Takeovers and Mergers

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Structural takeover defenses--poison pills and shark repellents [1] such as staggered boards--have long been controversial. At the core f the controversy is a striking split in how defenses are viewed by legal academics, on the one hand, and practicing lawyers, judges, and legislators, on the other hand.


The theory f how defenses reduce firm value is a simple application f agency cost analysis: agency costs make defense adoption possible and likely, and defenses in turn increase agency costs by making it harder for principals (shareholders) to replace or otherwise discipline agents (directors) through a takeover. [2] But the academic conviction that agency cost theory is the lens through which to view takeover defenses has been reinforced by empirical studies. Legal academics widely believe that those studies show that firms' stock prices fall on average when firms adopt defenses. Without that evidence, the theoretical case against defenses remains, but is much less compelling, particularly for policy making.
Practitioner support for defenses no doubt stems in part from the fact that defense adoption (and litigation over defenses) provides legal practitioners with profits. But practitioners have also looked to economic theory and empirical evidence for support in convincing boards f directors that they are justified in adopting defenses and in persuading lawmakers not to intervene against defenses. ...
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