What are the costs and benefits of regulating the market for corporate control through statutes like the Pennsylvania anti takeover law?
Ans : There are both costs and benefits associated with regulation of market by the anti takeover laws like the Pennsylvania anti takeover law. Antitakeover laws raise both the costs and benefits of mounting a hostile takeover. The law raises the cost of takeover. As a result, they allow managers to pursue goals other than maximizing shareholder wealth. The resulting “slack” increases the payoff from a successful takeover. The observed frequency of takeovers changes little while stock value declines and takeover premiums increase. The firms who are protected by anti takeover law generally issue less debt and, over time, substantially reduce their leverage ratios, but unprotected firms did the reverse. Generally, the post law reduction in debt funding is approximately offset by reductions in funds post-law by pay-out through net stock re purchases and dividends. Passage of an antitakeover law provides a change in managerial incentives that is less forceful but more exogenous, except for the specific firm whose takeover attempts seemed to prompt the law’s passage. Anti takeover laws influences in debt reductions, as antitakeover laws substitute for debt as a means to extract premiums from bidders. Antitakeover legislation ceases to have a significant effect on capital structure. Generally tightly-held firms were effectively immune from hostile takeover before the passage of legislation. . The postlegislation debt reduction is significant for firms in which insiders control is less. Protected firms generally undertake fewer major new investments or disinvestments. Anti takeover laws generally induce a shift from debt to equity financing. Although corporations were traditionally meant to serve the shareholder's profit interest, the anti – takeover law recast corporate charters to implicitly include community-wide goals. In this particular case Pennsylvania's tough anti-takeover law provided Conrail's management with enough leeway to continue to hold Norfolk at bay. Conrail's board invoked this provision to justify its disregard for Norfolk's higher-valued bid that benefited the short term interest of shareholders. But there are some problems in the law also. Some portions of the anti-takeover provisions-for example, the fair price provision-was intended to protect shareholders and insure that they would be able to maximize their share value. Other portions, however-for example, the other constituencies provision-was intended to protect management's ability to subvert shareholder profit for community goals. In Conrail merger with CSX, the provisions worked against one another. The possibility that multiple bidders also not completely covered by this law. Regardless of the community-wide benefits of a merger, Pennsylvania law still leaves the final decision in the hands of the shareholders, if there is a two-tier offer, because the fair price provision effectively trumps the other constituencies provision. The law does not determine exactly what it considers a "friendly," as opposed to "hostile," bidder. In the case of Conrail, it was difficult to tell who the friendly bidder was. The Pennsylvania law provisions succeeded in slowing down the merger process and bringing all relevant parties together. It also provided Conrail shareholders with a final share price far beyond
expectation. On the other hand, Conrail was ultimately acquired, at least in part, by a foreign hostile bidder and, subsequent to the acquisition, would be broken up by CSX and Norfolk. This was what the anti-takeover legislation was intended to prevent. So, in conclusion there are both costs and benefits of an anti –takeover law, and the law should be holistic to prevent any loop-holes in the system.
