420. Lucian Arye Bebchuk, Why Firms Adopt Antitakeover Arrangements, 04/2003; subsequently published in University of Pennsylvania Law Review, Vol. 152, No. 2, December 2003, 713-753.
Abstract: Firms going public have increasingly been incorporating antitakeover provisions in their IPO charters,while shareholders of existing companies have increasingly been voting in opposition to such charter provisions. This paper identifies and analyzes possible explanations for this empirical pattern. Specifically, I analyze explanations based on (1) the role of antitakeover arrangements in encouraging founders to break up their initial control blocks, (2) efficient private benefits of control, (3) agency problems among pre-IPO shareholders, (4) agency problems between founders and public investors about the firm's future growth prospects, and (6) bounded attention and imperfect pricing at the IPO stage.
I also discuss the policy implications of the possible explanations. Among other things, the analysis implies that researchers should not automatically infer that arrangements adopted in IPO charters are ones that enhance shareholder value. The analysis also indicates that board veto arrangements are unlikely to serve shareholders in companies with dispersed ownership and should not be chosen as a default. The analysis provides some support for limits on contractual freedom at the IPO stage. Finally, the analysis suggests that it might be desirable for corporate law to use sunset strategies, requiring that entrenching arrangements adopted by charter provisions lapse after a certain period unless renewed by a shareholder vote.