The Value of Voting in Hostile Takeovers: An Experimental Model

For many years academics have debated whether it is better to permit hostile acquirers to use tender offers to gain control over unwilling target companies, or to force them to use corporate elections of boards of directors in these efforts. The Delaware courts have expressed a strong preference for shareholder voting as a change of control device in hostile acquisitions. To force acquirers to accept their preferences, the Delaware courts have developed a jurisprudence permitting the effective classified board (ECB), a poison pill combined with a classified board, to protect target company management from removal by a hostile tender offer alone, or through a single corporate election. For companies with ECB's, this means that a determined acquirer must engage in two corporate elections over a period of two years to force entrenched managers to give up power. In this paper, we examine whether proxy contests, tender offers or combined proxy contest/tender offers are more likely to result in value maximizing outcomes for shareholders when target companies are able to deploy defensive tactics. We begin by showing that prior work suffers from serious flaws involving the use of voting models that are inappropriate for analyzing proxy contests. 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. Using this model, and these different sets of assumptions, 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. These results hold whether we permit existing defensive tactics or eliminate them. We conclude that in order to properly analyze the role of defensive tactics, courts must take into account the underlying shareholder ownership patterns. This requires them to engage in a fact sensitive analysis of whether defensive tactics are impeding or facilitating the maximization of shareholder value. When we examine the Delaware Chancery Court's decisions, the reasonableness analysis that they have employed to decide whether to overturn defensive tactics permits them to do so. We recommend that the courts continue to apply this type of analysis in the future with more direct consideration of the impact of the underlying ownership structure in determining whether the defenses are being used to maximize shareholder value.