Takeover Defense Tactics: A Comment on Two Models
Ira M. Millstein Center for Global Markets and Corporate Ownership
Center for Law and Economic Studies
One of the most important debates of current corporate law practice and scholarship is about the appropriate role of target management confronted with a takeover bid. The controversy turns on the identification of a criterion for evaluating takeovers and target management defensive tactics. An influential body of opinion contends that maximization of shareholder wealth is the appropriate criterion because, first, traditional notions of fiduciary duty generally require managers to act in the shareholders' interest, and, second, shareholder wealth maximization is seen as the best available proxy for social wealth maximization. On this view, takeovers are desirable because they can increase shareholder wealth in two ways: first, by moving assets to managers who can produce the greatest economic return from them; and second, by increasing pressure on current management to maximize economic return from assets under their stewardship.
From this starting point, management has only two justifiable options for responding to a takeover bid. Some argue that management should respond passively. Passivity will maximize shareholder wealth by increasing the returns to search for takeover targets, which raises the number of value-increasing bids. Others contend that management may abandon passivity, but only to the extent necessary to instigate an auction for the firm. An auction will ensure that the user who most highly values the target assets will gain control over them (without the transaction costs of successive sales) while maximizing the payoff to target shareholders. Which of these responses would in fact maximize shareholder wealth is a matter of dispute.
Those who favor permitting target management responses that instigate auctions must face the problem of the divergence of shareholder and target management interests in a takeover. A successful auction means that target managers will possibly lose their jobs and certainly their autonomy. In adopting tactics that would tend to produce an auction, management may be hoping to thwart the takeover altogether. On the assumption that target management will act in a self-interested way, how should we distinguish tactics that will increase shareholder wealth from those that will not?
Jeffrey N. Gordon & Lewis A. Kornhauser,
Takeover Defense Tactics: A Comment on Two Models,
Yale L. J.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/251