February 27, 2011
Barry and Hatfield on takeover defenses
Before Airgas gets too far into your rearview mirror - Jordan Barry and John Hatfield have recently posted a paper, Pills and Partisans: Understanding Takeover Defenses. Although Chancellor Chandler's opinion in Airgas may be the last word on the question for now, that doesn't mean we have to stop asking the questions!
Abstract: Corporate takeover defenses have long been a focal point of academic and popular attention. However, no consensus exists on such fundamental questions as why different corporations adopt varying levels of defenses and whether defenses benefit or harm target corporations' shareholders or society generally. Much of the disagreement surrounding takeover defenses stems from the lack of a fully developed formal analytical framework for considering their effects. Our Article presents several formal models built upon a common core of assumptions that together create such a theoretical framework. These models incorporate the reality that target corporate insiders have superior information about the target but are imperfect agents of its shareholders. They suggest that modern defenses enable target shareholders to extract value from acquirers by empowering corporate insiders, but that takeover defenses do not benefit society as a whole. They also suggest why corporations with different characteristics may choose to adopt varying levels of takeover defenses. Our findings have implications for the longstanding debate about who is best served by state-level control of corporate law and the desirability of increased federal involvement in corporate law.
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