Voting Models, Corporate Elections and Takeover Bids
Paul H. Edelman
Vanderbilt University - Law School
Randall S. Thomas
Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)
July 30, 2003
Vanderbilt Law Review, Vol. 58, p. 453, 1004
Vanderbilt Law and Economics Research Paper No. 03-09
This paper examines corporate voting contests experimentally using a weighted voting model. We begin by providing a systematic treatment of weighted voting models as an analytical tool for legal policy. After this short intuitive guide to the basic concepts and techniques employed in these models, we then explore their use (and misuse) by the courts in the political arena. We continue this introduction by examining prior work using weighted voting models in the corporate setting. Here the literature has focused on two different aspects of corporate voting: the analysis of voting concentration and corporate control and, more recently, proxy contests for corporate control.
In the next section, we engage in an in-depth analysis of the new models of corporate elections developed by Gilson & Schwartz and Bebchuk & Hart. In our critique, we show that both the Gilson & Schwartz approach and the Bebchuk & Hart paper are flawed. In particular, we find that the models used in Gilson & Schwartz employ unreasonable hypotheses and reach questionable conclusions, whereas we argue that the Bebchuk & Hart effort requires exceptionally strong hypotheses and very stringent mathematical assumptions to reach its conclusions.
To develop a more realistic approach to these questions, we employ a probabilistic version of a standard weighted voting model that explicitly incorporates two critical features of corporate voting: first, that shares are normally voted in large blocks rather than in single shares; and second, that independent third party proxy voting advisors play an important, and often pivotal, role in determining the outcome of corporate elections. In addition, we explicitly incorporate information about the size of different corporate constituencies and their voting preferences. Using our model, we show experimentally how the distribution of shares among various investor constituencies will affect the outcome of different types of voting contests.
Initially, we assume that the current legal regime applies so that corporate management determines whether to accept an unsolicited bid and can use a wide variety of anti-takeover defenses to forestall hostile bidders. We find that neither proxy contests, tender offers, nor combined proxy contests and tender offers will always lead to the desirable outcome for target company shareholders in any scenario. With each type of acquisition technique, bidders succeed in obtaining control of the target company in some value decreasing transactions, and are defeated in their acquisition efforts in some value increasing transactions. The implication is that, under current law, there will generally be some plausible basis for target company management to argue that it is value increasing to use defensive measures to preclude shareholder acceptance of a takeover bid.
Finally, we study the effect on our results of adopting different theoretical perspectives on the proper role for shareholder voting. One alternative theory we examine is that target management should be barred from using defensive measures to stop an unsolicited takeover bid. Our model shows that if we adopt this theory, a change of control will occur in any case where the bid's value significantly exceeds the target's prior stock price. However, we are unable to accurately measure how this change will affect the size of premium offered in all bids, or the frequency of takeover bids, so that we cannot make social welfare comparisons between this regime and the current one.
We then examine a second alternative theory that proposes shareholders should be able to vote within a reasonable period of time to remove any defensive tactic that impedes their ability to accept a takeover bid. This approach reduces all takeover battles to proxy contests occurring within at most thirteen months, the maximum length of time most states permit to elapse between annual meetings from the time of the announcement of the bid. In this situation, the shareholder vote will, in most circumstances, lead to an acceptance of value maximizing bids and a rejection of value decreasing offers. We endorse this position because it is at least as good as the current legal regime in insuring the maximization of shareholder vote, and better in that it permits shareholders to decide their own fate in more circumstances.
Number of Pages in PDF File: 55
JEL Classification: K2, K22, G30, G34, G38
Date posted: August 5, 2003