The New World of Risk for Corporate Attorneys and Their Boards Post-Sarbanes-Oxley: An Assessment of Impact and a Prescription for Action

Abstract

This Article develops a theory that sheds light on recent evidence that shows that high-quality issuers antitakeover adopt defenses during an IPO, and keys this behavior to the existing literature on private benefits of control. The Article then analyzes the decision of the pre-IPO owners concerning takeover defenses. Their decision is shown to be influenced by the quality of the venture that goes public. High quality in firms that go public often means an abundance of growth and business opportunities, rather than sizeable existing assets. In such ventures, managers are unlikely to consume many harmful control benefits. Nevertheless, managers derive a great deal of non-monetary control benefits from their stint in the promising entity. Consequently, takeover defenses help the pre-IPO owners to preserve their non-monetary control benefits without causing too much harm to the value of the enterprise. This Article also shows that even if we take as given the conventional assumption that antitakeover defenses are harmful to shareholders, the inimical influence of takeover defenses is hard to trace since the issuers that adopt them are those whose antitakeover charter provisions' influence is the least harmful. Finding a matching sample for the adopting issuers, as some have tried before, may therefore be an impossible task. This Article thus considers possible extensions that result from complications of asymmetric information, and concludes with the perils of federal intervention.