Cross-Listings, Antitakeover Defenses, and the Insulation Hypothesis

Nan Yang is Assistant Professor of Finance at the Hong Kong Polytechnic University; Albert Tsang is Professor of Accounting at the Hong Kong Polytechnic University; Lingyi Zheng is a postdoctoral fellow at the Hong Kong Polytechnic University. This post is based on their recent paper, forthcoming in the Journal of Finance Economics. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk; and Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

Understanding why firms cross-list their shares abroad has attracted many studies in finance (Karolyi, 2006, 2012). These studies has argued that overseas listings can broaden firms’ shareholder base, or bond firms to stronger legal enforcement and more prestigious financial intermediaries in the hosting countries. While these studies mainly focus on the capital market benefits of cross-listings (e.g., lower cost of capital, higher stock valuation, and higher liquidity), we examine a new motive for cross-listing: to insulate firms from hostile takeovers. In our paper, forthcoming in the Journal of Finance Economics, we provide strong evidence that firms are more likely to cross-list in foreign countries when facing corporate control threats.

Kastiel and Libson (2019) is the first to propose this new motive in their insulation hypothesis. They argue that cross-listing can protect firms from potential hostile takeovers owing to the increased costs and barriers for acquirers. If acquirers launch tender offers in both domestic and foreign exchanges, they can be subject to massive direct fees. Acquirers would also be concerned about immense complexity, uncertainty, and possible litigation risk when dealing with different accounting regimes, governance, and other regulatory requirements between jurisdictions. The complexity, uncertainty, and litigation risk also represent significant costs because time is crucial in the success of a takeover attempt, and these matters could cause serious delays in the merger process.

Kastiel and Libson (2019) provide two examples showing that these costs are more than a theoretical possibility. In a hostile offer to acquire its mining competitor Rio Tinto Group, which was listed on three exchanges (the UK, Australia, and the US), BHP Billiton had to draft three separate but equivalent tender offers for these different exchanges. In addition, the UK and Australia offers depended on each other and had to be closed simultaneously. BHP Billiton also had to comply with different takeover, accounting, and governance rules for each jurisdiction. The immense complexity caused Slaughter and May, the law firm that advised BHP Billiton, to have more than 30 lawyers at a time working on the project. In another hostile takeover attempt, the target (Perrigo Company) was dual-listed on the NASDAQ and the Tel Aviv Stock Exchange. Mylan, the bidder, was trying to get around publishing a prospectus, as required by Israeli securities law, but Perrigo challenged this move in an Israeli court. The complexity and uncertainty were one of the reasons for both acquires’ to eventually drop the bids.

While the anecdotes may have shown that the antitakeover effect is in place once a decision to cross-list was made, there is no scholarly evidence on whether insulation is a significant motive for firms to cross-list. Hence, our paper is the first to suggest that firms are aware of the adverse impact of mixing various forms of regulation on the market for corporate control and utilize it as an antitakeover device.

To measure the ex ante corporate control threat, we first use two industry-level measures capturing whether at least one peer firm in the same industry received hostile takeover bids in the previous year or within the past three years (Servaes and Tamayo, 2014; Billett and Xue, 2007; Agrawal and Knoeber, 1998). We also use a firm-level Hostility Index measure, developed by Cain, McKeon, and Solomon (2017), which estimate the hostile takeover probability for individual firms using five decades (1965–2014) of hostile takeover data and 17 takeover laws in the United States. We use a dummy variable to track a firm’s foreign cross-listing status.

Our empirical analysis reveals that when facing higher hostile takeover threats, the U.S. incorporated public firms are significantly more like to cross-list their share in foreign jurisdictions, for which firms are more likely to choose hosting countries with greater accounting differences from the US GAAP. This is consistent with the idea that barriers and costs for acquirers would increase with the differences in the accounting regimes between jurisdictions. Furthermore, subsample evidence show that cross-listing is more likely to be used as an antitakeover device if firms have foreign market operations, suggesting that the global antitakeover device is more cost-effective for firms already having foreign market exposure. In contrast, since cross-listings do not affect the cost of all-cash takeover deals as much as that of stock deals, we shows that firms are less likely to rely on cross-listing as an antitakeover device in times when all-cash offers are more likely.

Finally, to further alleviate endogeneity concerns, we exploit exogenous variations in takeover threat due to the staggered adoptions of antitakeover poison pill statutes and cases (PP laws) across states in the United States. If firms use cross-listing as an antitakeover device and consider PP laws as effective substitutes for cross-listing, the propensity for cross-listing would decline following the passage of PP laws, especially for firms facing greater takeover threat prior to the law change. The results are affirmative. We also show that this effect is unlikely to be explained by managerial entrenchment following reduced takeover pressure. We conclude that insulating firms from hostile takeovers is a significant motive for firms to cross-list.

Our paper is the first to provide empirical evidence on the antitakeover motive behind the US firms’ cross-listing decisions, which could improve the understanding of cross-listing by considering its implications related to the market for corporate control. The findings could also encourage regulators, institutional investors, and professional proxy advisory firms to pay attention to the governance implications of cross-listing. For example, since cross-listing can be used to deter hostile takeover threat, advisory firms may consider including cross-listing as an integral component of a firm’s antitakeover provisions.

The complete article is available for download here.

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