Shark Repellents the Role and Impact of Anti Takeover Charter Amendments

8/8/2019 Shark Repellents the Role and Impact of Anti Takeover Charter Amendments

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Economist

DC

September 7, 1984

\ Shark Rer;>el16!nts7 The R o l e and, Impacto f Ant1takeover Charter Amenaments

o f th e Off i ce o fha s expressed no


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PERSONS TO. CONTACT

/'Shark Repel l ih t s : The Role and Impact

. ~ of Anti takeover Char te r Amendmenty '

- 272-7104272-7102272-7115

Gregg J a r r e l lMike RyngaertAnnette poulsen -

Corporate cont ro l b a t t l e s have taken many forms. The ro le

6f a n t i takeover c h a r t e r amendments - - whether they b e n e f i t

shareholders o r management - - ha s no t y e t been determined.

However, t h e i r increasing prevalence on shareholder b a l l o t s ha s

le d to strong i n t e r e s t in determining the impact of these

-amendments on shareholder weal th .

In th i s s tudy, we take a l a rge sample of f irms proposing

ant i takeover amendments and cons ide r th e impact of these

amendments on share p r i c e s . We include 131 New York or American

stock exchange f irms and 40 f irms t raded over th e counte r. Al l

::Jf these firms introduced successful f a i r pcice amendments,

nost of which included supermajor i ty prov is ions .

We f ind evidence which supports the hypothesis t h a t

an t i takeover amendments reduce shareho lde r wea l th . From fo r ty


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t rad ing days before through the mailing date of th e proxy

d e t a i l i n g th e amendments, we f ind tha t shareholder wealth

decreases an average o f approximately th ree percent fo r 87

NYSE or ASE firms a t th e 1proposa of f a i r pr ice combined with

supermajor i ty proposa ls . In d o l l a r terms, th e shareholders of

these firms l o s t about $1.13 b i l l i o n in capl ' tal value , accordingto these r e s u l t s . The 400TC firms suffered an average loss ofnearly 5 percent in th e time per iod around t h e i r proxy mailing

dates . This implies a d o l l a r loss of another $250 m i l l i o n .

Therefore , th e aggrega te loss t o shareholders of these 127

NYSE, ASE, and OTC firms resul t ing from passage of ant i - takeover

amendments' is estimated to be about $1 . 35 b i l l i o n .

.I n t h i s memorandum, we f i r s t review the cont roversy.

Arguments ,de ta i l ing th e p o t e n t i a l benef i t s and harms of a n t i -

takeover c h a r t e r amendments ar e o u t l i n e d . We then tu rn to th e

ques t ion of why shareholders would vote fo r these amendments i f

they a r e , in f a c t , harmful to shareholder weal th . Our empir ica lwork follows in which we more com 1 t 1p e e y repo'ct ou r r e s u l t s .

I. Hypo th e s i s One: A " j ' n ~ t r . i ; - ; t : ; a ~ k . : ; e : ; , o : : . . . : : . v . : : e . : : r . - : : C : ! h ! ! a : . : r = - t : : ; e = . r = - ~ A m : ! ! ! : e : . . : . n ! . : d : ! ! m ~ e : . : n ~ t . = : ! , S Benef l t Shareholders

The f a c t t h a t shareholders vote fo r these amendmentssuggests t h a t they perce ive some good in them. Sever.alposs ib le benef i t s have been

suggested by var ious wri ters . I fwe assume t h a t these amendments lower th e probabi l i ty of a

takeover contes t in the firm in t roduc ing them, then the firm

may benef i t by protec t ing t h e i r management team from abrupt

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'- i smissa l . Managers may be more l i k e l y to engage in longer

investment projec ts which do no t have an immediate payoff .

se longer-term projec ts may ul t imate ly be more p r o f i t a b l e ,

t shareholders may no t be able to ident i fy those p o t e n t i a l

as well as th e managers. Under t h i s scenar io , pro tec ted

would be more l i k e l y to choose the ncor rec t" investment,l ess worry about short-term s tock pr ice reac t ion .

