The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy

Abstract:     
This article argues that effective staggered boards (ESBs) provide a powerful antitakeover defense, more powerful than is commonly recognized. We develop a theoretical account of how ESBs impede hostile bids by forcing bidders both to wait at least one year to gain control and to win two elections far apart in time rather than a one-time referendum on their offer. We then test our theory using a new data set of hostile bids during 1996-2000. We find that in this period:

1) Not a single hostile bidder won a ballot box victory against an ESB;
2) An ESB nearly doubled the odds of remaining independent for an average target in our data set;
3) Shareholders of targets that remained independent were made worse off compared with accepting the bid;
4) ESBs did not provide significant countervailing benefits in terms of increased premiums to offset the costs of remaining independent;
5) Overall, during 1996-2000, ESBs reduced the returns to shareholders of hostile bid targets on the order of 8-10%; and
6) Most ESBs were adopted before the developments in takeover jurisprudence that made ESBs.

In view of these findings, we argue that courts should not permit managers of a target with an ESB to continue maintaining a pill after they lose one election conducted over an acquisition offer. This approach, we suggest, would best implement the basic proportionality principles underlying takeover doctrine.

The Stanford Law Review is planning to publish a symposium with responses and reactions to this article. Participants will include Steve Bainbridge (UCLA), Mark Gordon (Wachtell, Lipton), Patrick McGurn (Institutional Shareholder Services), Lynn Stout (UCLA), and Leo Strine (Delaware Chancery Court). We are now in the process of writing for the symposium a paper that will respond to these five commentators and will further develop our analysis of staggered boards. Accordingly, comments or reactions on the article would be most welcome.

Keywords: Takeover, mergers and acquisitions, tender offers, takeover bids, defensive tactics, staggered boards, poison pills

JEL Classifications: G30, G34, K22

Accepted Paper Series