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Corporate Antitakeover Defenses

At the heart of any free economy is its capital markets. Investors put their money in these capital markets with the expectation of a return on their investment. What assurance do these investors have that they will receive a fair return on their investment?

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Corporate Antitakeover Defenses

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  1. At the heart of any free economy is its capital markets. Investors put their money in these capital markets with the expectation of a return on their investment. What assurance do these investors have that they will receive a fair return on their investment? Corporate governance is the set of processes and procedures that ensures investors a fair return on their investment. In practical terms, corporate governance includes • the articles of incorporation of the company, • the mechanics of the election of the board of directors, • the responsibility of the board to act as fiduciaries of the shareholders, • the responsibility of the board to hire, compensate, and fire senior management, and the public auditors of the company.

  2. Corporate Antitakeover Defenses • Description • Brickley/Lease/Smith (1988), Table A.1. • Example: Poison Pills • Firms issue rights to shareholders. These rights allow shareholders to purchase shares in surviving firm (bidder) at a substantial discount (50%) from the market price. However, (target) firm’s directors can postpone date when these right become exercisable.

  3. Are corporate antitakeover defenses in the interest of shareholders? • No. • Discourages takeovers (lowers probability of a takeover). • Yes. • Encourages higher premia. Target managers’ bargaining position improves. • Of course, since shareholders have to vote to approve such defenses.

  4. Stock Market’s reaction to announcements of corporate antitakeover defenses. • Earlier studies: Zero market reaction. • Tale (Tail !) of the dogs that did not bark! • Did the stock market anticipate announcements of corporate antitakeover defenses? • Bhagat-Jefferis (1991): Yes. Table 7. • After adjustment for anticipation: -1%

  5. Brickley/Lease/Smith (1988) • Over 95% of management-sponsored antitakeover provision proposals pass. • Who votes for such proposals? (Table 2) • Managers and directors. • Pressure-sensitive institutions (insurance companies, bank trusts) • Who votes against such proposals? • Unaffiliated blockholders. • Pressure-resistant institutions (public pension funds, mutual funds, endowments). • Question: Costs on shareholders of understanding firm-value consequences of these and other proposals on a proxy statement.

  6. Over 95% of management-sponsored proposals pass? Why? • Bhagat/Jefferis (1991): Managers only propose amendments that are (very) likely to pass. • Table 7: As votes controlled by ESOPs (affiliated investment plans) increases, managers are more likely to propose antitakeover amendments. • Table 7: As votes controlled by CEO/officers/directors increases, managers are less likely to propose antitakeover amendments.

  7. Table 7: As votes controlled by CEO/officers/directors increases, managers are less likely to propose antitakeover amendments. Why? • Do not want to discourage takeovers (and associated premia). • As they own more shares, less concerned of a hostile takeover and job-loss.

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