Why Firms Adopt Antitakeover Arrangements
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
University of Pennsylvania Law Review, Vol. 152, pp. 713-753, 2003
Harvard Law and Economics Discussion Paper No. 420
Firms going public have increasingly been incorporating antitakeover provisions in their IPO charters, while shareholders of existing companies have increasingly been voting in opposition to such charter provisions. This paper identifies and analyzes possible explanations for this empirical pattern. Specifically, I analyze explanations based on (1) the role of antitakeover arrangements in encouraging founders to break up their initial control blocks, (2) efficient private benefits of control, (3) agency problems among pre-IPO shareholders, (4) agency problems between pre-IPO shareholders and their IPO lawyers, (5) asymmetric information between founders and public investors about the firm's future growth prospects, and (6) bounded attention and imperfect pricing at the IPO stage.
I also discuss the policy implications of the possible explanations. Among other things, the analysis implies that researchers should not automatically infer that arrangements adopted in IPO charters are ones that enhance shareholder value. The analysis also indicates that board veto arrangements is unlikely to serve shareholders in companies with dispersed ownership and should not be chosen as a default. The analysis provides some support for limits on contractual freedom at the IPO stage. Finally, the analysis suggests that it might be desirable for corporate law to use sunset strategies, requiring that entrenching arrangements adopted by charter provisions lapse after a certain period unless renewed by a shareholder vote.
Number of Pages in PDF File: 42
Keywords: corporate governance, corporate control, takeovers, mergers and acquisitions, takeover bids, tender offers, takeover defenses, antitakeover charter provisions, staggered boards, corporate charters, IPO, mandatory rules, sunset arrangements
JEL Classification: G30, G34, K22
Date posted: February 13, 2004 ; Last revised: April 29, 2009