Pills and Partisans: Understanding Takeover Defenses
Jordan M. Barry
University of San Diego School of Law
John William Hatfield
University of Texas at Austin
February 23, 2011
University of Pennsylvania Law Review, Forthcoming
Stanford Law and Economics Olin Working Paper No. 407
Rock Center for Corporate Governance at Stanford University Working Paper No. 98
Corporate takeover defenses have long been a focal point of academic and popular attention. However, no consensus exists on such fundamental questions as why different corporations adopt varying levels of defenses and whether defenses benefit or harm target corporations' shareholders or society generally. Much of the disagreement surrounding takeover defenses stems from the lack of a fully developed formal analytical framework for considering their effects. Our Article presents several formal models built upon a common core of assumptions that together create such a theoretical framework. These models incorporate the reality that target corporate insiders have superior information about the target but are imperfect agents of its shareholders. They suggest that modern defenses enable target shareholders to extract value from acquirers by empowering corporate insiders, but that takeover defenses do not benefit society as a whole. They also suggest why corporations with different characteristics may choose to adopt varying levels of takeover defenses. Our findings have implications for the longstanding debate about who is best served by state-level control of corporate law and the desirability of increased federal involvement in corporate law.
Number of Pages in PDF File: 64
Keywords: law and economics, takeovers, takeover defenses, corporate governance, imperfect information, adverse selection, agency theory, market for corporate control, poison pill, securities regulation, regulatory competition, economic federalism, directors, shareholders, managers
JEL Classification: D70, D82, G18, G30, G34, G38, H11, H70, K22
Date posted: March 3, 2011 ; Last revised: February 21, 2013
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