Is your anti-takeover provision affecting shareholder wealth?

Since the hostile takeover boom of the 1980’s, corporations have been implementing anti-takeover measures to protect their independence. These protections range from expensive executive parachutes, which provide company leaders with large severance packages should they be terminated following an acquisition, to free articles amendments that require a supermajority vote to affect a merger. Over the years, various researchers have studied anti-takeover measures in an effort to understand their effect on shareholder wealth. A 2013 article published by Miroslava Straska and Gregory Waller in the Journal of Financial and Quantitative Analysis[1] attempts to provide some answers.

Straska and Waller’s article was a study of studies; while their overall conclusion was that the effect anti-takeover provisions have on shareholder wealth remains uncertain, they discussed the factors that could move the scale either way. For instance, one studied they examined argued that where anti-takeover provisions aim to protect managerial positions (i.e. parachutes), shareholder wealth decreases if the takeover would have increased managerial efficiency. Where the anti-takeover provisions give the shareholders bargaining benefits and encourage group action (i.e. supermajority provisions), however, they maximize shareholder wealth by providing that in the event of a takeover, the shareholders will receive a higher premium. 

In addition, studies suggest that corporate structure influences shareholder wealth. For instance, when managerial control of voting rights is less than 10%, shareholders tend to react more positively to the adoption of anti-takeover measures than when managerial control is above 10%. Likewise, the adoption of a poison pill provision tends to be more positively received when the board is composed of a majority of outside directors as opposed to insiders.

Short-term studies on the financial effect of announcing the adoption of anti-takeover provisions were similarly inconclusive. This is likely due to the competing messages anti-takeover measures send: first, that management is concerned about a takeover attempt and second, that implementing anti-takeover measures decreases the likelihood of a takeover attempt. If either message dominates, the stock price could be swayed accordingly. Where the anti-takeover measures do not require shareholder adoption, however, the stock price may be unaffected.

The bottom line is that shareholder wealth is influenced by a corporation’s adoption of anti-takeover measures, though researchers are not quite sure how. Unfortunately, this consideration can be overshadowed in the complex decision-making process that characterizes takeover discussions. For further guidance on the adoption of anti-takeover provisions, contact Laura Wasson.