Uncle Sam and the Hostile Takeover

by Jonathan Macey for Yale Law School, March 21st, 2011.

The following commentary was published in The Wall Street Journal on March 21, 2011.

Conflicts between a public company’s top management and shareholders are seldom more intense than when an activist investor emerges with plans to make a substantial investment in the company’s stock. These investors sometimes are hedge funds or “value investors” like Warren Buffett. Whoever they are, after they take a huge stake in the target company they have strong incentives to agitate vigorously for reforms that will increase the value of their investments.

Shareholders benefit from the reforms of corporate governance initiated by these activist investors. So does the economy generally, because the overall economy performs better when companies perform better. But managers are not so fond of this process because activist investors push incumbent senior managers hard to improve their performance. Occasionally they even fire them.

Since incumbent managers sometimes lose to activist investors in fair corporate elections, their preferred strategy for dealing with them is to hire legal talent and team up with friendly regulators to make new rules and to concoct anti-takeover devices like poison pills.

For example, J.C. Penney adopted a poison pill last October, soon after learning that the hedge fund Pershing Square Capital Management and the publicly traded Vornado Realty Trust had acquired a sizeable position in the company. The particular poison pill it adopted would dilute the voting rights of the two activist investors’ shares if they further increased their holdings or attempted a takeover of the company by giving other shareholders the right to buy J.C. Penney shares at half-price. (continue reading… )


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