An a l t e r n a t i v e suggested benef i t from a n t i akeover amendmen

s based on th e premise t h a t management t r i e s to p r o t e c t i t s

. o b . To do t h a t , there a re severa l a l t e r n a t i v e s teps they may

Defensive ac t ions may inc lude ant i takeover amendments,

~ a y m e n tof greenmail to p o t e n t i a l bidders , s t a n d s t i l l agreements,

cont rac ts for asse t sa les which would decrease the f i rm's value

in th e event of a takeover bid , or an y number of other procedures

devised by crea t ive managers and investment bankers. Of a l l th e"-

poss ib le protec t ive maneuvers, some sugges t t h a t ant i takeover

amendments ar e th e l e a s t cos t ly to th e f i rm's shareholders. ThU

a n t i takeover amendments benef i t shareholders because they dis.

courage a l t e r n a t i v e , more cos t ly maneuvers.

Though these two explana t ions have v a l i d i t y, economists

suggest a th i rd ra t ionale fo r why shareholders WOuld approve

takeov'er amendments. This explana t ion r e l i e s on ind iv idual

incent ives to t ender to an o ff e r even i f a b e t t e r o f f e r might be

forthcoming. That incent ive to accept a r e l a t i v e l y low o f f e r

is founded on th e fear t h a t i f th e o f f e r i s accepted by over 50

~ e r c e n tof the shareholders , a non-tendering shareholder w i l l


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be forced to accep t a lower pr ice than what might have been

ultimatelY offered . That i s , an ind iv idua l shareholder w i l l

accept a pr ice which he bel ieves i s no t high enough because he

fears a t l e a s t SO percent o f th e other shareholders w i l l accept

th e o f f e r . Because each shareholder expects the same of every

other shareholder, th e o f f e r i s accepted . l /

Some proponents of a n t i takeover amendments sugges t t h a t

these amendments a l t e r th e s i t u a t i o n . In an y weal th- increas ing

combination o f two f i rms , th e shar ing o f the wealth between th e

two firms must be determined. 1 / The bidding firm w i l l want to

to cap ture a l a rge por t ion of th e wealth increase by purchasing

th e firm a t a r e l a t i v e l y low premium. The t a r g e t firm w i l l

want to cap ture as much of the wealth increase as it ca n by

forcing th e h i g h e s t poss ib le bid . Under c e r t a i n condi t ions ,

th e t a r g e t managers can b e n e f i t t h e i r shareholders by 'acting ast h e i r c e n t r a l negot ia t ing agent (as they do fo r merger n e g o t i a ~

h o n s )

Consider an example. Suppose Company A and Company B

would experience a $1 mil l ion increase in wealth i f they were

to combine. This wealth increase might be due to complementary

production t echniques . Company A makes a bi d fo r Company B 's

l / DeAngelo, Harry an d Edward M. Rice, "Anti takeover Charter

Amendments and Stockholder Wealth," The Journa l o fF inanc ia l Economics, 1983, vol . 11 , pp . 329-361.

1 / Bradley, Desai, an d Kim, "The. RationaleTender Offers : Information o r Synergy?"Financ ia l Economics, 1983, Vol. 11 , pp .

Behind In ter- f i rmThe Journa l of

183-206.

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J,b,'000 shares . They should be w i l l i n g t o pay up to a $100

Vremium fo r each of those shares , fo r a t o t a l premium payment

i f $1 mil l ion . However, they would p r e f e r to pa y a $1 premium.

ompany B's shareholders would prefer to rece ive a $100 premium

u t even a $1 premium l eaves them b e t t e r o t f than they were

. ~ f o r e

The s ize of the premium received by Company B's shareholder

11 1 be clE:!termined by th e r e l a t i v e barga in ing s t rengths of the

WO companies. Company A 's pos i t ion i s s t ronger th e fewer th e

umber of firms which may make competing b i d s . (That i s , th e

ewer th e number o f firms t h a t would b e n e f i t in a s i m i l a r mann

rom a combination.) Company B' s p o s i t i o n is s t ronger th e mor

ohesive the shareholders a re in determining a response to an y

, a r t i c u l a r b id .

