Corporate Control Activism

Abstract

We identify a commitment problem that prevents bidders from unseating resisting and entrenched incumbent directors of target companies through proxy fights. We discuss potential solutions and argue that activist investors are more resilient to this commitment problem and can mitigate the resulting inefficiencies by putting such companies into play. This result holds even if bidders and activists have similar expertise and can use similar techniques to challenge the incumbents, and it is consistent with the evidence that most proxy fights are launched by activists, not by bidders. Moreover, we show that there is complementarity between shareholder activism and takeovers: Activists benefit from the possibility that companies in which they invest will become a takeover target, while bidders, who interpret the presence of an activist as a signal that the target is available for sale, are more likely start takeover negotiations when the target has an activist as a shareholder. Combined, the analysis sheds light on the interaction between M&A and shareholder activism.