State Takeover Legislation: The Case of Delaware

Abstract

The rise in hostile takeover attempts in recent years has apparently motivated many states to pass antitakeover legislation, often after lobbying by the management of targeted firms. At least 39 states have passed some sort of antitakeover legislation. In 1988, Delaware, the state of incorporation of almost half of the firms listed on the New York Stock Exchange, enacted its own antitakeover legislation. How did investors in Delaware firms react to news of the progress of this particular law? Since shareholders typically enjoy rapid price gains when their firms are successfully acquired (see Jensen and Ruback, Jarrell et al.), laws reducing the probability of a takeover may also reduce the value of a potential target. Such value reduction may be mitigated as antitakeover laws may also have the effect of raising takeover premiums. Critics also argue that takeover protection makes management less accountable to shareholders, which may lead to corporate decisions not in the best interest of shareholders. Firm value may not be maximized, however, when management feels vulnerable to a takeover. The threat of takeover may lead management to focus unduly on short-term results, holding costs down by deferring R&D and