March 14, 2019

Is a Fully Informed Shareholder Vote M&A’s “Sacred Cow”?

It’s hard to imagine a concept that’s gotten more traction in corporate law in recent years than the magical power of a fully informed shareholder vote to cure all a deal’s flaws.  But a new study says that – when it comes to M&A at least – the shareholder vote is more sacred cow than sacred right.  Here’s an excerpt from the abstract:

We provide strong empirical support based on a sample of 852 merger deals from 2000 to 2015 that there is a very large thumb on the scale that pushes all deals toward approval, regardless of any allegations of wrongdoing. We observe substantial ownership changes at target corporations, sometimes as high as 40 to 50% of their stock, from long-term investors to hedge funds upon the announcement of a deal and before the consummation of the transaction with a shareholder vote. This change reflects the merger arbitrageurs’ actions. We further show that this change in ownership has a positive and statistically significant impact on the likelihood of merger deals garnering the required shareholder approval.

We conclude that the Delaware courts need to rethink their obsession with the shareholder vote, renounce the current doctrinal trends that are taking them in the wrong direction, and return to their historic role of evaluating whether directors have satisfied their fiduciary duties in M&A transactions.

I’ll make a bold prediction that although there may be a lot of merit to this critique, it’s going to go nowhere. Sure, it might increase board accountability in M&A, but it has broader implications that a lot of people aren’t going to like.

That’s because the study’s recognition of the implications of the real-world fluidity of a shareholder base undermines today’s prevailing theory of good corporate governance  – the idea that shareholders should be regarded as the true “owners” of the corporation, and that anything that enhances their power in comparison to the board’s is the embodiment of virtuous conduct.  Too many people have too much invested in that paradigm to let it be eroded.

John Jenkins