If a U.S. firm is a takeover target, it is almost entirely up to its board to decide whether to offer resistance, i.e., to formally reject a specific bid, and potentially take financial or operational actions to defend against the bid. Such actions include standstill agreements, litigation, asset/liability restructurings, and targeted repurchases. In contrast, boards in the UK and most EU countries — those that have adopted Article 9 of the E.U. Takeover Directive — are largely prevented from taking any action that could frustrate the bid, unless it has been duly considered and approved by stockholders. There has long been a debate about the optimal level of board discretion in this context and the resulting policy implications. Easterbrook and Fischel (1981)[1] argue for removing any managerial discretion by enacting a “board neutrality” rule in the U.S.; Bebchuk (2002)[2]makes a case for requiring stockholder approval of board intentions through a less restrictive “no board veto” rule, consistent with Bebchuk’s (2005) advocacy more generally for shareholder empowerment rather than director primacy;[3] and Gilson and Schwartz (2021) recommend placing minimal restrictions on board discretion to resist takeover bids.[4]

This issue of board discretion is important and contentious because the board’s decision to offer post-bid resistance can be motivated not just by good faith bargaining to get a better offer for stockholders, but, alternatively, by a desire to entrench the board. Board motivation is economically significant because boards often exercise their discretion to resist a bid: 17.4 percent of our sample of 995 firms spanning a 20-year period.

Unlike other researchers, we investigate board motivation through a research design that allows us to draw causal inferences. We generate empirical evidence for two ex ante causal scenarios and use the associated empirical results to unambiguously infer the underlying dominant board motivation – good-faith bargaining in stockholders’ interest or self-interested entrenchment – behind the target board’s decision on whether to resist the bid. These ex ante causal scenarios are each also significant contributions to the literature. First, we investigate the causal impact on the target-board’s post-bid resistance decision of the generic antitakeover provisions (hereafter “ATPs”) that a particular firm has chosen to adopt and leave in place ex ante in equilibrium without reference to a specific bid. Examples of ATPs include classified/staggered boards, supermajority amendments, fair price amendments, and poison pills. Second, we examine the causal impact of the initial bid premium on the board’s resistance decision.

Our first ex ante causal scenario arises because the underlying perspective – shareholder wealth maximization or entrenchment – that governs the target board’s motivation to resist also arguably governs the firm’s ATPs and their effect on the firm’s decision to resist. Our second scenario similarly arises because the underlying perspective that governs the target board’s post-bid resistance decision also governs how that decision depends on the bid premium in the initial offer. To our knowledge, our study is the first on each of these relationships that circumvents endogeneity to document likely causal relationships.

Our primary measure for ATPs is the commonly used Gompers, Ishii, and Metrick (2003)[5] “G-index.” In addition, we use the Bebchuk, Cohen, and Ferrell (2009)[6] “E-index”, comprising arguably the six most potent ATPs out of the 24 in the G-index, and the “O-index,” consisting of the other G-index 18 ATPs. Following Karpoff, Schonlau, and Wehrly (2017)[7], we utilize two instrumental variables for each index – based on initial-public-offering cohorts and geography cohorts – to filter variation in firms’ takeover defenses due to distinct factors other than those non-arbitrarily driven by their expected takeover target likelihoods. We also circumvent endogeneity issues in takeover target selection, accounting for the possibility that private information held by an initial bidder could render ATPs less effective, making it more likely for boards to use post-bid resistance.

Our second ex ante causal scenario is based on examining the causal impact of initial bid premium on post-bid resistance. Given that the initial bidder may pre-empt post-bid resistance by boards by setting the initial bid at a higher level than would otherwise be the case, we use – following Baker, Pan, and Wurgler (2012) – the pre-run-up price to 52-week-high price as an instrumental variable to circumvent endogeneity in this context.[8]

We develop a conceptual framework to determine what our results imply about the dominant motivation of a board in choosing to resist post-bid. This framework is based on a binary scenario in which a board is extrinsically driven to act either in the best interests of stockholders or, alternatively, in the board’s own interest to promote entrenchment. In the specific context of ATPs, we allow for the possibility that exogenous external factors – like public perceptions, signaling imperatives, and views of influential stakeholders – can affect the board’s general policies on the presence or absence of at least a subset of ATPs, and we do so independent of any inherent extrinsic board motivations. We also allow for this conditioning to be different for different ATPs.

