Stakeholders and Takeovers: Can Contractarianism be Compassionate?

The issue of what, if any, purchase non-shareholder corporate constituencies (that is, employees, creditors, suppliers, customers, and communities) should have on the discretionary decisions of corporate management has proved to be one of the most durable, if not vexing, issues in modern corporate scholarship. Most recently, the issue has resurfaced in the context of the takeover wave of the 1980s, particularly during the latter part of the decade when control transactions became associated with high levels of leverage. At core, stakeholder advocates were riveted by the asymmetries involved in change-of-control transactions. While target shareholders earned consistent and sizeable returns from these transactions, stakeholders were left in the cold. Indeed, in some cases, control transactions were thought to be capable of inflicting highly focused losses on stakeholders. So severe were these losses that some commentators, were led to conclude it was the gains from opportunistic breaching of stakeholder contracts that motivated the transactions in the first place. As in the past, participants in the stakeholder and takeover debate generally array themselves into two distinct camps: one, which views any judicial or legislative attempt to protect stakeholders from harms not explicitly prohibited by corporate contracts as anathema ('non-protectionists'), and the other, which regards corporate responsibility for stakeholder harms as an innate and natural feature of the system of modern corporate governance ('protectionists'). In a perceptive article, Romano attributes part of the differences among scholars on divisive issues of corporate law to the starkly divergent normative beliefs that underlie each side. For nonprotectionists, the underlying normative framework is individualistic liberalism, whereas for protectionists, it is usually communitarianism. Given the gulf that divides these underlying normative views, the hope for a principled and durable resolution to the stakeholder debate is indeed dim.