Target Directors Research Articles

Responsibility, Retribution and Remainder: Using Corporate Criminal Liability to Target Blameworthy Corporate Officers and Directors

The law’s dominant conception of responsibility is individualist – even where several people commit a wrong together, the law typically assigns responsibility to each participant just to the extent that his or her act has contributed to the injury. Given this general commitment to individual responsibility, it is no surprise that corporate criminal liability has been described by legal scholars as an “embarrassment,” and a violation of a “basic premise of criminal law that guilt requires personal fault.” Yet our commonsense responses to corporate crime betray the individualist position. Even where we can identify individual perpetrators, we are still sometimes inclined to blame the corporation, arguably because our sense of the wrong exceeds the responsibility borne by the individual perpetrators. This Article uncovers two dogmatic precepts that account for the divergence between public reactions to corporate crime and scholarly criticism of the doctrine of corporate criminal liability. The Article then seeks to offer a novel rationale for holding corporations criminally responsible – one that takes seriously the suggestion that corporate crime may not always be reduced to the acts of individuals. Thus, the Article proposes that we understand corporate criminal liability as a way of providing voice for that portion of our indignation that cannot be discharged on the individual malefactors. In particular, the Article defends corporate criminal liability as a way of targeting officers and directors who bear responsibility for the corporation’s crime, even if they did not participate in that crime. The Article ends by describing ways in which the sentencing of corporations can be constructed in order to orient blame toward corporate officials.

Board composition after mergers, does it matter to target shareholders?

This paper examines whether post-merger board composition affects the premiums paid to target shareholders. Using a sample of 207 stock-for-stock mergers from 1996 to 2004, we show that target merger premiums vary inversely with target director representation on the post-merger board. We also provide some evidence that both inside and outside target directors may trade shareholder wealth for board seats in the combined firms. However, we do not find board ownership moderates the relation between target merger premiums and post-merger board composition. Consistent with previous studies of management incentives in mergers, our empirical evidence supports the non-perfect agency theory. That is, target directors may sacrifice target shareholder interests to obtain a seat on the post-merger board.

Acquirer-Target Social Ties and Merger Outcomes

This paper investigates the effect of social ties between acquirers and targets on merger performance. Using data on educational background and past employment, we construct a measure of the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms. We find that between-firm social ties have a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm’s CEO and a larger fraction of the target firm’s pre-acquisition board of directors remain on the board of the combined firm after the merger. This also holds true at the level of individual target directors. An individual target director is more likely to be retained on the post-merger board if that target director has more social connections to the acquirer’s directors and senior executives. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to occur between two firms that are well-connected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision-making and lower value creation for shareholders overall.

Salvaged Directors or Perpetual Thrones?

Amidst a public outrage at grants of golden parachutes to failed executives, the award of to directors of distressed companies has gone unnoticed. Several merger agreements provide for an undertaking by the acquirer to increase the size of its own board and include a few of the target's board-members on the expanded board. This arrangement is attractive to the target's directors who will be nominated to the acquirer's board. Rather than losing a board seat as a result of the merger, these target directors will be promoted to a board of an even bigger corporation. The increase in the board size may also serve the acquirer's management, as the inflated board size may decrease the monitoring of the board. This arrangement, however, may not serve the best interests of the shareholders of either corporation. There is evidence that suggests that board size is negatively correlated with firm performance. And the potential offer of a perpetual throne further erodes the deterrence effect of the market for corporate control. The possibility of a perpetual throne, which benefits the director in case of a merger, diminishes the director's incentives to maximize the value of the firm as a stand-alone entity. Yet, the tying of perpetual throne provisions with the merger agreement renders shareholder approval (to the extent it is required) useless. The Article puts forward a proposal aimed at restraining perpetual thrones from adversely affecting the market for corporate control and distorting managerial incentives.

Target Director Turnover in Acquisitions: A Conceptual Framework

Manuscript Type: Conceptual Research Question/Issue: Post-acquisition director turnover is a complex and multi-faceted phenomenon that needs to be examined beyond the agency lens. In this article, we examine the likelihood of non-executive director turnover in target firms following an acquisition. Research Findings/Result: Acquisitions present an interesting case where conflict of interests may arise between shareholders and directors. This study proposes that the likelihood of target non-executive director turnover depends on the factors that determine the performance of directors in their monitoring, advisory and social roles pre-acquisition and during the acquisition process. Theoretical Implications: While there are multiple studies examining the likelihood of turnover of executive directors (TMTs) following an acquisition, there is no systematic conceptual research explaining the likelihood of turnover of non-executive directors. We draw on three theoretical perspectives–agency theory, resource-based view and the social capital perspective to comprehensively investigate target non-executive director turnover post-acquisition. We further clarify the boundaries of these theoretical arguments concerning their implications for target non-executive director turnover. Practical Implications: One of the most important tasks for the newly formed firm post-acquisition is to build the new leadership team, including a new board. In view of the important roles directors take on in modern corporations, it is critical to understand how the new board should be constituted and what members of the target firm are more likely to join that new board.