In e f f e c t , a n t i takeover amendments in genera l , and super-~ j o c i t yprovis ions in p a r t i c u l a r , ca n force shareholders to

lCt in a more cohesive manner. Because shareholders know a bi,d

r i l l only be accepted in the case where 66-2/3 to 90 percent o

~ : . h eshareholders accept th e o f f e r Cas in the case of super

\ a j o r i t y provis ions) , they have l e s s to fear by not tendering

: ~ n yspec i f ic o f f e r which they may th ink is to o low. The prob

: ~ b i l i t yis reduced t h a t an y o f f e r wil l be accepted without th e

: ~ o l d e r ' sshares . In the end, Company B 's shareholders may be

; ~ b l eto e x t r a c t a higher premium i f they ca n a c t in a cohesive

,nanner. (However, i t is a lso poss ib le t h a t th e prospec t o f pay

. ~ high premium could d e t e r a bidder from attempting a t akeover. )


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Thus, i t is argued by some obse rve r s t h a t shareho lde rs

may gain from the passage of a n t i takeover c h a r t e r amendments.

Shareholders may benef i t by providing t h e i r managers with a

s t ronger bargaining pos i t ion with p o t e n t i a l l y h o s t i l e bidders .

Management may benef i t from th e a b i l i t y to focus on longer-term

p r o j e c t s . Also, fewer f irm resources may be spen t on a l t e r n a t i v e

pro tec t ive dev ices .

I I . Hypothesis Two: Ant i t akeover Char te r AmendmentsHurt Shareholders

Shareho lde rs , many o t h e r s a rgue , a re hur t by an t i t akeover

amendments. Subs tan t ia l l i t e r a t u r e e x i s t s which v e r i f i e s tha t

t a r g e t shareho lde rs r ece ive l a rge premium.s from tender offe rs

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fu tu re poten t ia l wages fo r poor managers and 3) th e t h r e a t of

th e loss o f management's jobs through shareho lde r vo te , such

~ s through a proxy f i g h t o r a sa le of the f irm to new owners.

Antitakeover amendments reduce managerial d i s c i p l i n e by

The co s t to shareho lde rs o f vot ing ou t ex is t ing~ his theory.

. s u b s t a n t ; a l l y Management is al lowed toanagement ~ n c r e a s e s ~ .

je more se l f - se rv ing in i t s ac t ions than before th e amendments

ind ar e b e t t e r insu la ted from takeovers and proxy f igh t s i f th

: a i l to maximize the value of f irm equi ty.

['I I . Why Do Shareholders Vote fo r Anti takeover Amendments?

I f ou r f i r s t hypothesis i s t rue t h a t shareho lde rs benef i t

~ r o ma n t i takeover amendments, then it i s c l e a r why shareho lde rs

an d merger agreements . I f an t i t akeover amendments are success fu l ~ p p r o v ethem. Firms which pass a n t i takeover amendments would

in discouraging t ender o f f e r s o r mergers, then shareho lde rs may.

lose- subs tan t ia l benef i t s as a r e s u l t of these amendments.

) 'et ter of f as a r e s u l t . Fo r some reason , these f irms would

~ ' s p e c i a l l ybenef i t from long-term job pro tec t ion fo r management

The poten t ia l cos t s o f a n t i takeover amendments, however, ar e ')'r from e f f i c i e n t a n t i takeover maneuvers . Or, they a re f irms

no t l imi ted foregone premiums. Antitakeover amendments may

lead to "management entrenchment". Management's jo b pro tec t ion

is inc reased and i t s dec i s ions may be l e s s c lose ly l inked to

r e s p o n s i b i l i t i e s towards shareho lde rs . A long-noted problem in

publ ic companies is th e separa t ion of ownership by shareho lde rs

ihich perce ive a spec ia l need to a c t cohes ive ly on corpora te

' : 'ntrol ques t ions . Iden t i fy ing why t h i s s e t o f f irms f indn~ h e s eamendments espec ia l ly benef ic ia l is beyond th e scope o f11 _ . ~

l~,' ~ h i ss tudy. However, i f th e f i r s t hypothesis is t r u e , it isj{1'\,ot surprising t h a t shareho lde rs approve these amendments.

