DP3073 Takeover Bids versus Proxy Fights in Contests for Corporate Control

Author(s): Lucian Arye Bebchuk , Oliver Hart

Publication Date: November 2001

Keyword(s): corporate governance , corporate control , takeovers , proxy contests , mergers and acquisitions

JEL(s): G30 , G34 , K22

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP3073.asp

This Paper evaluates the primary mechanisms for changing management or obtaining control in publicly traded corporations with dispersed ownership. Specifically, we analyse and compare three mechanisms: (1) proxy fights (voting only); (2) takeover bids (buying shares only); and (3) a combination of proxy fights and takeover bids in which shareholders vote on acquisition offers. We first show how proxy fights unaccompanied by an acquisition offer suffer from substantial shortcomings that limit the use of such contests in practice. We then argue that combining voting with acquisition offers is superior not only to proxy fights alone but also to takeover bids alone. Finally, we show that, when acquisition offers are in the form of cash or the acquirer’s existing securities, voting shareholders can infer from the pre-vote market trading which outcome would be best in light of all the available public information. Our analysis has implications for the ongoing debates in the US over poison pills and in Europe over the new EEC directive on takeovers.