Current US Debate (2016) | Holger Spamann | February 02, 2016


Current US Debate (2016)

by Holger Spamann Show/Hide

So where are we now?

The Airgas excerpt below summarizes the current state of Delaware fiduciary law for takeover defenses. A board can maintain a poison pill for as long as it likes and for the mere reason that it believes the offer price to be inadequate. This means that the only way to overcome determined resistance by an incumbent board is to replace it in a proxy fight.

Until recently, most large corporations’ charters did not permit replacing a majority of the board in a single annual meeting. Their boards were staggered, i.e., only a third of the directors were up for reelection each year (re-read DGCL 141(d), (k)(1)!). Consequently, an acquirer had to win proxy fights at two successive annual meetings to replace the majority of an intransigent board. This takes at a minimum one year and a couple months, and the acquirer would have had to keep the tender offer open (and capital tied up etc.) during that entire time. Hardly any challenger was willing to attempt this. Airgas is about one of the very few exceptions.

In recent years, however, the incidence of staggered boards has declined precipitously among the largest U.S. corporations. By 2012, only a fourth of the corporations in the S&P 500 index had staggered boards. Between 2012 and 2014, most of these hold-outs “destaggered” as well. The impetus came from a law school clinic, the Shareholder Rights Project (SRP) based at Harvard Law School. Acting on behalf of several institutional shareholders, the SRP submitted precatory destaggering proposals (why not binding proposals?) for the corporations' annual meetings. Under rule 14a-8, the targeted corporations had to include these proposals on their proxies. Other shareholders generally supported these proposals, and most recipient corporations soon agreed to destagger. At the same time, staggered boards remain the norm in IPO charters — the charters of corporations selling their stock to the public for the first time.

1. Most observers believe that staggered boards have important consequences for corporate governance and thus ultimately the value of these very large firms. In other words, hundreds of billions are at stake. Other shareholders generally supported destaggering. Why did it take a law school clinic to bring about this change?

2. Why do institutional investors vote against staggered boards in established corporations but continue buying staggered IPO firms? Put differently, why do IPO charters still include staggered boards?

Opinions are sharply divided about the desirability of takeover defenses in general, and of staggered boards in particular. Managers and their advisors argue that defenses allow boards to focus on long-term value creation rather than on catering to short-term pressures from the stock market. Opponents claim that defenses shield slack and prevent efficient reallocations of productive assets.

3. The accountability argument for takeovers is easy to understand. What about the short-termism counterargument? Why would stock markets exert short-termist pressures on boards?

4. Many are concerned that the rules on poison pills, as policed by Delaware courts, allow management and boards to entrench themselves against shareholder interest, but also believe that the pill can be a valuable tool in the hands of a well-motivated management and board. Distinguishing good and bad uses of the pill in a charter or bylaw provision is probably impossible. What other governance device might align use of the poison pill with shareholder interest?


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  1. 1 Show/Hide More Airgas (Del. Ch. 2011)
    Original Creator: Holger Spamann
    Airgas (Del. Ch. 2011)

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