Takeover Defenses: Yea or Nay?

Companies are finding that they must be more sensitive to shareholder interests and governance concerns.
Stephen TaubJanuary 29, 2004

Companies have become less inclined to institute takeover defenses, according to a new study by the Investor Responsibility Research Center (IRRC), a shareholder advocate group.

This may reflect heightened sensitivity to corporate governance issues and shareholder interests in the aftermath of numerous corporate scandals.

“Nevertheless, a substantial majority of major companies are still protected by a range of barriers that make it difficult for a hostile acquisition to succeed,” stresses the IRRC.

The most popular defenses remain blank-check preferred stock, advance notice requirements, classified boards, poison pills, and golden parachutes, according to the IRRC’s survey of corporate control features at 1,982 public companies as of the end of 2003. Each one of these features was found at a majority of the companies surveyed.

However, the popularity of classified (or staggered) boards has peaked at just under 60 percent of companies, and the adoption of poison-pill provisions is holding steady at about 55 percent.

On the other hand, the percentage of companies requiring advance notice for shareholder proposals rose to 77 percent as of the end of 2003, from less than 72 percent two years earlier and only about 44 percent when takeover defenses were first tracked by the IRRC in 1995.

The only other anti-takeover feature to show a significant gain in the past two years is golden parachute arrangements — typically consisting of severance based on three-times pay in the event of a change-in-control-related termination — which jumped to 73 percent of companies, compared with 68 percent two years ago and 53 percent in 1995.

“While friendly mergers in the 1990s generally supplanted hostile takeover attempts of the 1980s, all companies view takeovers as a legitimate corporate strategy,” said Carol Bowie, Director of IRRC’s Governance Research Service. “Implementation of defenses may have peaked for the moment, but corporations will continue to seek ways to shield themselves from unwanted takeovers, including those initiated by institutional activists and value investors seeking change at underperforming companies.”

Shareholders aren’t sitting on their hands, either. The IRRC found that shareholder proposals to eliminate classified boards and supermajority vote requirements, and to eliminate or allow a shareholder vote on poison pills, have received support averaging at least 60 percent at companies where the IRRC tracks voting results on annually. More than one-quarter of the profiled companies faced one or more corporate governance shareholder proposals since 1984.