M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, February 2, 2011

Airgas - a natural experiment

Lucien Bebchuk, Alma Cohen and Charles Wang have just posted a paper on SSRN, Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment.  In the paper they test the effect of the recent Airgas decisions - in the Chancery Court as well as in Supreme Court on company valuations.  They find that to the extent the Chancery Court weakened the power of staggered board by revealing a chink in the armor, it also increased valuations of firms with staggered boards.   On the other hand, when the Supreme Court reversed that decision, the reversal had the effect of reducing valuations.  In short, though the courts appear to disagree, the markets believe that staggered boards are value reducing.

While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely being the product of the tendency of low-value firms to have staggered boards. In this paper, we use a natural experiment setting to identify how market participants view the effect of staggered boards on firm value. In particular, we focus on two recent rulings, separated by several weeks, that had opposite effects on the antitakeover force of the staggered boards of affected companies: (i) an October 2010 ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company’s annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws.

We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of companies significantly affected by the rulings –namely, companies with a staggered board and an annual meeting in later parts of the calendar year –and that the Supreme Court ruling produced a reduction in the value of these companies that was of similar magnitude (but opposite sign) to the value increase generated by the Chancery Court ruling. The identified positive and negative effects were most pronounced for firms for which control contests are especially relevant due to low industry-adjusted Tobin’s Q, low industry-adjusted return on assets, or relatively small firm size. Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. The findings are thus consistent with institutional investors’ standard policies of voting in favor of proposals to repeal classified boards, and with the view that the ongoing process of board declassification in public firms will enhance shareholder value.



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