Abstract
Many companies continue to go public with takeover defenses even though institutional investors zealously oppose defenses in public companies. In this Article, I analyze the determinants of takeover defenses at IPO firms using an empirical analysis of 259 IPOs from 2008-12, interviews with numerous practitioners, and a survey of the corporate governance policies of significant investors. I find that the type of an issuer’s legal counsel’s M&A experience and the identity of pre-IPO shareholders explain much of the variation in takeover defenses at IPO firms. Companies advised by law firms with more target-side M&A experience adopt more defenses, while companies advised by law firms with more acquirer-side M&A experience adopt fewer defenses. Companies backed by venture capital funds are significantly more likely to adopt more takeover defenses. However, private equity backing has no effect on the pre-IPO adoption of staggered boards. Even though mutual funds and public pension funds are some of the most ardent opponents of takeover defenses in public companies, I find that issuers that they had invested in prior to the IPO almost always go public with robust takeover defenses in place. A comparison of issuers backed by Silicon Valley law firm Wilson Sonsini and New York law firm Simpson Thacher is particularly telling: Wilson Sonsini, a firm well known for its ties to the venture capital industry and its representation of targets, installed staggered boards in all of its IPO clients while Simpson Thacher, known for its private equity practice and acquirer representation, installed staggered boards in only 50% of its IPO clients. The lack of a consensus regarding the efficiency of defenses among the most experienced participants in the IPO market leads me to reject the idea that takeover defenses are generally optimal for pre-IPO shareholders.
Highlights
Over thirty years after the poison pill was first invented, the fight over takeover defenses still figures prominently in public discourse on corporate governance and shareholder rights.† While courts have generally decided in favor of boards,‡ shareholder activists have been extremely successful at the ballot box.§ Over the past decade, virtually every major mutual fund and public pension fund has come out in opposition to takeover defenses such as staggered boards in public companies
A comparison of issuers backed by Silicon Valley law firm Wilson Sonsini and New York law firm Simpson Thacher is telling: Wilson Sonsini, a firm well known for its ties to the venture capital industry and its representation of targets, installed staggered boards in all of its initial public offerings (IPOs) clients while Simpson Thacher, known for its private equity practice and acquirer representation, installed staggered boards in only 50% of its IPO clients
I test the hypothesis that the quality of legal services—as measured by a law firm’s overall experience in public merger and acquisition (M&A) transactions—provided to pre-IPO manager-shareholders explains the variation in the adoption of takeover defenses at the IPO
Summary
Over thirty years after the poison pill was first invented, the fight over takeover defenses still figures prominently in public discourse on corporate governance and shareholder rights.† While courts have generally decided in favor of boards,‡ shareholder activists have been extremely successful at the ballot box.§ Over the past decade, virtually every major mutual fund and public pension fund has come out in opposition to takeover defenses such as staggered boards in public companies. The presence of a venture capital fund amongst an issuer’s pre-IPO shareholders is correlated with a significantly higher likelihood that an issuer goes public with an effective staggered board. The presence of a private equity fund has no statistically significant relationship with the adoption of a staggered board and decreases the likelihood that a company goes public with dual class control structure These results are interesting because there is significant overlap in the identity of limited partners in private equity and venture capital funds, and many of these limited partners zealously oppose takeover defenses in public companies.
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