Private Benefits of Control, Antitakeover Defenses, and the Perils of Federal Intervention (original) (raw)

2005, Berkeley Business Law Journal

This Article develops a theory that sheds light on recent evidence that shows that high-quality issuers antitakeover adopt defenses during an IPO, and keys this behavior to the existing literature on private benefits of control. The Article then analyzes the decision of the pre-IPO owners concerning takeover defenses. Their decision is shown to be influenced by the quality of the venture that goes public. High quality in firms that go public often means an abundance of growth and business opportunities, rather than sizeable existing assets. In such ventures, managers are unlikely to consume many harmful control benefits. Nevertheless, managers derive a great deal of non-monetary control benefits from their stint in the promising entity. Consequently, takeover defenses help the pre-IPO owners to preserve their non-monetary control benefits without causing too much harm to the value of the enterprise. This Article also shows that even if we take as given the conventional assumption that antitakeover defenses are harmful to shareholders, the inimical influence of takeover defenses is hard to trace since the issuers that adopt them are those whose antitakeover charter provisions' influence is the least harmful. Finding a matching sample for the adopting issuers, as some have tried before, may therefore be an impossible task. This Article thus considers possible extensions that result from complications of asymmetric information, and concludes with the perils of federal intervention. 2. See Frank Easterbrook & Daniel Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 HARV. L. REV. 1161 (1981) (arguing that it is socially optimal that the target's management remain passive in takeover event); John C. Coates IV, Explaining Variation in Takeover Defenses: Blame the Lawyers, 89 CAL. L. REV. 1301, 1327 (2001) ("[A]cademics have generally opposed defenses, and practitioner-commentators have generally supported them."). But see Jennifer Arlen & Eric Talley, Unregulable Defenses and the Perils of Shareholder Choice, 152 U. PA. L. REV. 577 (2003) (arguing that a ban on legal antitakeover defenses would only yield harsher transactional defenses that are unregulable); Marcel Kahan & Edward B. Rock, Corporate Constitutionalism: Antitakeover Charter Provisions as Pre-Commitment, 152 U. PA. L. REV. 473 (2003) (arguing that takeover defenses provide managers with leverage that benefits the shareholders from an ex ante point of view).