Board changes following mergers

This study documents an overall increase in board independence and size following completed mergers. The increase in board size is positively related to the size of the target firm, suggesting either that large targets have bargaining power to negotiate inclusion of their directors on the board of the merged firm, or that high target director representation is perceived to be vital in mergers of equals. The change in board independence is positively related to post-merger cash flow difficulty, suggesting that independent directors are more likely to be added if the firm faces financial constraints.

The Missing Link in Sarbanes-Oxley: Enactment of the 'Change of Control Board' Concept, or Extension of the Audit Committee Provisions to Mergers and Acquisitions

This paper builds upon on my 2000 article, Change of Control Board: Federal Preemption of the Law Governing a Target's Directors (2000 COCB Article). In that article I propose that Congress address the conflicts of interest that can arise in the acquisition of a publicly held target corporation in various types of hostile and consensual merger and acquisition (M&A) transactions by requiring the independent appointment of a disinterested Change of Control Board. Under this proposal, unless the shareholders elect-out, once a public corporation becomes a target of a bona fide M&A offer, a federal Change of Control Official would appoint for the target a three-person Change of Control Board, which would have complete authority over the acquisition process. This concept would override all state takeover laws, and because of the obvious independence of the Change of Control Board, a Federal uniform standard of review, the business judgment rule, would apply in determining if the board acted properly. Thus, this concept would eliminate the several confusing standards of review applicable to the actions of a target's directors in M&A transactions under Delaware law. Many features of the Change of Control Board concept are similar to those provided for audit committees in the Sarbanes-Oxley Act of 2002 (SOX). The audit committee is directly responsible for dealing with the firm's CPA, each member of the audit committee must be independent, and the audit committee has the authority to hire its own advisors. Also, the U.S. stock exchanges have promulgated rules requiring that the boards of directors of each listed company consist of a majority of independent directors. Although these independence requirements move in the right direction, they do not properly address issues that can arise when a publicly held corporation engages in a M&A transaction. The continuing problem with the acquisition of publicly held targets is illustrated most recently in two 2007 cases in the Delaware Chancery Court: Caremark and Netsmart, and the problem with acquirors is illustrated in the 2006 decision of this Court in J.P. Morgan Chase. This article first explains how the audit committee provisions of SOX and the independent director requirement of the exchanges build upon a previous proposal for federalization of certain aspects of corporate law. The article then discusses (1) the manner in which current state law deals inadequately with various types of conflicts of interest that can arise in mergers and acquisitions, and (2) the bizarre structure of state anti-takeover law under which some states provide boards with virtually unlimited power to block a hostile acquisition. After explaining why the Change of Control Board concept should also apply to major acquisitions made by acquiring corporations, the article then elaborates on the essential features of the concept. Finally, the article discusses how many of the principles could be implemented by the SEC through its rulemaking authority under the audit committee provisions of SOX.

Directors’ Recommendations in Takeovers: An Agency and Governance Analysis

Abstract: This paper evaluates whether directors of target companies make response recommendations in takeovers which are consistent with the interests of shareholders, by examining the relationship between target director recommendations and associated takeover characteristics and ownership and corporate governance characteristics of target companies. The findings suggest that response recommendations appear to be more closely associated with the self‐interest of directors rather than shareholders’ concerns, and that common governance initiatives aimed at aligning the interests of shareholders and managers are ineffective in resolving this agency problem. The results suggest the need for legislative or judicial reforms in Australia to encourage takeover activity and reduce takeover hostility.

