Self-Serving Fiduciaries? Board Discretion in Publicly Resisting Takeover Bids

Abstract

In this paper, we make three important contributions to the extensive literature on takeover resistance. First, given that both antitakeover provisions (ATPs) and post-bid resistance have the potential to be credible bargaining tools on behalf of shareholders, as well as effective means for the board to remain entrenched, we investigate – through a research design that accounts for endogeneity and sample selection, and thereby facilitates causal inference – the observed effect of the ATPs that the target firm has chosen to keep in place (prior to receiving any bid interest) on the bid-specific takeover resistance by the firm conditional on an actual bid. Second, we investigate, again in a way that facilitates causal inference, the observed effect of the initial public bid premium on the board’s resistance decision. Third, we develop a conceptual modeling framework for inferring what these causal relationships, generated using well-documented context-relevant instrumental variables, imply for the broader debate on a crucial broader question: i.e., are U.S. target-firm boards, in deciding to resist a public bid, motivated to act significantly more as bona-fide fiduciaries serving the best interests of shareholders, or more as self-serving entrenchment-focused fiduciaries? This question is particularly important in the U.S. since, in sharp contrast with Britain, Australia, New Zealand, and most E.U. countries, the board of a U.S. takeover target firm has virtually total discretion on whether to offer post-bid resistance; and hence there has long been an extensive debate among legal scholars about the normatively optimal level of board discretion that should exist in this context. Our paper highlights how critical the debate around board discretion and director primacy is for U.S. law and practice relating to public takeover bid resistance.