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Takeover bids vs. Proxy Fights in Contests for Corporate Control

  • Lucian Bebchuk
  • Oliver Hart

This paper evaluates the primary mechanisms for changing management or obtaining control in publicly traded corporations with dispersed ownership. Specifically, we analyze 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8633.

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Date of creation: Dec 2001
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Handle: RePEc:nbr:nberwo:8633
Note: CF LE
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  1. 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.
  2. 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.
  3. Lucian Arye Bebchuk, 1999. "A Rent-Protection Theory of Corporate Ownership and Control," NBER Working Papers 7203, National Bureau of Economic Research, Inc.
  4. Philippe Aghion & Oliver Hart & John Moore, 1992. "The Economics of Bankruptcy Reform," NBER Working Papers 4097, National Bureau of Economic Research, Inc.
  5. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
  6. Pound, John, 1988. "Proxy contests and the efficiency of shareholder oversight," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 237-265, January.
  7. 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.
  8. 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.
  9. Stein, Jeremy C., 1988. "Takeover Threats and Managerial Myopia," Scholarly Articles 3708937, Harvard University Department of Economics.
  10. Ilya Segal, 1999. "Contracting With Externalities," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 337-388, May.
  11. Timothy Feddersen & Wolfgang Pesendorfer, 1997. "Voting Behavior and Information Aggregation in Elections With Private Information," Levine's Working Paper Archive 1560, David K. Levine.
  12. Bebchuk, Lucian Arye, 1989. "Takeover Bids below the Expected Value of Minority Shares," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 171-184, June.
  13. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 110.
  14. 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.
  15. 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.
  16. Lucian Arye Bebchuk & Lars A. Stole, 1994. "Do Short-Term Managerial Objectives Lead to Under- or Over-Investment in Long-Term Projects," NBER Technical Working Papers 0098, National Bureau of Economic Research, Inc.
  17. 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.
  18. Harris, Milton & Raviv, Artur, 1988. "Corporate control contests and capital structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 55-86, January.
  19. Lucian Arye Bebchuk, 1994. "Efficient and Inefficient Sales of Corporate Control," NBER Working Papers 4788, National Bureau of Economic Research, Inc.
  20. 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.
  21. 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.
  22. 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.
  23. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 351.
  24. 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.
  25. Mikami, Kazuhiko, 1999. "Proxy contests and corporate democracy," Journal of Economic Behavior & Organization, Elsevier, vol. 40(4), pages 353-371, December.
  26. 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.
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