from c o n t r o l by management. Several mechanisms work to disc iP l ine! ! ) The more d i f f i c u l t ques t ion a r i s e s when on e asks why shar

managers to ensure t h a t t h e i r goals a re analogous to those of

shareho lde rs . These mechanisms inc lude : 1) c o n t r a c t s between

shareho lde rs and management, such as compensation plans which

ar e t ied to managerial performance - - as in bonus or stock. ' op t ion p lans , 2) managerial l abor market forces which lower

, 1

hblders would vote fo r amendments which harm them by reducingx _

~ h el i k e 1 ihood o'f premium opportuni t i e s from t ender o f f e r s and

hlYinc reas ing cos t s o f managerial d i s c i p l i n e . This d i f f i c u l tJA .~ e s t ~ o nar i ses i f ou r second hypothesis were t rue


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TwO. pess ib le exp lana t ions fo r perve r se vot ing behavior

have been sugges ted . 11 Beth of these r e s t on th e premise t h a t

c e r t a i n sharehe lde r s pe rce ive t h a t th e c o s t ef ve t ing aga ins t

th e amendments exceeds an y benef i t frem ve t ing fe r them. The

f i r s t exp lana t i en suggests t h a t t h e r e i s a group of i n v e s t o r s

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,ju'ld intraduce a proxy f i g h t . However, th e s u b s t a n t i a l cos t s'%

dvalved wauld have to be l e s s than th e loss in share value., ~

J should be noted t h a t both th e f i r s t and second exp lana t ionJ s t on th e assumption t h a t th e group vo t ing fo r th e antitakeave.

'mendment holds a m a j e r i t y p e s i t i o n .

which ga ins by werking with incumbent managers . These i n v e s t o l : ' s ' t d Methedelegy. Da a an

weuld probably take the form of i n s t i t u t i o n a l i n v e s t o r s who

hold l a rg e blocks of s tocks . I f these he lde rs expect fu tu re

cons ide ra t i en from incumbent management as a r e s u l t e f t h e i r

votes in favor e f an t i t akeever amendments, they may ga in more

than an y resu l t ing loss in share va lue .

The a l t e r n a t i v e exp lana t ion again r e s t s on two. c lasses o f

v o t e r s . DeAngelo. an d Rice c a l l t hese ve te rs "informed" and

"uninformed". Informed ve te rs (perhaps i n s t i t u t i e n a l he lde rs )

w i l l care fu l ly assess the amendment and vote a g a i n s t it i f theyexpect it to hur t sha re va lue . In c o n t r a s t , th e uninformed

v o t e r ha s r e l a t i v e l y high in fe rmat ien cos t s e f determining the

impact e f th e amendment on h is wea l th . The uninformed vet,er

may f ind t h a t in genera l h is wealth is maximized by agreeing

with management when it s o l i c i t s prex ies , r a t h e r than always

expending r e sau rces to p r e d i c t th e e f f e c t s himse l f . Thus, he

A. sample

Kidder peabedy previded us with a l i s t ef f i rms proposing

~ i r p r i c e amendments from th e per ied 1980 threugh 1 9 8 3 .

Hough th e l i s t probably dees n et include a l l prepesed f a i r

t i c e amendments, we be l i eve t h a t th e 171 f irms l i s t e d a re

~ p r e s e n t a t i v ea f a l l f a i r pr ice amendments during t h i s p e r i

f these f irms, 131 ar e t r aded on th e New York o.r ~ ~ e r i c a n

tack exchanges, and th e remaining 40 are traded over the

: )unter.Fa i r pr ice amendments ar e designed to. p r a t e c t minor i ty

f iarehalders a f t e r a bidder ha s acquired a l a rge black e f

Hares. I t is feared t h a t a l a rge he lde r ceuld "squeeze out"