The Firm and the Nature of Control: Toward a Theory of Takeover Law

Like much of life, corporate governance is about control. One of the most interesting and controversial subjects in corporate law concerns the market for corporate control - the buying and selling of companies. Should boards have the authority to fend off hostile takeover attempts, including the right to just say no, or should target shareholders have the right to decide whether or not to sell the company to a willing buyer, overriding the board's objections? After nearly twenty years of doctrinal developments since the landmark Unocal case, the Delaware Supreme Court and the Delaware Chancery Court continue to struggle with the proper role of directors and shareholders in responding to a bid for the company. Lawyers, investment bankers, corporate executives, directors, shareholders, and legal scholars also remain unclear about the extent to which directors can impede the decision of shareholders to sell to a bidder. The Delaware Supreme Court's most recent takeover decision, Omnicare, Inc. v. NCS Healthcare, Inc., seems to confuse things only more. This Article offers a model of Delaware takeover law that explains how the leading Delaware Supreme Court takeover cases fit together. Instead of looking at takeover law through the lens of fiduciary duty, this Article's control-based approach to Delaware takeover law relies on the theory of the firm, as well as positive corporate law, to understand how control is allocated between the board and shareholders. At bottom, there are separate spheres of board (managerial) control and shareholder (residual) control. The takeover decision occurs at the intersection where board and shareholder control meet and in fact overlaps both spheres. One might think that shareholders have an absolute right to sell to a bidder, since alienability is a characteristic feature of ownership. However, the fact that a shareholder quite literally owns her shares is not enough to resolve the debate over defensive tactics, because the sale of the company can significantly impact the target's corporate strategy, over which the board exercises authority. According to the control-based model of takeover law, the extent to which target directors can adopt defensive tactics depends on whether the takeover attempt primarily implicates board control or shareholder control - in other words, on whether the bid raises matters of corporate policy and strategy sufficient to justify the board in blocking shareholders from selling. This general framework is then applied to explain how the leading Delaware takeover cases fit together and sheds light on two particularly important questions: first, what triggers Revlon; and second, can target boards just say no? The paper concludes with a blueprint for the future development of Delaware takeover law in a way that would ultimately lead to more shareholder choice and limits on defensive tactics.

Competition For Board Seats Following Stock‐For‐Stock Mergers

AbstractWe examine the board structure of firms following stock‐for‐stock mergers. We find that former target inside (outside) directors are more likely to join the combined firm board when target insiders (outsiders) have a relatively strong position on the pre‐merger target board. The relative size of the target firm, target firm profitability, and target blockholder ownership also influence whether target directors join the combined board. We conclude that competition for board seats on the combined board is won by target directors with greater bargaining positions.

Takeover Bids and Target Directors' Incentives: The Impact of a Bid on Directors’ Wealth and Board Seats

Takeover Bids and Target Directors' Incentives: The Impact of a Bid on Directors’ Wealth and Board Seats

Corporate governance and ownership structure of target companies and the outcome of takeovers

This paper examines the influence of the corporate governance and ownership attributes of target companies on the outcome of takeovers in Australia between 1991 and 2000. The findings suggest that board composition and chairperson identity of target companies and director, institutional investor and external share ownership in targets have minimal effects on the likelihood of takeover success. The nature of the recommendations of target directors is found to be the most significant determinant of takeover success or failure, and bid premium levels and offer price revisions are also shown to be important in discriminating between successful and failed takeovers. The results bring into question the likely effectiveness of the introduction of formal corporate governance requirements in Australia and advocate a modification to existing corporate legislation to encourage takeover activity.

Takeover bids and target directors’ incentives: the impact of a bid on directors’ wealth and board seats

I investigate the nature of the incentives that lead outside directors to serve stockholders’ interests. Specifically, I document the effect of a takeover bid on target directors, both in terms of its immediate financial impact and its effect on the number of future board seats held by those target directors. Directors are rarely retained following a completed offer. All target directors hold fewer directorships in the future than a control group, suggesting that the target board seat is difficult to replace. For outside directors, the direct financial impact of a completed merger is predominately negative. This documents a cost to outside directors should they fail as monitors, forcing the external control market to act for them. Future seats are related to pre-bid performance. Among outside directors of poorly performing firms, those who rebuff an offer face partial settling-up in the directorial labor market, while those who complete the merger do not.

Effects of Acquisition Characteristics on the Post‐acquisition Performance of Malaysian Companies

This study focused on analysing the effect of acquisition characteristics on post‐acquisition operating performance for 83 bids consisting of 83 public listed bidders acquiring 80 private, 2 public listed and 1 non‐public listed targets in Malaysia during the period 1988–1992. The specific bid characteristics analysed are business relatedness, management turnover, the relative size of targets to bidders, the method of payment offered and board of directors' ownership structure. Since the specific feature of the current sample is that it consists mainly of privately owned targets, the characteristics of disciplinary bids found in acquisitions of public listed targets were not expected in agreed bids between the bidders and targets in this study. The results indicate that the target directors' turnover and the directors' share ownership do not have a significant effect on the post‐acquisition performance. Rather it appears that, if anything, retention of existing management is more likely to lead to performance improvement. Further analysis shows that replacement of target management has no impact on post‐acquisition performance regardless of the relatedness line of business. The latter findings reinforce the unique characteristics of the data set used in the current analysis of acquisitions of privately owned Malaysian companies in which unique skills of previous directors may often be retained post‐acquisition regardless of the business relatedness. The study also provides evidence that acquisitions of highly related business between target and acquiring firm, large relative size of target to bidders and payment for the acquisition by shares have a significant positive impact on post‐acquisition control‐adjusted performance. However, highly related business between target and bidder and payment by shares are the only significant acquisition characteristics that have a significant positive impact on the post‐acquisition control‐adjusted performance when multiple regression is used.

