It's My Stock and I'll Vote If I Want To: Conflicted Voting by Shareholders in (Hostile) M&A Deals

Abstract

This paper fills a vacuum in current takeover literature by organically analyzing instances in which shareholders’ conflicts might lead to inefficient acquisition outcomes. While outside of the takeover field Delaware courts have been wary of the perils for shareholder wealth maximization of misalignments in shareholders incentives, and while almost all jurisdictions that require a shareholder referendum as a precondition to conduct a hostile transaction have implemented disinterested shares regimes, Delaware takeover law has been silent. This paper presents three possible approaches to address conflicted voting in acquisitions: a rule-based approach, a standard-based approach, and an unengaged approach. This paper argues that none of these approaches can be expected to work better than the others under all circumstances — they each carry positives and negatives. A system of balanced bright-line rules (that is, applicable to both bidder and target incumbents) would contain conflicted voting in a series of circumstances, but its potential over-deterrence can put at risk a subset of deals in which the universe of disinterested shareholders might not get it right. Standards have the advantage that, if well adjudicated, only the prohibited, conflicted conduct will be detected and sanctioned, with no problems stemming from over- or under-deterrence. But the worrying aspect of a standard approach is judicial discretion and potential error: the policy would call for the judge to establish the inherent long-term value of the target as an independent entity. While the advantage of the unengaged approach is preserving the status quo, its clear problem is not offering protection when a conflicted vote distorts the voting and acquisition outcomes. This paper suggests a combination of a rule-based approach and a standard-based one: the bidder and the incumbents would vote, but their shares would be presumed conflicted and thus not counted for determining the outcome of the vote/acquisition (rule-based element); however, each group could rebut the presumption by proving that its votes are not conflicted because they are directed to an outcome that maximizes shareholder value (standard-based element). This would constitute a less harsh version of a pure disinterested shares regime, because a group initially labeled as interested could actually demonstrate the opposite: entrenchment-seeking directors and management will have to convince a judge they are casting their vote because rejecting the bid is the best course of action, while bidders will have to prove their offer is not a low baller.