fie minari ty , fe rc ing them to accep t a law p r i c e . In genera l ,

"air pr ice amendments requ i re th e b idde r to. pa y minar i ty sha re

ci1Jers a t l e a s t as much as th e highes t pr ice paid to. acqu i re

accepts the a n t i takeover prapesa l even when infarmed shareho. lders hares already he ld . More de ta i l ed prov i s i ens may t i e th e

recagnize i t s de t r imenta l e f f e c t s . The infermed shareha lde r

A thi rd pass ib le exp lana t i an i s t h a t shareha lde r s ar ei r r a t i a n a l . Thaugh t h i s exp lana t i en may be a t t r a c t i v e tosome, t he re is no t h e o r e t i c a l or empi r i ca l bas i s fo r i t .

' t i ce to market value e f th e f i rm o r p r i c e - e a r n in g s t::aties and

a rn ings per sha re .

Of th e 131 NYSE or ASE f irms propesing f a i r pr ice amendme

7 included supermajori ty p r o v i s i o n s . Supermajari ty approval


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prov i s ions requ i re a g r e a t e r than 50 percen t approval by share

holders fo r t r ansac t ions such as mergers, l i q u i d a t i o n s ,

d i s s o l u t i o n s , or sa le .or l ease of major a s s e t s . Required share

holder approval of these t r ansac t icns may range from 66-2 /3 to

90 percen t , and in genera l requ i re a s i m i l a r percen t approval

of th e amendment i t s e l f . Most of th e 40 OTC f irms included

supermajor i ty p rov i s ions a l s o .

A problem with in te rpre t ing o ur t ' e su l t s is t h a t we do n ot

account fo r th e many .other factot 's t h a t cculd cause changes i n

f irm value simultaneously with publ ic anncuncement .of an t i t ake

over proposa l s . For example, in the i t ' s tudy of 265 an t i t akeover

amendment proposa l s f rom 1974-1979, DeAngelo and Rice i d e n t i f y

14 4 cases where a ' confounding event" may have occur red . These

confounding events include changes in number of authot ' ized

shares , changes in managerial incen t ive plans , changes i n s t a t eof incorpora t ion , simultaneous removal of other a n t i takeover

prov i s ions an d changes in vc t ing r i g h t s . Hcwever, because we

considet ' a l a rge numbet' .of t ender o f f e r s , we hope t h a t ou r lack

of i d e n t i f i c a t i o n of p o t e n t i a l confounding even t s w i l l 'wash ou t"

in cu r r e s u l t s . 1/

Data on ne t -o f -marke t s tock re tu rns fot' th e NYSE and ASE

f irms a re ob ta ined from th e CRSP (Center fo r Research in Secur i ty

1 / I ~ shculd be noted t h a t th e twc samples used by DeAngelo an dRJ.ce - tl;e "clean" sample and th e l a rg e r on e including theconfoundJ.ng events - bcth yie ld near ly i d e n t i c a l r e s u l t s onth e average ne t -o f -marke t s tock re tu rns dur ing the announcement per iod . .

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da ta f i l e . We compute s tock re tu rns EorOTC firms from'. i ces )an d employ the s t andard market model to ne t ou t .e ISL t apes , -

e e f f e c t s of genera l market movements on gross s tock r e tu rns .

B. Event Date

In an y s tudy of market reac t icn to a p a r t i c u l a r even t , th e

'ate a t which market p a r t i c i p a n t s become aware of the even t

t lst be iden t i f i ed . In th i s s tudy, we could choose from several .

0 t e n t i a l da tes . Bhagat o u t l i n e s these cho ices . i / The e a r l i e s t

a te a t which th e market might become aware .of an even t such as

he proposa l of an an t i t akeover amendment is when t h e b c a r d .of

i r e c t o r s of the company apprcves th e amendment. H c w ~ v e r ,

hagat nctes t h a t pt 'cpcsed c h a r t e r a m ~ n d m e n t sar e r a r e l y repor ted

n th e f inanc ia l press and. t h i s in fo rmat icn is kncwn only tc

orpora te ins iders .

