Staggered boards, which a majority of public companies now have, hurt shareholders by enabling managers to fend off value-increasing offers from hostile bidders, according to new empirical research by three Harvard Law professors. Staggered boards hurt shareholders of hostile bid targets even when a majority of the board is made of independent directors, and they do not appear to benefit shareholders of targets that are acquired in a negotiated acquisition. The new study–conducted by Harvard Law School professors Lucian Bebchuk, John Coates, and Guhan Subramanian–will appear in an upcoming Stanford Law Review symposium focusing on the researchers’ work.

This research expands upon an earlier study by the three Harvard professors, which provided the first empirical evidence about how staggered boards affect the outcome of hostile. The research found that companies with a staggered board were much more likely to remain independent and block a value-increasing bids and that staggered boards produced a loss of eight to ten percent of corporate value for target-company shareholders. A range of responses to this research will be published in the Stanford symposium. The new study responds to critics of the initial work by providing new empirical evidence that strongly confirms the view that staggered boards hurt shareholders.

The study finds that two widely held beliefs of proponents of defensive tactics are not borne by the evidence. First, while much reform efforts look to independent directors as a cure-all for corporate governance problems, the authors find that companies with a majority of independent directors are not less likely to abuse defensive tactics. Second, supporters of staggered boards believe that, even if staggered boards hurt shareholders of hostile bid targets, they help shareholders in friendly deals by enabling managers to extract higher premia. However, the authors find that companies with effective staggered boards do not appear to obtain higher premia in negotiated transactions.

Bebchuk, Coates and Subramanian argue that incumbents armed with a staggered board should not be permitted to maintain a poison pill and thereby block an offer after losing a proxy contest conducted over the offer. The adoption of this approach by the Delaware courts, the researchers suggest, could “contribute significantly to shareholder welfare and to a healthier and more efficient acquisition market.” Leo Strine, vice chancellor of the Delaware Chancery Court, describes the policy proposal as a “Professorial bearhug” and concludes that the researchers’ evidence poses a challenge to the judiciary: “[Bebchuk, Coates, and Subramanian] call on the Delaware judiciary to reconcile the doctrines by which it resolves takeover cases with its pronouncements about the primary purpose of the corporation law…. Because of the authors’ skillful arguments and thorough research…we in the Delaware judiciary may find these questions harder to avoid.”

The Harvard researchers are currently expanding their data on takeover defenses in an attempt to empirically resolve long-standing debates about the effect of such defenses. “Although takeover defenses have long played an important role in takeover contests, too little effort has been directed toward developing an empirical fact base from which we can make wise policy decisions,” says Subramanian. “Our study attempts to fill this gap.”

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