Corporate Voting and the Takeover Debate

Summary

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For many years academics have debated whether it is better to permit hostile acquirers to use tender offers to gain control over unwilling target companies, or to force them to use corporate elections of boards of directors in these efforts. The Delaware courts have expressed a strong preference for shareholder voting as a change of control device in hostile acquisitions. To force acquirers to accept their preferences, the Delaware courts have developed a jurisprudence permitting the effective classified board (ECB), a poison pill combined with a classified board, to protect target company management from removal by a hostile tender offer alone, or through a single corporate election. This article examines whether proxy contests, tender offers, or combined proxy contest/tender offers are more likely to result in value maximizing outcomes for shareholders when target companies are able to deploy defensive tactics. Using a probabilistic version of a standard weighted voting model, the authors find that neither proxy contests, tender offers, nor combined proxy contests and tender offers will always lead to the desirable outcome for target company shareholders in any scenario.

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Extract

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Corporate Voting and the Takeover Debate

I. INTRODUCTION

Shareholder voting is the key to the outcome of hostile takeovers. The most obvious example arises when an acquirer tries to unseat a corporate board in a proxy contest for corporate control. But shareholder votes are needed in almost all other takeover settings as well. For instance, when a bidder announces a hostile tender offer, a resistant target company's board of directors will normally use its poison pill antitakeover defense, or a combination of a poison pill and a classified board, to stop its shareholders from selling their shares to the bidder, forcing the bidder to engage in at least one proxy contest to obtain control.1 In addition, if the company is incorporated in one of the twenty-seven states that have control shareholder antitakeover statutes, the bidder can accumulate a significant stake in the target and demand a disinterested shareholder vote by the target company's shareholders on whether the bidder's stock should have voting rights.2 In all of these contested elections, the main issue before shareholders is whether to accept the hostile bid.

Given the central importance of shareholder voting to corporate takeovers, legal academics have begun to model shareholder elections to gain insights into the ongoing debate over the efficiency of different forms of takeover techniques and antitakeover defenses. Professors Gilson and Schwartz have developed a voting model to explore the Delaware Supreme Court's apparent preference for voting as a change of control mechanism.3 They claim that elections represent an inferior change of control mechanism compared to market transactions through tender offers, and that therefore the Delaware courts should overrule their prior decisions that allowed the use of defensive tactics as a means of defeating tender offers. Professors Bebchuk and Hart subsequently used a voting model to examine the differences between pure voting contests, pure takeover bids, and acquisition offers that combine voting contests and takeover bids.4 They argue that their model reveals that a combined proxy contest and tender offer is superior to either of the latter two.

In this Article, we argue that these earlier models present a far too simple picture of the world. For example, both of the aforementioned papers assume that the every shareholder holds exactly one share of the company. Gilson and Schwartz further assume that every shareholder decides how to vote believing that that his or her vote will be pivotal. Bebchuk and Hart insist that all shareholders presume that current management is superior to any rival. But shareholders are heterogeneous in their stockholdings and voting behavior: they have different valuations of the target's stock, hold different views of management and listen to different advice about how to cast their ballots. To realistically model shareholder voting behavior, one must explicitly incorporate each of these variables into the model.

In this Article, we construct a simple model of shareholder voting that captures these important variables in five common shareholder voting scenarios. Ini...

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