The second da te a t which market par t ic ipants may becomeware of proposed amendments is th e da te on which proxie.s

escr ib ing th e amendments ar e mai led . At t h i s t ime, the p roposa l

s publ ic kncwledge. A thi rd p.ossible . chcice f.or a da te a t'0. .

,diCh a propcsed amendment wculd a f f e c t th e pr ice .of a f i r m ' s

~ c u r i t yis th e da te .of th e sharehc lde r meeting a t whiCh th e;)

~ e n d m e n tis voted on . However, i t is prcbable t h a t a t th e

lime th e propcsal is voted on, mat'ket par t ic ipants have a l ready

'ssessed a high p r o b a b i l i t y t h a t th e amendment wi l l pass ariu: j

/ Bhagat , "The Effec t of pre-Emptive Right Amendments .onShareholder Wealth", The Jcurna l o f F inanc ia l Econcmics,1983 , '101. 1 2, pp . 289-310.


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th e secur i ty pr ice w i l l r e f l e c t t h a t i n fo rma t ion . Th l s es t ima ted re la t ionsh ip is then used toi i l i n g da te . -

We choose th e proxy mailing da te as th e event da te fo r ou r ~ e d i c twhat secur i ty p r ices would be i f they continued to

s tudy. I t is a t t h i s t ime t h a t the market l e a r n s o f th e proposed ~ a c kth e market in th e same manner. Pred ic ted s tock re tu rns

amendment on d widespread b a s i s . At an e a r l i e r da te , only a

few ins iders would be aware of the in fo rmat ion . At d l a t e r

da te , th e s e c u r i t y pr ice would a l ready r e f l e c t the high prob

a b i l i t y of th e passage of th e amendment. Our approach is

cons i s ten t wi th t h a t of Bhagat , Linn an d McConnell, and

DeAngelo and Rice . 2 /'

Of .course, th e proxy mailing da te wi 11 no t be p e r f e c t l y

cor re la ted wi th t he da te a t which th e market becomes aware o f

:.e compared to ac tua l re tu rns to determine i f the s tock per- .

)rmed unusually well o r badly in the pred ic t ion per iod .

In e f f e c t , t h i s procedure uses th e es t ima ted r e l a t i o n s h i p

i tween an ind iv idua l s e c u r i t y an d th e market to " n e t out"

: ' e ra l l market in f luences from s e c u r i t y p r i c e s . Thus, we look

::" th e period 40 t r ad ing days before through two .days .a f te r th e

' :oxy mailing da te to determine i f th e market perce ives a n t i -

:ikeover amendments in a p o s i t i v e o r negative. l i g h t .

the proposed amendments. The f irm may i s sue advance announcements

o r the information may be l.eaked in on e form o r ano the r. Thus,

e r r o r in iden t i fy ing th e announcement da te . Also , we look a t

s tock re tu rns from 40 t r ad ing days before the proxy mailing

da te through two days a f t e r to determine th e overal l impact of

th e proposed amendments. Othe r events affec t ing secur i ty pr ices

may f a l l in t h i s 43-day per iod - - aga in , we re ly on averagesover l a rge samples to wash ou t these poss ib le f luc tua t ions .

C. Estimation Procedure

The re la t ionsh ip between each secur i ty p r i c e and th e market

index is es t ima ted over a c o n t r o l period preceding th e proxy

7./ Linn and MC.Connell, "An Empirical Inves t iga t ion of theImpact of 'Ant i t akeover ' Amendments on Common Stock p r i c e s , "The Journal of Financ ia l Economics, 1983, Vol. 11, pp.361-41)0.

