Final Report Summary - LAM (Legal Aspects of Mergers)
Legal aspects of mergers
Professor Ehud Kamar, ekamar@law.usc.edu
2011
Mergers and acquisitions are transformative events for corporations. The responsibility on corporate managers to make the right decisions in these events is great, and the potential for divergence between their interests and those of shareholders is high: managers may resist a sale at a large premium to keep their job, push for a sale at an inadequate price to secure high retirement benefits, or overpay in acquisitions to increase their own power.
An intricate system of legal rules is in place to minimise such self-serving behavior. The most important of these rules is the shareholder approval requirement. But is this requirement effective? The study uses an empirical analysis to answer this question negatively and proposes how the law can be improved.
The first part of the study focuses on the sell side. It finds that managers bundle controversial governance changes with mergers to secure shareholder approval of both. Its findings are detailed in Lucian Bebchuk and Ehud Kamar, 'Bundling and entrenchment', 123 Harvard Law review 1549 (2010).
The paper provides the first systematic evidence that managements have been using bundling to introduce antitakeover defenses that shareholders would likely reject if they were to vote on them separately. It studies a hand-collected dataset of 393 public mergers announced during the period from 1995 through 2007. While shareholders were strongly opposed to staggered boards during this period and generally unwilling to approve charter amendments introducing a staggered board on a stand-alone basis, the deal planners often bundled the mergers studied with a move to a staggered-board structure.
The paper proposes solutions, including heightened judicial scrutiny over mergers that are bundled with entrenching arrangements and giving shareholders the power to rid the combined firm of the entrenching arrangement introduced by the merger. More generally, it calls for caution in treating shareholder approval of management initiatives as evidence of shareholder support.
The second part of the study focuses on the buy side. It finds that, even without bundling, collective action costs regularly lead shareholders to approve acquisitions that they view as value destroying. The findings are detailed in Ehud Kamar, 'Does shareholder voting matter' (working paper, 2011).
The paper examines the effects of shareholder voting on acquisitions by comparing acquisitions that require acquirer shareholder approval to acquisitions that do not in a hand-collected sample of 2,249 acquisitions announced between 1995 and 2006. It finds no evidence that the approval requirement is related to announcement returns, premiums, or deal completion, or that acquisitions are less likely to require shareholder approval when approval is less likely. At the same time, it finds that shareholder approval is less likely to be required in acquisitions that can otherwise be completed quickly, and that it prolongs these acquisitions when it is required.
These findings call into question the justification for the approval requirement. Not only is it unclear that this requirement brings shareholder voice into the acquisition process, it imposes a cost. In the absence of evidence of benefit to balance this cost, the burden of justifying the approval requirement shifts to those advocating its continued existence. One alternative would be a regime in which large acquisitions required shareholder approval only if shareholders with a threshold voting power so demanded within a limited number of days after the acquisition announcement.
Professor Ehud Kamar, ekamar@law.usc.edu
2011
Mergers and acquisitions are transformative events for corporations. The responsibility on corporate managers to make the right decisions in these events is great, and the potential for divergence between their interests and those of shareholders is high: managers may resist a sale at a large premium to keep their job, push for a sale at an inadequate price to secure high retirement benefits, or overpay in acquisitions to increase their own power.
An intricate system of legal rules is in place to minimise such self-serving behavior. The most important of these rules is the shareholder approval requirement. But is this requirement effective? The study uses an empirical analysis to answer this question negatively and proposes how the law can be improved.
The first part of the study focuses on the sell side. It finds that managers bundle controversial governance changes with mergers to secure shareholder approval of both. Its findings are detailed in Lucian Bebchuk and Ehud Kamar, 'Bundling and entrenchment', 123 Harvard Law review 1549 (2010).
The paper provides the first systematic evidence that managements have been using bundling to introduce antitakeover defenses that shareholders would likely reject if they were to vote on them separately. It studies a hand-collected dataset of 393 public mergers announced during the period from 1995 through 2007. While shareholders were strongly opposed to staggered boards during this period and generally unwilling to approve charter amendments introducing a staggered board on a stand-alone basis, the deal planners often bundled the mergers studied with a move to a staggered-board structure.
The paper proposes solutions, including heightened judicial scrutiny over mergers that are bundled with entrenching arrangements and giving shareholders the power to rid the combined firm of the entrenching arrangement introduced by the merger. More generally, it calls for caution in treating shareholder approval of management initiatives as evidence of shareholder support.
The second part of the study focuses on the buy side. It finds that, even without bundling, collective action costs regularly lead shareholders to approve acquisitions that they view as value destroying. The findings are detailed in Ehud Kamar, 'Does shareholder voting matter' (working paper, 2011).
The paper examines the effects of shareholder voting on acquisitions by comparing acquisitions that require acquirer shareholder approval to acquisitions that do not in a hand-collected sample of 2,249 acquisitions announced between 1995 and 2006. It finds no evidence that the approval requirement is related to announcement returns, premiums, or deal completion, or that acquisitions are less likely to require shareholder approval when approval is less likely. At the same time, it finds that shareholder approval is less likely to be required in acquisitions that can otherwise be completed quickly, and that it prolongs these acquisitions when it is required.
These findings call into question the justification for the approval requirement. Not only is it unclear that this requirement brings shareholder voice into the acquisition process, it imposes a cost. In the absence of evidence of benefit to balance this cost, the burden of justifying the approval requirement shifts to those advocating its continued existence. One alternative would be a regime in which large acquisitions required shareholder approval only if shareholders with a threshold voting power so demanded within a limited number of days after the acquisition announcement.