In Part I, I explore the motives of litigious target managers. I briefly examine the takeover defense literature and empirical evidence regarding the frequency of target litigation, both of which indicate that target managers usually sue bidders in order to defeat unwanted takeover attempts. I also suggest that judicial reactions to target lawsuits largely confirm this hypothesis.
I then discuss, in Part II, target management’s conflict of interest in control contests and the particular strategic considerations that lead target managers to sue hostile bidders. I argue that target litigation is peculiarly likely to be frivolous and, based on a study of successful target defenses, show that litigation often repels unwanted bids. This result, empirical studies demonstrate, adversely affects target shareholder wealth and, I suggest, undermines an optimal allocation of corporate resources.
I conclude in Part III by proposing reforms that would limit harmful target litigation without unduly restricting the ability of target managers to seek redress for legally cognizable wrongs. I also suggest that the benefits that Jarrell attributes to target litigation can be preserved cheaply and effectively under the approach that I propose.