Governance of Corporate Takeovers: Time for Say-on-Takeovers?

Abstract

We study the potential for digital, online information and electronic voting to improve shareholder surplus by facilitating a new governance structure: owner-governance, which shifts control of the takeover decision from the board to shareholders. We compare analytical models of owner-governance to the current practice of delegated-governance in the context of increasing availability of online information which increases public informedness. Our analysis shows that shareholders of the target firm and the acquirer both prefer owner-governance to delegatedgovernance when informedness is sufficiently high. Interestingly, we find a region where ownergovernance offers a higher probability of takeover but delegated-governance offers higher shareholder surplus. Under delegated-governance, the board endogenously sets an entrenchment level that is always greater than the entrenchment level preferred by the shareholders and increasing informedness reduces the probability of a takeover. Our results suggest that ownergovernance should be considered because of increasing informedness.

The decline of corporate governance and the transfer of wealth from public investors to private equity

“…An international examination of corporate governance found that governance affects shareholder wealth (Aggarwal et al, 2007). Academic research supports the conclusion that transferring power from boards to shareholders increases existing shareholder wealth (Vithayathil and Shiv-endu, 2019;Vithayathil and Choudhary, 2018, Bebchuk, 2002, 2004.…”

“…Measures such as staggered boards, poison pills, supermajority requirements, and others act together to entrench boards. Striking evidence from research supports the conclusion that entrenchment of boards is harmful to shareholders (Vithayathil and Choudhary, 2018;Gompers, Ishii, and Metrick, 2003;Bebchuk, Cohen, and Ferrell, 2008). Entrenchment is one way to frame weak corporate governance.…”