First, we find a positive and statistically significant causal relationship from existing ATPs to post-bid resistance based on the G-index ATPs and the subset of O-index ATPs, and no significant causal relationship for the other subset of E-index ATPs. The magnitudes of the impact from the G- and O-indices are economically significant. For example, the effect of the instrumented G-index, after correcting for takeover target selection in the presence of unobservable factors, equates to a 4.3 percent increase in the likelihood of post-bid resistance for each additional ATP. According to the implications of our ex ante causal scenarios, these results do not support good faith bargaining in stockholder interests as the dominant motivation of the board for post-bid resistance. This is because, for that hypothesis to have been supported, post-bid resistance would have been more likely for fewer existing ATPs, implying a negative causal relationship, irrespective of whether the board actively influences some or all ATPs ex ante. Additionally, our E-index results suggest that boards tend to be relatively constrained in relation to changing the status quo for what may be the most potent ATPs.

Second, we find no statistically or economically significant causal effect of bid premiums on the board decision to resist. This result also does not support good faith bargaining in stockholder interests as the motivation for post-bid resistance, since post-bid resistance would then have been more likely for a lower bid premium, implying a negative causal relationship.

Our overall conclusions remain robust to an extensive battery of checks and supplementary non-causal analyses.

While we add to the debate around board motivation for post-bid takeover resistance, our results reflect the overall average picture. It is likely that a significant fraction of boards exercise their discretion by diligently acting in the best interests of their shareholders. Nonetheless, our empirical results do strongly underscore the need to revisit the issue of board discretion in relation to post-bid takeover resistance in U.S. law and practice.  At the very least, it is necessary to introduce a framework of checks and balances in this regard and consider measures that can give boards incentives to exercise their discretion to best serve shareholders.

ENDNOTES

[1] Easterbrook, F.H. and D.R. Fischel, 1981, The proper role of a target’s management in responding to a tender offer, Harvard Law Review, 94, pp. 1161-1204.

[2] Bebchuk, L.A., 2002, The case against board veto in corporate takeovers, University of Chicago Law Review, 69, pp. 973-1035.

[3] Bebchuk, L.A., 2005, The case for increasing shareholder power, Harvard Law Review, 118, pp 833-914.

[4] Gilson, R.J. and A. Schwartz, 2021, An efficiency analysis of defensive tactics, Harvard Business Law Review, 11, pp. 1-54.

[5] Gompers, P., J. Ishii, and A. Metrick, 2003, Corporate governance and equity prices, Quarterly Journal of Economics, 118, pp. 107-155.

[6] Bebchuk, L., A. Cohen, and A. Ferrell, 2009, What matters in corporate governance? Review of Financial Studies, 22, pp. 783-827.

[7] Karpoff, J.M., R.J. Schonlau, and E.W. Wehrly, 2017, Do takeover defense indices measure takeover deterrence? Review of Financial Studies, 30, pp. 2359-2412.

[8] Baker, M., X. Pan, and J. Wurgler, 2012. The effect of reference point prices on mergers and acquisitions. Journal of Financial Economics, 106, pp. 49-71.

This post comes to us from Nicholas Carline at the University of Birmingham’s Birmingham Business School, Sridhar Gogineni at the University of Tampa’s John H. Sykes College of Business, and Pradeep Yadav at the University of Oklahoma’s Michael F. Price College of Business. It is based on their recent article, “Self-Serving Fiduciaries: Board Discretion in Resisting Takeover Bids,” available here.