SOCIETÀ ITALIANA DI DIRITTO ED ECONOMIA
Robert Rhee (University of Florida Levin College of Law)
Abstract
This Article advances a theory of entityness that theorizes the firm and its relationship to the acquisition premium. This theory is the first scholarly analysis to construct a general model of takeover valuation by integrating the modern finance theory of asset value and a corrected Coasean theory of the firm. The acquisition premium is an enigma. Acquirers must pay it. But why?—if the market price is tethered to fundamental value through an efficient market. This enigma reveals a key insight about firms. The theory of entityness postulates that the acquisition premium is compensation for a capitalized asset intrinsic in the firm structure. This Article’s core idea is that Coasean transaction cost incurred in firm creation is not really a “cost” as Coase and economists assert and have long believed as axiomatic. They are wrong. Coasean “transaction cost” begets entityness, the state of high, durable order and organization of factors of production within the legal boundary of the firm.
Coasean “transaction cost” converts into a form of capitalized asset that impounds the value of entityness. If an acquirer seeks a corporate asset, it must unavoidably invest resources to organize factors of production since these things do not self-order in a world of free resources. This Article constructs a formal arbitrage argument that proves an acquirer cannot arbitrage away the need for this investment through an election of the form of acquisition (i.e., strategic “buy” or “build” decision) and the law of one price must hold under both choices. The acquisition premium is payment for the precondition of a firm structure that is necessary to venture in a firm, i.e., the firm’s entityness. The value of this capitalized asset is monetized not in the capital market among traders of individual shares valued only on expectation of discounted cash flow under the modern theory of asset value, but in the market for corporate control by acquirers of whole corporate assets who must give value to entityness. The theory of entityness has major implications on merger law.