Empirical Resu l t s

I f secur i ty pr ices of f irms proposing a n t i takeover amendme

i r i o d surrounding th e announcement of those amendments, then

~ e evidence supports the f i r s t hypothesis t h a t anti t 'akeover.! ~ e n d m e n t s. benef i shareho lde rs . However, i f we observ:e. a

, i g n i f i c ~ n tdeprec ia t ion in share value during ' th e announcement .

a r i o d , then th e evidence supports the second hypothesis t h a t,

iriti takeover amendments hur t sha reho lde rs . Though we ca n no t

icike conclusive s t a t emen t s abou t th e v a l i d i t y of e i t h e r hypothes

ije to ou r lack of a n a l y s i s of a l l poss ib le confounding even t s ,

.e ca n l ea rn s u b s t a n t i a l l y th e genera l e f f e c t s on s tock va lue

these ;1nti takeover p roposa l s an d compare them to th e work of

r r e sea rche r s in t h i s area .

Our resu l t s ar e summarized in Table 1 . In ou r sample of


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II

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TABLE 1

The Effec t s o f Ant i t akeover Char te r AmendmentsNet-of-Market Stock Returns, Fo r NYSE, ASE

and OTC Firms, 1980-1983. '

,

On

:' ~ ~ = = =

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These ar e cumulat ive n 7 t - o f - m a r k e ~s tock re tu rns ave.ragedover a l l of the f irms 1n t h e p a r t l c u l a r sample over thei n t e r v a l -4 0 to +2 (un less otherwise ind ica ted) r e l a t i v eto th e proxy mai l ing da te . The n e t - o f - m a r k e ~re tu rns ar ecomputed using the s t andard market model, Wh1Ch employseach f i rm ' s h i s t o r i c a l l y determined "be ta" measure to ne t .ou t th e e f f e c t s of genera l market movements from th e f i r m ' sgross s tock r e t u r n s .

Average Net-af-Market Level of This measure is a t - s t a t i s t i c (i n abso lu te va lue) . LevelsChange in Stock Pr ice Sta t i s t i i ' l above 1.96 provide g r e a t e r than a 95% confidence l eve l

; : ; s ; . : a m = p " , 1 : : . e = - - . : : ; o = f - = F . . : i : . : r m : . . : : : . : s ~ l o , -_________ ';(L1::n ~ ~ p ~ e 1 : r ~ c ~ e ~ n : . 1 t ~ ) L 2 = -______ S . . . ! i ~ g E n ~ i J f ~ i ~ c ~ , , 1 th a th e es t ima ed av e rage chang e in s tock p ri ce i s d i f e re n.,' than ze.ro.

131 NYSE and ASE FirmsProposing Fai r Pr iceProvisions, . 1980-83.

87 NYSE an d ASE Firmsproposing Both Fai ran d Supermajori tyProvis ' ions, 1980-83.

40 OTC Firms ProposingFai r Pr ice p rov is ions ,1980-83, Measuredover -4 0 to +2.

'- .40 OTC Firms proposing

Fai r Pr ice pro.visions, .1980-83, Measured

- 1 . 78 1.46

-3.09 2.22

-2.111.22

over -4 0 to +10.4 . -3.38 2.4140 OTC Firms proposing

Fai r P r i ce prov is ions ,1980-83, Measuredover -4 0 to +20. 4 - 4 . 9 2 2.44

Notes to Table 1:

1. T ~ efir\ns in t h i s s ~ m p l ear e se lec ted f roma . survey byK1dder Peabody of f lrms proposing f a i r p r i c e prov i s ionsb e t w e e ~1980-83. ,We used a Drexel Burnham survey of f irmspropoS7 ng s u ? e r m a ~ o r i t yprov i s ions between 1 9 8 0 - 8 3 todeterm1ne Wh1Ch f17ms passed both types of prov is ions .Note t h a t th.e 87 f1rms proposing both proviSions cons t i tu tea s u ~ - ~ a m p l e? f th e 131 f irms t h a t proposed f a i r pr iceprOV1S1ons. We presume t h a t a l l of the f irms passed thesechar te r amendments. '

We include res .u l t s from expanded i n t e r v a l s forOTe. f i rmsbecause o f the observed continued d r i f t in ' s tock p r i c e sa f t e r th e proxy mai l ing d a t e . There is no analogous d r i f tin th e NYSE an d ASE sample.


