Posts Tagged ‘Antitakeover’

“Just Say No”

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Tuesday December 9, 2014 at 9:17 am
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Editor’s Note: 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 Sabastian V. Niles.

On October 22, 2014, Institutional Shareholder Services issued a note to clients entitled “The IRR of ‘No’.” The note argues that shareholders of companies that have successfully “just said no” to hostile takeover bids have incurred “profoundly negative” returns. In a note we issued the same day, we called attention to critical methodological and analytical flaws that completely undermine the ISS conclusion. Others have also rejected the ISS methodology and conclusions; see, for example, the November analysis by Dr. Yvan Allaire’s Institute for Governance of Public and Private Organizations entitled “The Value of ‘Just Say No’” and, more generally, a December paper by James Montier entitled “The World’s Dumbest Idea.” Of course, even putting aside analytical flaws, statistical studies do not provide a basis in individual cases to attack informed board discretion in the face of a dynamic business environment. The debate about “just say no” has been raging for the 35 years since Lipton published “Takeover Bids in the Target’s Boardroom,” 35 Business Lawyer p.101 (1979). This prompts looking at the most prominent 1979 “just say no” rejection of a takeover.

…continue reading: “Just Say No”

The Law and Finance of Anti-Takeover Statutes

Posted by Marcel Kahan, NYU School of Law, on Tuesday December 9, 2014 at 9:15 am
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Editor’s Note: Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law. This post is based on a paper co-authored by Professor Kahan and Emiliano M. Catan at the New York University School of Law.

Over the last 15 years, numerous economics articles, many published in top finance journals, have examined the effect of takeover law on performance, leverage, managerial stock ownership, worker wages, patenting, acquisitions, and other firm actions. These studies have concluded, among other things, that anti-takeover laws are associated with a decline in managerial stock ownership, and increase in wages, and a decline in dividend payout ratios.

From a legal perspective, however, the varying methods that financial economists use to measure the takeover protection afforded by state law make little sense. Economists generally look either at whether (and when) a state adopted a business combination statute; at when a state adopted the first of a set of statutes (typically, business combination statutes, control share acquisition statutes, and fair price statutes); or at how many different types of statutes a state has adopted.

…continue reading: The Law and Finance of Anti-Takeover Statutes

Delaware’s Choice

Posted by Guhan Subramanian, Harvard Law School, on Monday February 10, 2014 at 9:17 am
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Editor’s Note: Guhan Subramanian is the Joseph Flom Professor of Law and Business at the Harvard Law School and the H. Douglas Weaver Professor of Business Law at Harvard Business School. The following post is based on Professor Subramanian’s lecture delivered at the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In November 2013 I delivered the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. My lecture, entitled “Delaware’s Choice,” presented four uncontested facts from my prior research: (1) in the 1980s, federal courts established the principle that Section 203 must give bidders a “meaningful opportunity for success” in order to withstand scrutiny under the Supremacy Clause of the U.S. Constitution; (2) federal courts upheld Section 203 at the time, based on empirical evidence from 1985-1988 purporting to show that Section 203 did in fact give bidders a meaningful opportunity for success; (3) between 1990 and 2010, not a single bidder was able to achieve the 85% threshold required by Section 203, thereby calling into question whether Section 203 has in fact given bidders a meaningful opportunity for success; and (4) perhaps most damning, the original evidence that the courts relied upon to conclude that Section 203 gave bidders a meaningful opportunity for success was seriously flawed—so flawed, in fact, that even this original evidence supports the opposite conclusion: that Section 203 did not give bidders a meaningful opportunity for success.

…continue reading: Delaware’s Choice

The Case for an Unbiased Takeover Law

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday May 22, 2013 at 9:34 am
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Editor’s Note: The following post comes to us from Luca Enriques, Nomura Visiting Professor of International Financial Systems at Harvard Law School and Professor of Business Law at LUISS University (Rome), Ronald J. Gilson, Charles J. Meyers Professor of Law and Business at Stanford Law School and Marc and Eva Stern Professor of Law and Business at Columbia University School of Law, and Alessio M. Pacces, Professor of Law & Finance, Erasmus School of Law, Rotterdam.

