The Case Against Board Veto In Corporate Takeovers
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
University of Chicago Law Review, Vol. 69, pp. 973-1035, 2002
Harvard Law and Economics Discussion Paper No. 361, 2002
Abstract:
This paper argues that once undistorted shareholder choice is ensured – which can be done by making it necessary for hostile bidders to win a vote of shareholder support – boards should not have veto power over takeover bids. The paper considers all of the arguments that have been offered for board veto – including ones based on analogies to other corporate decisions, directors’ superior information, bargaining by management, pressures on managers to focus on the short-run, inferences from IPO charters, interests of long-term shareholders, aggregate shareholder wealth, and protection of stakeholders. Examining these arguments both at the level of theory and in light of all available empirical evidence, the paper concludes that none of them individually, nor all of them taken together, warrants a board veto. Finally, the paper discusses the implications that the analysis has for judicial review of defensive tactics.
The Case Against Board Veto In Corporate Takeovers – Introduction
In the last thirty years, takeover law has been the subject most hotly debated by corporate law scholars. During this period, takeover law has undergone many changes and much development, receiving the frequent attention of both legislators and courts. State legislators have been busy adopting a variety of antitakeover statutes. Courts have been busy developing a rich body of takeover doctrine. And an army of lawyers and investment bankers has been busy improving and practicing techniques of takeover defense and attack.
A central issue in the debate has been whether boards should have power to block unsolicited acquisition offers. To some scholars, such power is a serious impediment to efficient corporate governance.1 To others, a board veto is, on the contrary, necessary for effective corporate governance.2 Whereas opinions on the role of boards in corporate take-overs differ greatly, there is wide agreement about the importance of this subject for corporate governance and for the allocation of corporate assets.
The aim of this Article is to present the case against board veto over takeover bids. Board veto could be justified in the absence of an undistorted choice by shareholders—that is, a choice reflecting their judgment on whether acceptance of the acquisition offer would serve their collective interest. However, such an undistorted choice can be secured by appropriate mechanisms, especially ones based on shareholder voting.
In the presence of a mechanism ensuring shareholders’ undistorted choice, I argue, boards should not have a veto power over acquisitions beyond the period needed for the board to put together alternatives for shareholders’ consideration. In the course of my analysis, I examine the full array of arguments that supporters of board veto have made over the years. I also use and rely on the substantial body of empirical evi-dence that has accumulated since the debate on the subject started. Concluding that board veto is undesirable, at least in the absence of explicit shareholder authorization to the contrary, I also discuss how takeover law should best proceed given its established structure and principles.
Part I of this Article discusses arrangements needed to ensure undistorted shareholder choice. In the absence of any such arrangements, arguments for board veto could be based on collective-action problems that could lead shareholders to tender even if they view remaining independent (at least for the time being) as best. Such collective-action problems, however, can be effectively addressed without providing boards with a veto power. One approach that has received considerable support is to block “structurally coercive” bids, but such an approach, I show, is not an effective instrument for securing undistorted choice. A better approach for this purpose is “the shareholder voting approach” that makes it necessary for hostile bidders to win a vote of shareholder support. Such a vote would provide a genuine reflection of shareholders’ preferences regarding the acquisition offer.
There are different ways, some better than others, to introduce winning a shareholder vote as a formal or practical condition for a take-over. Many existing arrangements, both in the United States and Europe, have introduced voting as such a condition. In the United States, most states have control share acquisition statutes that make it practically necessary for a bidder to win a vote in order to gain control. Furthermore, in most states, boards may install and maintain poison pills that prevent an acquisition. The power to maintain pills implies that a hostile bidder would be able to gain control over incumbents’ objections only if the bidder first won a ballot box victory to replace the incumbents with directors that would redeem the pill.
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