Towards a More Balanced Treatment of Bidder and Target Shareholders

Wednesday, January 1st, 1997 at 12:00 am by Mirial P. Hechler
Mirial P. Hechler, Towards a More Balanced Treatment of Bidder and Target Shareholders, 1997 Colum. Bus. L. Rev. 319

In recent years, a new wave of merger and acquisition activity has greeted the corporate world. Unlike the hostile takeover wave of the 1980’s, the current wave of takeovers is characterized by mergers and acquisitions initiated by large, publicly held companies such as IBM or Disney, as opposed to private LBO firms or corporate raiders like T. Boone Pickens or Carl Icahn. These “new” mergers often are completed under “friendly” circumstances and are justified by various potential synergies between bidder and target, such as economies of scale and scope and vertical integration. Unlike the ill-fated conglomerate mergers of the 1960’s or the hostile buy-outs of the 1980’s, the new wave of mergers and acquisitions promises to improve industrial production and generate substantial increases in shareholder wealth. It is probably too soon to tell whether the current wave of merger activity is any different from former waves that have swept Wall Street. Whatever the case, target shareholders that confront such merger activity will not be lacking in legal protection from bidders offering too little stock or cash for the value of their stock. If target shareholders dislike an offer, they can use their voting power to block a bid. In addition, legal mechanisms such as the Williams Act prevent bidders from taking targets by surprise, reduce the coercive effect of tender offers, and arguably result in higher premium payments to target shareholders. Legal mechanisms not only protect target shareholders from overreaching bidders, but they also protect them from overreaching managers as well. In Delaware, judges examine target managers’ defensive actions according to a heightened standard of review as dictated by the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum Co. Moreover, once the target is put up for sale, its managers must procure the highest premium possible for target shareholders–usually through an auction. Finally, if the shareholder truly believes that a bidder’s price fails to reflect the value of his stock, he can ask for appraisal rights and opt out of the transaction altogether. Unlike target shareholders, the owners of acquiring firms do not enjoy legal protection for the value of their stock when their managers decide to acquire other firms. Indeed, as bidding firms increase their premium in order to win more competitive auctions, their shareholders are more likely to suffer a loss in the value of their stock rather than a gain. Despite the magnitude of loss they may suffer from overpriced and ill-fated acquisitions, bidder shareholders have no more legal protection from their ego-driven managers than the deferential standards of judicial review laid out by the business judgment rule. In fact, the only way a shareholder can signal his displeasure with his company’s impending acquisition is to take the “Wall Street walk”: upon announcement of a pending acquisition, he can sell his stock. The purpose of this paper is to determine whether bidder shareholders ought to have more options than the “Wall Street walk” when their managers propose acquisitions that threaten to destroy the value of their stock. In this paper, I construct the argument for increased legal protection of bidder shareholders by first looking at the comparatively large number of options open to the target shareholder, either when he is dissatisfied with an offer to buy the company, or when he is unhappy with his management’s response to what appears to be a fair bid.

Author Information

Litigation associate, Cravath, Swaine & Moore.