Takeovers remain the most controversial corporate governance mechanism. According to pro-takeover commentators, takeovers are generally beneficial for corporate governance. Takeovers can displace poorly performing managers and facilitate corporate restructuring. From this perspective, regulation should encourage takeovers. On the opposite side of the debate, those who oppose hostile takeovers argue that they can disrupt well-functioning companies and encourage short-termism. From this point of view, policies that hamper takeovers are favored.

In our paper The Case for an Unbiased Takeover Law (with an Application to the European Union), we reject a categorical pro- or anti-takeover position. While hostile and friendly takeovers may be efficient in the aggregate, individual takeovers and individual companies’ exposure thereto are efficient or inefficient depending on a variety of factors. These factors include the production functions of companies, the conditions in the relevant industry, the problems confronting the corporation and the best response to those problems. Because these all may differ from company to company and over time, so also may the appropriate stance to takeovers differ. Consequently, we posit that takeover regulation should sanction the efforts by individual companies to devise a takeover regime appropriate to their own, mutable circumstances. In other words, takeover regulation should be limited to a set of optional rules.

…continue reading: The Case for an Unbiased Takeover Law

Takeover Defenses as Drivers of Innovation and Value-Creation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday May 6, 2013 at 8:42 am
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Editor’s Note: The following post comes to us from Mark Humphery-Jenner of the Australian School of Business at the University of New South Wales.

In the paper, Takeover Defenses as Drivers of Innovation and Value-Creation, forthcoming in the Strategic Management Journal, I analyze the role of anti-takeover provisions in ameliorating agency conflicts of managerial risk aversion in certain types of companies.

The desirability of anti-takeover provisions (ATPs) is a contentious issue. ATPs can lead to shareholder wealth-destruction by insulating managers from disciplinary takeovers and enabling them to engage in empire building. However, without ATPs, managers of hard-to-value (HTV) firms, which might trade at a discount due to valuation-difficulties, are exposed to ‘opportunistic takeovers’ (which aim to take advantage of low stock prices), potentially causing managerial myopia and under-investment in innovative projects. Thus, in HTV firms, ATPs might serve as credible commitments to encourage managers to make value-creating investments, but in easier-to-value firms, they might lead to inefficient governance.

…continue reading: Takeover Defenses as Drivers of Innovation and Value-Creation

Taxing Control

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday November 13, 2012 at 9:46 am
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Editor’s Note: The following post comes to us from Richard M. Hynes, Professor of Law at University of Virginia School of Law.

Early corporate law scholarship argued both that anti-takeover devices are inefficient (they reduce the value of the firm) and that firms adopt efficient governance terms before they make their initial public offering. Some of this scholarship asserted that firms go public without anti-takeover devices and adopt them later when agency costs are higher. However, subsequent research revealed that most firms adopt anti-takeover devices before completing their initial public offerings. For example, over eighty-six percent of firms that have gone public in 2012 have a staggered board of directors, and both Google and Facebook chose dual-class capital structures that allow the founders to retain voting control disproportionate to their economic stake.

The literature offers a number of explanations for this apparent puzzle. Capital market imperfections may prevent initial public offering prices from reflecting differences in corporate governance terms. Firms may choose inefficient terms due to bad legal advice or because of frictions in the market for financing prior to the initial public offering. Anti-takeover protections could be efficient after all, at least for some firms, because they correct for myopic investors or some other problem. Finally, managers may choose anti-takeover provisions to signal something about their firms. In an essay forthcoming in the Journal of Corporation Law I offer a very different explanation, one based on the tax code.

My argument begins with a variant of one of the existing explanations for anti-takeover protections. The heart of the argument is that managers are not driven solely by a desire for material gain but derive some happiness or utility from the control they exercise over their firm. To the extent that managers derive happiness from control, they may not choose governance terms that maximize the dollar value of the firm. However, unless there is some contracting failure, they will still choose efficient terms — terms that maximize the total value of the firm (the dollar value plus the control value).

…continue reading: Taxing Control

Concentrating on Governance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday May 2, 2011 at 9:33 am
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Editor’s Note: The following post comes to us from Dalida Kadyrzhanova of the Finance Department at the University of Maryland and Matthew Rhodes-Kropf of the Entrepreneurial Management Unit at Harvard Business School.