Change of Control Board: Federal Preemption of the Law Governing A Target's Directors

This article sets out a proposed federal uniform standard governing the actions by the board of directors of a publicly held corporation that is the target of a change of control transaction. This proposal would apply in each of the following four merger and acquisition transactions: (1) the acquisition of a target in an arm's length negotiated merger or acquisition; (2) the acquisition of a target in a management buyout; (3) the proposed acquisition of a target in a hostile tender offer; and (4) the acquisition by a target's controlling shareholder of the minority interests in such target in a freezeout merger. Under this proposal, an independent and knowledgeable change of control board would be appointed for the target, and this board would have complete authority over the acquisition process. Because of the board's obvious independence, a uniform governance standard, the business judgment rule, would apply in determining if the board acted properly. Thus, this article proposes that federal law preempt state law rules governing the actions of a publicly held target's board in each of these transactions. However, this is only a default rule because a corporation's shareholders could elect not to have the provision apply or could elect to have it apply only in certain circumstances, such as in a hostile tender offer. The adoption of this provision would enhance the competition for corporate governance rules in change of control transactions. This proposal would replace the four separate governance rules generally applicable to a target's directors under Delaware and other state law in arm's length transactions, management buyouts, tender offers, and freezeouts. This article also rejects the four sets of rules proposed for these transactions in the American Law Institute's PRINCIPLES OF CORPORATE GOVERNANCE: ANALYSIS AND RECOMMENDATION. This proposal would also override all state takeover laws, such as control share statutes, business combination statutes and disgorgement statutes, which generally have the purpose or effect of protecting incumbent management. By placing the control of the change of control process in the hands of truly disinterested directors and applying the business judgment rule in all cases in which a change of control board acts, this proposal should cure the problem of unpredictability and vagueness, should result in a substantial decrease in litigation in change of control situations, and should enhance the efficiency of the change of control market.

Takeover Bids and Target Directors' Incentives: Retention, Experience and Settling-Up

I investigate the nature of the incentives that lead outside directors to serve stockholders' interests. Specifically, I document the effect of a takeover bid on target directors, both in terms of its immediate financial impact and its effect on the number of future board seats held by those target directors. Directors are rarely retained following a completed offer. All target directors hold fewer directorships in the future than a control group, suggesting that the target board seat is difficult to replace. The direct financial impact of a completed merger is predominately negative for outside directors. This documents a cost to outside directors should they fail as monitors, forcing the external control market to act for them. Future seats are related to pre-bid performance. Among directors of poorly-performing firms, those that rebuff an offer are penalized in the directorial labor market, while those who complete the merger fare better. I also find some evidence that less-experienced outside directors gain seats from the experience of the takeover bid.

Takeovers in New Zealand: Motives, stockholder returns, and executive share ownership

The market for corporate control is subject to relatively little regulation in New Zealand and the number of takeovers is high given the size of the economy. Recent proposals to increase regulation enhance the need for more research on New Zealand. The legal and institutional setting is sufficiently different from other countries that the findings from other nations cannot be imputed to New Zealand. This study set out to examine the takeover process and measure returns to target firms, acquiring firms, and the overall gain/loss. The results are partitioned by the type of consideration offered by the bidder and by whether the bid is contested. The shareholdings of target company directors and acquiring company directors are analyzed to see if they are associated with stock returns. The results indicate significant positive returns to target shareholders and negative abnormal returns to the acquirers. Investors appear to be skeptical of the benefits from takeovers to the acquiring firm. A small overall gain to the takeover is found although targets benefit at the expense of the acquiring stockholders. Acquiring firm directors' shareholdings have a positive association with abnormal returns. In contrast, the share ownership of target directors appear to have no relationship with whether the bid is contested, with its successful completion, and with target company abnormal returns. These results contrast with those from some recent U.S. studies.

The Determinants of Outcome in UK Take–over Bids

In this paper we have investigated the determinants of the outcome of 238 friendly and hostile take–over bids that occurred in the UK during the 1980s. We also use our model for prediction purposes and in order to map the effects of a variety of independent variables on the probability of the bid being successful. Our main results can be summarised as follows. First, target management resistance and the wealth effect of a bid are key determinants of the outcome of a bid. Second, we find limited evidence to suggest that share ownership by the bidding company and by target directors also contributes significantly to bid outcome. In the latter case we find a non–linear relationship consistent with the argument that when director holdings are low the bid is discouraged but when they are high the bid is encouraged. Third, our model is good at predicting outcome for all bids but weak at predicting the outcome of hostile bids on their own.

The Regulation of Target Director in a Hostile Take-over

The Regulation of Target Director in a Hostile Take-over

The Second Common Market: Development of a Unified Standard for Reviewing the Actions of Target Directors in the United States and the European Community

The Second Common Market: Development of a Unified Standard for Reviewing the Actions of Target Directors in the United States and the European Community