Bundling and Entrenchment

Abstract

Because corporate charters can be amended only with shareholder approval, it is widely believed that new charter provisions appear in midstream only if shareholders favor them. However, the approval requirement may fail to prevent the adoption of charter provisions disfavored by shareholders if management bundles them with measures enjoying shareholder support. This Article provides the first systematic evidence that managements have been using bundling to introduce antitakeover defenses that shareholders would likely reject if they were to vote on them separately. We study a hand-collected dataset of 393 public mergers announced during the period from 1995 through 2007. While shareholders were strongly opposed to staggered boards during this period and generally unwilling to approve charter amendments introducing a staggered board on a stand-alone basis, the deal planners often bundled the mergers we study with a move to a staggered-board structure. In mergers in which the combined firm was one of the parties, a party’s odds of being chosen to survive as the combined firm were significantly higher if it had a staggered board and the other party did not. Similarly, in mergers that combined the parties into a new firm, the new firm was significantly more likely to have a staggered board than the merging parties. Overall, we demonstrate that management has the practical ability to use bundling to obtain shareholder approval for pro-management arrangements that shareholders would not support on a stand-alone basis. We discuss the significant implications our findings have for corporate law theory and policy.

Keywords: Bundling, entrenchment, staggered boards, mergers, charter amendments, charter provisions, shareholder voting, shareholder approval

JEL Classification: G30, G34, K22