Severely Obstructive Takeover Resistance in Hostile Takeover Bids: “Neutral” Boards as Bona Fide Advisors of Shareholders

Abstract

Boards often advise shareholders on the merits of retaliating against a hostile takeover bid with severely obstructive maneuvers (e.g., divestment; acquisition; stock repurchase) aimed at “frustrating” the bid. On one hand, these frustrating actions represent credible threats for the eventual success of the bid, and hence can be seen as potentially detrimental for shareholders. On the other hand, they can also be seen as theoretically optimal resistance strategies for forcing a higher offer for shareholders. We empirically investigate whether these frustrating actions are driven by such bona fide bargaining in shareholder interest, or the alternative of management being driven by self-serving considerations. We do so in a corporate governance legal framework in which any such severely obstructive actions require prior shareholder approval, and the role of Boards is legally required to be purely advisory (in this specific context) after a bid is received. We find that Boards are more likely to recommend such frustrating actions when they have less potential to fully unlock the value of private information that is not reflected in market prices, and when management has greater incentives for continuing to retain control. We also find evidence of adverse information effects for both shareholders and management.

Keywords: hostile takeover; bid resistance; stockholder wealth; managerial turnover; corporate governance

JEL Classification: G34; G38