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Takeover Bids versus Proxy Fights in Contests for Corporate Control

  • Bebchuk, Lucian Arye
  • Hart, Oliver

This Paper evaluates the primary mechanisms for changing management or obtaining control in publicly traded corporations with dispersed ownership. Specifically, we analyse and compare three mechanisms: (1) proxy fights (voting only); (2) takeover bids (buying shares only); and (3) a combination of proxy fights and takeover bids in which shareholders vote on acquisition offers. We first show how proxy fights unaccompanied by an acquisition offer suffer from substantial shortcomings that limit the use of such contests in practice. We then argue that combining voting with acquisition offers is superior not only to proxy fights alone but also to takeover bids alone. Finally, we show that, when acquisition offers are in the form of cash or the acquirer’s existing securities, voting shareholders can infer from the pre-vote market trading which outcome would be best in light of all the available public information. Our analysis has implications for the ongoing debates in the US over poison pills and in Europe over the new EEC directive on takeovers.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3073.

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Date of creation: Nov 2001
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Handle: RePEc:cpr:ceprdp:3073
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  1. Grossman, Sanford J & Hart, Oliver D, 1981. "The Allocational Role of Takeover Bids in Situations of Asymmetric Information," Journal of Finance, American Finance Association, vol. 36(2), pages 253-70, May.
  2. Lucian Arye Bebchuk & Allen Ferrell, 2001. "A New Approach to Takeover Law and Regulatory Competition," NBER Working Papers 8148, National Bureau of Economic Research, Inc.
  3. Bhattacharya, Utpal, 1997. "Communication Costs, Information Acquisition, and Voting Decisions in Proxy Contests," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1065-97.
  4. Timothy Feddersen & Wolfgang Pesendorfer, 1994. "Voting Behavior and Information Aggregation in Elections with Private Information," Discussion Papers 1117, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 110.
  6. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 351.
  7. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  8. Philippe Aghion & Oliver D. Hart & John Moore, 1994. "The Economics of Bankruptcy Reform," NBER Chapters, in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 215-244 National Bureau of Economic Research, Inc.
  9. Holmstrom, Bengt & Nalebuff, Barry, 1992. "To the Raider Goes the Surplus? A Reexamination of the Free-Rider Problem," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 37-62, Spring.
  10. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June.
  11. Pekka Hietala & Steven N. Kaplan & David T. Robinson, 2003. "What is the Price of Hubris? Using Takeover Battles to Infer Overpayments and Synergies," Financial Management, Financial Management Association, vol. 32(3), Fall.
  12. Pound, John, 1988. "Proxy contests and the efficiency of shareholder oversight," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 237-265, January.
  13. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
  14. Neeman, Z. & Orosel, G.O., 1999. "Corporate Vote-Trading as an Instrument of Corporate Governance," Papers 9904, Washington St. Louis - School of Business and Political Economy.
  15. Lucian Arye Bebchuk, 1999. "A Rent-Protection Theory of Corporate Ownership and Control," NBER Working Papers 7203, National Bureau of Economic Research, Inc.
  16. Mulherin, J. Harold & Poulsen, Annette B., 1998. "Proxy contests and corporate change: implications for shareholder wealth," Journal of Financial Economics, Elsevier, vol. 47(3), pages 279-313, March.
  17. Ronald Gilson & Alan Schwartz, . "Sales and Elections as Methods for Transferring Corporate Control," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1022, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
  18. Stein, Jeremy C, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 655-69, November.
  19. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
  20. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  21. Stein, Jeremy C., 1988. "Takeover Threats and Managerial Myopia," Scholarly Articles 3708937, Harvard University Department of Economics.
  22. Bebchuk, Lucian Arye, 1994. "Efficient and Inefficient Sales of Corporate Control," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 957-93, November.
  23. Lucian Arye Bebchuk, 1988. "Takeover Bids below the Expected Value of Minority Shares," NBER Working Papers 2524, National Bureau of Economic Research, Inc.
  24. Ilya Segal, 1999. "Contracting With Externalities," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 337-388, May.
  25. Mikami, Kazuhiko, 1999. "Proxy contests and corporate democracy," Journal of Economic Behavior & Organization, Elsevier, vol. 40(4), pages 353-371, December.
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