In our paper, Concentrating on Governance, forthcoming in the Journal of Finance, we develop a unified account of the costs and benefits of external governance and explore the economic determinants of the resulting trade-offs for shareholder value. The importance of corporate governance is broadly recognized, but there is a great deal of disagreement on whether existing governance mechanisms ultimately benefit or hurt shareholders. Our novel perspective explains shareholder governance trade-offs, why they arise, and how they vary across firms and industries.

The classical agency view is that it is costly for shareholders to yield power to managers because managers pursue private benefits of control whenever their jobs are protected from takeovers or shareholder initiatives. A challenge to the agency view comes from the alternative bargaining view, which suggests that it is in the interest of shareholders to yield power to managers, a popular argument among M&A lawyers and practitioners.

…continue reading: Concentrating on Governance

An Antidote for the Poison Pill

Editor’s Note: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. This post is based on an op-ed article by Professor Bebchuk, available here, that appeared in today’s print edition of the Wall Street Journal. The op-ed article builds on Professor Bebchuk’s academic studies on the consequences of antitakeover defenses and the interaction of the poison pill with staggered boards, which include The Case Against Board Veto in Corporate Takeovers, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy (with Coates and Subramanian), The Costs of Entrenched Boards (with Cohen), and Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment (with Cohen and Wang). This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a major decision issued last week, William Chandler of Delaware’s Court of Chancery ruled that corporate boards may use a “poison pill”—a device designed to block shareholders from considering a takeover bid—for as long a period of time as the board deems warranted. Because Delaware law governs most U.S. publicly traded firms, the decision is important—and it represents a setback for investors and capital markets.

The ruling grew out of the epic battle between takeover target Airgas and bidder Air Products. Air Products made a takeover bid for Airgas in 2010, increased it several times, and kept it open until last week’s decision. Airgas’s directors argued that defeating the premium offer would prove, in the long run, to be in shareholders’ interests. As the Chancery Court stressed, however, the directors based their opinion solely on information publicly available to shareholders. Why should shareholders, who have powerful incentives to get it right, not be permitted to make their own choice between selling and staying independent?

…continue reading: An Antidote for the Poison Pill

Staggered Boards and the Wealth of Shareholders: Evidence from the two Airgas Rulings

Posted by Lucian Bebchuk, Alma Cohen and Charles C.Y. Wang, Harvard Law School, on Monday February 7, 2011 at 9:19 am
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Editor’s Note: Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang are all affiliated with Harvard Law School’s Program on Corporate Governance. This post is based on their recent study, available here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Program on Corporate Governance just issued our paper Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment.

While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely being the product of the tendency of low-value firms to have staggered boards. Our paper uses a natural experiment setting to identify how market participants view the effect of staggered boards on firm value.

In particular, we focus on two recent rulings, separated by several weeks, that had opposite effects on the antitakeover force of the staggered boards of affected companies: (i) an October 2010 ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company’s annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws.

We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of companies significantly affected by the rulings –namely, companies with a staggered board and an annual meeting in later parts of the calendar year – and that the Supreme Court ruling produced a reduction in the value of these companies that was of similar magnitude (but opposite sign) to the value increase generated by the Chancery Court ruling. The identified positive and negative effects were most pronounced for firms for which control contests are especially relevant due to low industry-adjusted Tobin’s Q, low industry-adjusted return on assets, or relatively small firm size.

Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. The findings are thus consistent with institutional investors’ standard policies of voting in favor of proposals to repeal classified boards, and with the view that the ongoing process of board declassification in public firms will enhance shareholder value.


Below is a more detailed description of what our paper does:

…continue reading: Staggered Boards and the Wealth of Shareholders: Evidence from the two Airgas Rulings

Classified Boards, the Cost of Debt, and Firm Performance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday January 17, 2011 at 10:46 am
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Editor’s Note: The following post comes to us from Dong Chen of the Finance Department at the University of Baltimore.

In the paper, Classified Boards, the Cost of Debt, and Firm Performance, which was recently made publicly available on SSRN, I analyze the effects of classified boards on bondholders’ wealth and the cost of debt, as well as the implications on firm performance. The empirical results suggest that classified boards are strongly associated with a lower cost of debt, and the effect is robust to the inclusion of other governance variables the literature has shown to be relevant to the cost of debt, especially the G-index.

…continue reading: Classified Boards, the Cost of Debt, and Firm Performance

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