Posted by Ronald J. Gilson, Columbia University, and Alan Schwartz, Yale University, on
Thursday, August 25, 2016
Ronald J. Gilson is Marc & Eva Stern Professor of Law and Business at Columbia Law School, Meyers Professor of Law and Business (Emeritus) at Stanford Law School, and a fellow of the European Corporate Governance Institute. Alan Schwartz is Sterling Professor of Law, Yale Law School, and Professor, Yale School of Management. This post is based on a recent paper by Professors Gilson and Schwartz and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell (discussed on the Forum here).
The appropriate division of authority between a company’s board and its shareholders has been the central issue in the corporate governance debate for decades. This issue presents starkly for defensive tactics: the extent to which a target board is allowed to prevent the shareholders from accepting a hostile bid. In the U.S., the board’s power is extensive; control largely lies with directors. While a poison pill would preclude a hostile offer, the Delaware Supreme Court held in Unitrin that the pill is preclusive only if it makes a successful proxy fight “mathematically impossible or realistically unattainable.” That a staggered board together with a pill would require a bidder to run two successive proxy fights does not reach this very high hurdle, despite the Delaware Chancery Court’s observation in Airgas that no bidder has attempted this extended effort.
Normative evaluations of current law face a critical obstacle: defensive tactics raise the social welfare question: to what extent these tactics deter ex ante efficient takeovers. This question cannot be answered empirically because the econometrician can observe bids but cannot observe deterred bids. In our working paper, Defensive Tactics and Optimal Search: A Simulation Approach (July 2016), we write a search equilibrium model of the market for corporate control and solve it by simulating plausible parameters for the variables of interest. Because we specify the number of ex ante efficient acquisitions that could be made, we can estimate market efficiency—the ratio of made matches to good matches—under legal regimes that are more or less friendly to defensive tactics. Also, we argue that the common metric among defensive tactics is time: the ability of various tactics to delay bid completion and thus reduce bidder, and thereby increase target, returns.
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