Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Anna Shifflet. Earlier posts by Martin Lipton taking issue with Lucian Bebchuk’s work on hedge fund activism and shareholder rights are available here, here, and here. Recent program research on these subjects by Professor Lucian Bebchuk includes The Long-Term Effects of Hedge Fund Activism (with Alon Brav, and Wei Jiang; discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value (discussed on the Forum here), and Toward a Constitutional Review of the Poison Pill (with Robert J. Jackson, Jr.; discussed on the Forum here).
Since the mid-1970’s the agency-cost theory, popularized by Michael Jensen, has been used and gilded by academics to justify and promote shareholder-centric corporate governance. The agency cost theory, along with Eugene Fama’s efficient market theory and Milton Friedman’s 1970 dictum that the sole purpose of the business corporation is to maximize profits for its shareholders, have been used to promote legislation, regulation and so-called “best practices” designed to limit the power of management and boards of directors to defend strategies designed to create sustainable long-term growth. So too these theories, combined with statistical studies purporting to show that attacks by activist hedge funds promote improved long-term performance and long-term shareholder value, have been used by Lucian Bebchuk to not only promote activism, but all forms of shareholder-centric governance. Indeed Bebchuk is such a fervent proponent of shareholder rights to govern corporations that he has argued that all material corporate actions should be subject to shareholder referendums, that the poison pill is unconstitutional and that the staggered board is so inimical to shareholder rights that it justified his creating a Harvard Law School group to promote proxy resolutions designed to force its abandonment.
