Anthony Niblett


Commentators have argued that employees should be compensated in the event of a hostile takeover; otherwise, the threat of such a takeover will fail to incentivize firm-specific investments by employees. Such deferred compensation is analogous to the payment of damages following a breach of contract. The analogous breach, here, is the breach of an implicit contract between management and employees. Employees trusted management to compensate them for firm-specific investments not explicitly contracted for. This Article uses a familiar result from the contract law literature: There is no measure of damages for breach of contract that can generate both efficient breach and efficient investment by parties to the relationship. While zero damages results in an inefficiently high likelihood of breach, expectation damages result in too much investment. Similarly, in the hostile takeover context, no measure of ex post compensation to employees can generate efficient takeovers from outside bidders and efficient firm-specific investment by employees. Measures of compensation that incentivize only those takeovers that are efficient will lead to overreliance, i.e., excessive firm-specific investments. Essentially, trying to plug one leak exposes another.