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Unformatted text preview: JANUARY/FEBRUARY 2002 35 Voting Rights, Private Benefits, and Takeovers Frank A. Schmid T his article presents a textbook exposition of the effects that institutional design of the firm has on allocation of control over assets. The efficient allocation of control over the assets bundled up in the firm is necessary for the optimal allocation of its resources. Dynamic efficiency in resource allocation presupposes that control over firms will change hands when a given allocation turns suboptimal. The institutional framework with- in which control changes hands is called the market for corporate control. This market is closely linked to the stock market as control rights over the assets of the firm are linked to voting stock. We analyze how the allocation of shareholder voting rights and other organizational designs of the firm affect the firm’s stock market valuation and the allocation of control over its assets. Transactions in the market for corporate control have increased greatly over the last decade both in number and value. Figure 1 shows that in the United States the number of acquisitions of publicly traded companies quadrupled between a trough in 1991 and a recent peak in 1999. Measured in dollar terms (without inflation adjustment), the rise in acquisi- tions of publicly traded companies was 30-fold during that period. Among the 50 industries distin- guished by Mergerstat (2000, pp. 61-69), “Banking & Finance” was among the seven most active indus- tries in any year in the 1996-2000 period as mea- sured by number of transactions announced. Based on the dollar value offered in announced acquisi- tions, Banking & Finance was among the six most active industries in that same period and topped the rankings in the years 1997 and 1998. The mechanics of the market for corporate control are determined by the legal system. Most importantly, the legal system shapes the incentive structure to which the participants in the market for corporate control respond in their actions. More- over, the incentive structure in place has impor- tant efficiency implications. If designed optimally, society’s legal system directs the self-interest of economic agents toward the optimal social outcome. Most significant to the legal framework of the market for corporate control are the firm’s articles of association and bylaws. There is also Securities and Exchange Commission (SEC) regulation, and there are the specific rules of the respective stock exchanges (such as the New York Stock Exchange, Nasdaq, and the American Stock Exchange). Articles of association and bylaws vary across corporations. For instance, corporations may have the choice to amend their articles of association such that unsolicited bidders find it difficult to obtain control over the assets. The legal options that are available to corporations vary across state lines. For instance, a wide variety of anti-takeover amend- ments exist for Delaware corporations, such as super- majority rules for decisions that pertain to mergers...
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This note was uploaded on 08/29/2011 for the course ECON 201 taught by Professor K during the Spring '08 term at Susquehanna.
- Spring '08