Public Takeover Bid Resistance: Board Discretion, Antitakeover Provisions, and Initial Bid Premium

Abstract

This paper makes three important contributions to the extensive literature on the market for corporate control. First, we investigate, through a research design that accounts for endogeneity and sample selection, the effect of the antitakeover provisions (‘ATPs’) that target firms have in place (prior to receiving any bid interest) on the decisions by their boards to offer ‘post-bid’ resistance in the event of an actual bid. Second, we simultaneously investigate, again in a way that facilitates causal inference, the effect of the initial public bid premium on the resistance decision. Third, we develop a conceptual modeling framework, incorporating pre-public-bid negotiation and price revision, for inferring what these relationships, estimated using well-documented context-relevant instrumental variables, imply for the broader question of whether U.S. boards act preponderantly as bona fide fiduciaries, or as self-serving fiduciaries, when deciding to resist post-bid. This question is particularly relevant for the U.S. – since, in sharp contrast to Britain, most E.U. countries, Australia, and New Zealand – U.S. boards have virtually total discretion over whether to offer post-bid resistance. We find a significantly positive relationship from extant ATPs to post-bid resistance, and no relationship from initial public bid premium to post-bid resistance. We conclude, reasonably unambiguously, that, over our twenty-year sample period, post-bid resistance decisions of target-firm boards are likely driven significantly more by entrenchment considerations than by bona fide bargaining. Our study underscores the crucial importance of policy debate on optimal board discretion and primacy for U.S. law and practice relating to public takeover bid resistance.

Keywords: takeover resistance; antitakeover provisions; bid premium; bargaining; entrenchment

JEL Classification: G34; G38