The Cost of Supermajority Target Shareholder Approval

Audra Boone is a senior financial economist at the U.S. Securities and Exchange Commission in the Division of Economic and Risk Analysis. This post is based on an article authored by Dr. Boone, Brian Broughman, Associate Dean for Research and Professor of Law at Indiana University, and Antonio Macias, Assistant Professor of Finance at Baylor University. The views expressed in the post are those of Dr. Boone and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff. This post is part of the Delaware law series; links to other posts in the series are available here.

Acquisitions via a tender offer can be significantly faster than a traditional merger, but this benefit is only available if the bidder can conduct a short-form merger following the tender, which avoids the need for a proxy statement filing and formal shareholder vote. Until recently this structure was only available if the bidder could convince a supermajority (90%) of shareholders to participate in the tender offer. In August 2013, however, Delaware’s legislature passed a new code provision, section 251(h) of the Delaware General Corporation Law (the DGCL), that allows bidders of targets incorporated in Delaware to conduct a short-form merger after achieving only 50% ownership as opposed to 90% that is required in almost all other states. We use this legal change to investigate how the required level of shareholder support affects acquisition outcomes.

In our paper, The Cost of Supermajority Target Shareholder Approval: Mergers versus Tender Offers, we show that the change from a 90% to 50% threshold significantly increases the use of tender offers for Delaware targets. Though the new law reduces target shareholders’ ability to vote on certain deals, they do not appear to be harmed by the change. Indeed, acquisition premiums and target cumulative abnormal returns are higher for Delaware targets acquired after passage of DGCL 251(h) relative to target firms incorporated in other states.


Bidders have two ways to acquire a target firm: long-form merger or two-step tender offer. Long-form mergers involve sending out a proxy statement and soliciting shareholder votes to approve the merger. Typically approval from a simple majority of shareholders (i.e. 50%) is sufficient to effectuate the deal and gain full ownership. In contrast, two-step tender offers involve making an offer to purchase shares directly from target shareholders. Upon completion of the solicitation period, the bidder purchases the tendered shares, but still does not fully own the target unless all shareholders accepted the original offer. At this point, the bidder will use either a long-form or short-form merger to acquire the remaining shares. The short-form merger is the preferred route as it does not require a shareholder vote or proxy statement filing and can thus be completed significantly faster. Yet, short-form mergers historically required the bidder to own 90% of the outstanding shares compared to only 50% for a long-form merger. DGCL 251(h) removed the 90% barrier, but only for acquisitions of target firms incorporated in Delaware.

We consider two hypotheses. The first hypothesis—Shareholder Hold-up—posits that lowering the authorization threshold could collectively benefit target shareholders by reducing the risk that a minority of shareholders can effectively delay a beneficial tender offer or force it to be inefficiently structured as a long-form merger instead. This hypothesis predicts that reducing authorization requirements causes a substitution from long-form mergers to two-step tender offers because targets and bidders are now able to choose the more efficient structure rather than being forced into a merger due to potential hold-up problems with a tender offer. Furthermore, as authorization thresholds are relaxed tender offers become feasible for deals with a smaller surplus, and consequently premiums for tender offers and mergers should begin to converge.

The second hypothesis—Managerial Self-Dealing—suggests that a lower authorization threshold could increase the scope for self-dealing by senior management in tender offer acquisitions. The speed of a two-step tender offer could decrease the ability of an alternative acquirer to make a topping bid, removing one of the primary constraints limiting merger side-payments to target executives. Thus, changing the authorization thresholds from 90% to 50% could result in lower acquisition premiums and increased use of side-payments to target executives in tender offers.


To test these predictions, we put together a sample of acquisitions of publicly-held US targets announced from 2010 to 2015. We find a significant increase in the use of tender offers for Delaware targets following the passage of the new law. This effect is pronounced when compared to the infrequent use of tender offers outside Delaware over the same time period. Based on our analysis, the predicted probability of a tender offer significantly increases from 29% to 40% for Delaware targets after August 2013, and significantly decreases from 30% to 24% for non-Delaware targets after August 2013.

We find that acquisition premiums and target returns are significantly greater for Delaware targets acquired after passage of the new law higher compared to a set of target firms incorporated in other states. Furthermore, and deal completion times also increase for these deals. Bidder returns are also significantly higher and bidders capture a larger relative share of the combined gains when acquiring a Delaware corporation after passage of DGCL 251(h). Both groups of shareholders appear to benefit. This result is not due to an increase in premiums for tender offers, but rather because tender offers, which typically have a higher premium than mergers, are more common in Delaware after passage of the new law. We interpret these results as consistent with the Shareholder Hold-up hypothesis. Supermajority shareholder approval thresholds appear to increase the risk of shareholder holdup and lead to inefficient choice between tender offer and merger.

By contrast, we find no evidence of managerial self-dealing. In particular, the new law seems to have no effect on the likelihood that a target CEO will be retained or receive a merger side-payment.

The full paper is available for download here.

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