11/11

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131 NYSE an d ASE f i rms , we find t h a t s h a r e h o i d e r s l o s e , on

average, 1.78 percent of the value of t h e i r shares during the

period 40 days before through two days a f t e r th e proxy mailing.

d a t ~ . This ~ e s u l tis of border l ine s t a t i s t i c a l s i g n i f i c a n c e ,

although th e mean e f f e c t i s of n o n - t r i v i a l magnitude.

Though we ar e unable to s t r i c t l y determine which type of

a n t i takeover amendment is more r e s t r i c t i v e than another, it

should be t rue t h a t e i ther type of amendment would a f f e c t share

pr ices in th.e same d i r e c t i o n ; t h a t i s , both should e i t h e r

increase shareholder wealth o r decrease slHlreholder weal th . In

87.of th e 131 NYSE o r ASE f i rms , supermajor i ty provis ions were

proposed a t th e same t ime as f a i r pri .ce amendments. These

firms experienced an average 3.09 percent dec l ine in share

va lue , s i g n i f i c a n t l y d i f f e r e n t from zero a t th e 97.5 percent

probabi l i ty l e v e l . In d o l l a r terms, t h i s represen ts a $1.13

b i l l i o n loss to shareholders .

Thus, i f a supermajor i ty provis ion i s combined with a f a i r

pr ice amendment, th e 10.ss to shareholders is much. g r e a t e r than

i f a f a i r pr ice amendment is introduced by i t s e l f . In fac.t,

the evidencesuggescs t h a t f a i r pr ice amendments by themselves

have l i t t l e e f f e c t on s e c u r i t y p r i c e s .

Simi la r re turns a re determined fo r 40 OTC f i rms . Again,

th e evidence suggests t h a t a n t i akeover amendments hur t t a r g e t

shareholders . From 40 days before through two days a f t e r t h e .

proxy mailing date , share pr ices of these 40 firms d ~ p r e c i a t e

an average 2.11 percent . Fo r a l o n g ~ rp e r i o d , 40 days before

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through 20 days a f t e r th e proxy mai l ing , share pr ices drop an

average 4.92 percent . In d o l l a r terms, these OTC firms l o s t

$216 mil l ion as a r e s u l t o f proposing a n t i takeover amendments,

according to ollr r e s u l t s .

Conclusion

This memorandum presents evidence t h a t the proposal o f

a n t i takeover amendments to corpora te char te rs is harmful to

s h a r e h o l d e r s . The average net -of -marke t s tock pr ice dec l ine

fo r 87 NYSE and ASE firms t h a t proposed f a i r pr ice an d super

major i ty provis ions from 1980 through 1983 is over t h r e e p e r c e n t ,

from for ty t rad ing days before to two t rad ing days a f t e r th e

proxy mailing d a t e . The average net -of -marke t s tock pr ice

dec l ine for 40 OTC firms t h a t proposed s i m i l a r ant i takeover

amendments from 1980 through 1983 i s near ly f ive percent . (Both

of these r e s u l t s i s s t a t i s t i c a l l y s i g n i f i c a n t a t th e 95%

confidence l e v e l . ) The average s tock pr ice dec l ines over

these 127 firms implies an aggregate c a p i t a l loss to share-

. holders of about $ 1 . 3 5 b i l l i o n .

While these on-average pr ice d e c l i n e s a r e cons is ten t with

i so la ted cases o f benef ic ia l a n t i takeover amendments, th e

aggregate data suppor t th e genera l conclusion t h a t these

amendments a re perceived by th e market as devices to entrench

incumbent management. This i n t e r p r e t a t i o n of th e evidence

.perhaps expla ins th e repor ted growing h o s t i l i t y towards these

amendments by i n s t i t l l t ions an d other sophis t ica ted , outs ide

s tockholders . I t remains puzz l ing , however, why such l a rge

numbers of publ ic firms rece ive shareholder approval fo r

an t i takeover amendments.

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Shark Repellents the Role and Impact of Anti Takeover Charter Amendments

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