Does Shareholder Voting Matter? Evidence from the Takeover Market

Abstract

Voting rights are a basic shareholder-protection mechanism. Outside of the core voting requirements state law imposes (election of directors and votes on fundamental changes), federal law grants shareholders additional voting rights. But these rights introduce concomitant costs into corporate governance. Each grant of a voting right thus invites the question: is the benefit achieved worth the cost the vote imposes?

The question is not merely a theoretical one. Recently the SEC, concerned about Nasdaq’s potential weakening of shareholder voting protections, has lamented that little evidence exists on the value of the shareholder vote. This Article provides that evidence. It examines the implementation of a Nasdaq shareholder voting rule to identify the associated costs and benefits of requiring the approval of acquisitions by the acquiring firm’s shareholders. It finds firms alter the structure of their acquisitions to avoid shareholder voting. On its own, this finding could suggest self-serving behavior — managers may be avoiding shareholder votes to effectuate suboptimal transactions at the shareholders’ expense. Yet this Article finds no difference in returns to acquisitions that require a shareholder vote and those that do not. This lack of a difference suggests that, on average, for acquiring shareholders the costs outweigh the benefits associated with shareholder voting. Such results suggest that regulators and exchanges alike should be cautious when imposing shareholder voting requirements. The shareholder franchise, a relatively blunt and costly instrument, is best suited to fundamental corporate changes and director elections.

Keywords: Mergers, Acquisitions, Corporate Governance, Shareholder Voting, Shareholder Rights, Shareholder Approval, Stock Exchange Rules, Method of Payment

JEL Classification: G32, G34, G38