Understanding the (Ir)Relevance of Shareholder Votes on M&A Deals

Abstract

Has corporate law and its bundles of fiduciary obligations become irrelevant? Over the last thirty years, the American public corporation has undergone a profound metamorphosis, transforming itself from a business with dispersed ownership to one whose ownership is highly concentrated in the hands of sophisticated financial institutions. Corporate law has not been immutable to these changes so that current doctrine now accords to a shareholder vote two effects: first, the vote satisfies a statutory mandate that shareholders approve a deal, and second and significantly, the vote insulates the transaction and its actors from any claim of misconduct incident the approved transaction.

This article takes issue with the courts and commentators who have so elevated the impact of shareholder approval to insulate misconduct. We develop why it is not reasonable to believe that the shareholders’ competencies extend to adjudging managerial misconduct, why that conclusion is inconsistent with other modern corporate law developments, and why such shareholder ratification is likely both coerced and poorly considered. We also point out that the position of courts and commentators who pronounce the death of corporate fiduciary law is deeply qualified by the deep conflicts of interest institutional investors face when voting as well as the very real threat that today’s ecology that supports shareholder activism is likely to change so that the voice of the discontented shareholder will be at least more muted in the future.

Finally, 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.

Keywords: activism, agency costs, bundling rules, class actions, corporate elections, corporate directors, corporate governance, corporate/securities law, deal completion rates, Delaware court, Delaware law suits, empirical analysis, governance, institutional investors, litigation, M&A transactions

JEL Classification: K22, G34