Why Do Takeover Targets Protect Acquirers? Evidence from Force-the-Vote Provisions

Abstract

We examine force-the-vote (FTV) provisions in M&A transactions from 2003-2016 and test competing agency and efficient contracting explanations for their usage. Target FTV provisions are observed more frequently when bidding is costly, and are associated with higher target returns, lower likelihood of competing bids and higher likelihood of deal completion. By providing greater deal protection to acquirers, target FTV provisions appear to improve bidding incentives, resulting in higher target returns, consistent with efficient contracting. Our primary results appear robust and economically significant and complement prior literature that evaluates the effects of various M&A clauses and features on deal outcomes.

Keywords: Force-the-vote, M&A provisions, deal protection, initial offer premium, mergers, M&A

JEL Classification: G34