The Iliad and the IPO

Andrew A. Schwartz is an Associate Professor of Law at the University of Colorado Law School. This post is based on Professor Schwartz’s recent article published in The Harvard Business Law Review, available here.

Many public companies have shed takeover defenses in recent years, on the theory that such defenses reduce share price. Yet new data presented in my latest article, Corporate Legacy, shows that practically all new public companies—those launching their initial public offering (IPO)—go public with powerful takeover defenses in place, which presumably depresses the price of the shares. This behavior seems strange, as pre-IPO shareholders both have a strong incentive to maximize the value of the shares being sold in the IPO and are in position to control whether to adopt takeover defenses. Why do founders and early investors engage in this seemingly counterproductive behavior? In Corporate Legacy, I look to a surprising place, the ancient Greek epic poem, the Iliad, for a solution to this important puzzle, and claim that pre-IPO shareholders adopt strong takeover defenses, at least in part, so that the company can remain independent indefinitely and thus create a corporate legacy that may last for generations.

The human condition is that we are mortal beings, and nobody can live forever. In the face of this challenge, ambitious people have always sought a way to live forever, from medieval knights who searched for the Holy Grail to Silicon Valley billionaires who hope to perpetuate their lives through the melding of man and machine known as “the Singularity.” These valiant attempts notwithstanding, immortality has always proved impossible. Hence, a deep question for poets and philosophers throughout the ages has been how to live a meaningful life despite the certainty of death.

Among the first and most important responses to this profound question is offered in the ancient Greek epic, the Iliad, composed around the eighth century B.C. by the poet Homer. The answer provided by the Iliad is that mortal humans can achieve a form of immortality through being remembered and talked about, even after their time on earth comes to an end. A warrior who fights gallantly and dies a noble death will have his story recounted by poets and bards for generations to come. In a way, then, he lives forever. This concept is called kleos aphthiton in Greek, translated as everlasting fame, eternal glory or perpetual legacy.

And while the Iliad is focused on achieving everlasting glory through heroics on the battlefield, this is not the exclusive means of winning that prize, as demonstrated by the Iliad itself. The poet’s name—“Homer”—is remembered long after his mortal body perished from this earth. By composing an epic that continues to be read thousands of years after he perished, Homer himself achieved a form of immortality. Countless other writers and artists have followed Homer in this quest, seeking their place in posterity through the cultural artifacts they leave behind. For example, the Roman poet Horace, writing in the first century B.C., wrote that by publishing a great poem, “I shall not wholly die, and a large part of me will elude the goddess of death.”

In the academic and scientific settings, scholars of every type publish their research not only to advance knowledge but also for the prospect of everlasting glory. To have one’s name attached to a field—like Euclid—or to have a standard measure called by one’s name—like Watt—is a crowning achievement precisely because it immortalizes the scholar. The lesson of the Iliad is not even limited to those who publish. Professional athletes similarly devote their lives to their sport and risk bodily injury to make their mark so that they may achieve perpetual renown. This can be seen by the keeping of all-time records or when a number is retired in homage to a great player. Slugger Babe Ruth has been dead for sixty-five years, but his likeness adorns the Baseball Hall of Fame and his greatness is still recounted. In modern America, movie stars epitomize the human quest for kleos aphthiton. Their likeness is captured on film, thus allowing them to live forever, in a sense. James Dean died in 1955—or did he? As the old Kinks song puts it, “Celluloid heroes never really die.”

In Corporate Legacy, I argue that, like art, athletics, and other forms, the corporate form can likewise serve as a vehicle for achieving immortality through perpetual legacy. This is because corporations are endowed by the law with perpetual existence. [1] And public companies, in particular, can have profound social and cultural significance, making a perpetual public company an important method for perpetuating one’s legacy down through the ages. This novel suggestion helps explain the mystery of why companies go public with powerful takeover defenses in place.

Public companies are an important form for achieving kleos aphthiton; Steve Jobs, Henry Ford and Walt Disney all concluded their earthly existence and yet clearly “live on” through the companies they led. But public companies have a special vulnerability that private companies do not share. Once a company goes public in an IPO, it is at risk of a hostile takeover, which could mean the end of the corporation as an enduring, independent institution, thus undermining its ability to perpetuate a legacy for the pre-IPO shareholders.

Takeover defenses, such as a staggered board, can be used to avoid this outcome and ensure that the company will remain independent for a long time—and thus perpetuate the legacy of the pre-IPO shareholders for many years to come. In addition, contemporary public companies face strong resistance to adding takeover defenses midstream, with the effect that the only chance for a public company to adopt such defenses is at the IPO stage. And this is precisely what we see in practice, as a set of original data presented in Corporate Legacy shows that nearly 90% of contemporary IPO firms go public with the most powerful takeover defense in the arsenal, an “effective staggered board,” in place. [2] (By contrast, fewer than 20% of S&P 500 companies have a staggered board these days.) These defenses are necessary to ensure that the company can endure for a long time and help their pre-IPO shareholders achieve kleos aphthiton.

As Jack Ma, founder of publicly-traded Alibaba, recently put it, “If I had another life, I would keep my company private.” Maybe he would, but that’s exactly the point! He has just one life to live. To make the most of it—to achieve a perpetual legacy that will survive him—he brought his company public on the New York Stock Exchange in the biggest IPO of 2014. And, of course, Alibaba went public with incredibly powerful takeover defenses in place, including a staggered board. Thanks to these defenses, Alibaba can remain independent indefinitely, and Ma can hope to join the pantheon of Jobs, Ford and others. The defenses may have lowered Alibaba’s IPO price—but that may well be a price worth paying for a shot at kleos aphthiton. 

The full article is available for download here.

Endnotes:

[1] See Andrew A. Schwartz, The Perpetual Corporation, 80 George Washington Law Review 764 (2012).
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[2] See Lucian A. Bebchuk, John C. Coates IV & Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 Stanford Law Review 887 (2002).
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