Institutional Shareholders, Private Equity, and Antitakeover Protection at the IPO Stage

Abstract

For well over a decade, institutional shareholders have been locked in battle with management of publicly held firms over matters of corporate governance generally, and takeover defenses specifically. The primary battles have been proxy contests over charter amendments. Institutional investors have opposed management proposals to amend charters in ways that would, in their view, impair governance and have supported shareholder proposals to amend charters in ways they believed would improve governance. The most common issues on which institutions have opposed management have involved takeover defenses. When management has proposed charter amendments to convert their boards from annually elected to classified boards, or to prevent shareholders from voting by written consent or calling special meetings, institutional investors have voted in opposition. In parallel fashion, when shareholders have submitted proposals to make charters more takeover-friendly-proposals to redeem poison pills, to submit poison pills to a shareholder vote, to declassify the boards of companies with classified boards, or to allow shareholders to vote by written consent or to call special meetings-institutions have voted in support of these proposals. In addition, institutions have supported shareholder governance proposals that are not directed specifically to takeover issues-including proposals requiring independent boards and board committees, separation of CEO and chairman positions, and confidential voting. While the attention of institutional investors, academics, and the press has focused on proxy fights, thousands of companies have gone public with charters containing the same takeover defenses that institutions oppose and omitting the governance provisions that they advocate. Until recently, this phenomenon seems to have escaped the attention of institutional investors. Indeed, it occurred under the radar of corporate governance experts and advocates of all stripes.