costs and behavioral biases thatreflect management self-interest. For purposes ofcorporate law, these concerns implicate the behavior offiduciaries—the officers and directors of the acquiringentity—and raise questions about whether thosefiduciaries are fulfilling their duty of loyalty. To addresscomparable sell-side concerns, the Delaware courtsdeveloped an intermediate standard of review known asenhanced scrutiny. There has been little exploration,however, of whether the rationales for applyingenhanced scrutiny to the actions of sell-side fiduciariesextend to comparable fiduciaries on the buy-side.This Article addresses this long-neglected question.Drawing upon the history of Delaware jurisprudence onenhanced scrutiny, it argues that enhanced scrutinyshould extend to the decisions of buy-side fiduciaries.The Article also recognizes that, although doctrinallycoherent, applying enhanced scrutiny to buy-sidedecisions would open the door to well-documentedstockholder litigation pathologies that have underminedthe effectiveness of enhanced scrutiny for sell-sidedecisions.

To address these pathologies, the Delaware courts have recently encouraged the use of fully informedstockholder votes on the sell-side to lessen litigation risk.This Article reasons that a primary argument in favor ofextending enhanced scrutiny to buy-side decisions restsnot on the ability of the litigation itself to generatesuperior outcomes, but rather as an inducement to morefrequent buy-side votes. This argument builds on recentempirical literature which finds that stockholder votingcan provide an important counterbalance against theself-interest and biases that lead to bidder overpayment.