Question

Anti-takeover amendments can be in the best interests of stockholders. Under what conditions is this likely to be true?

Answer 1

Corporate raiders can use devices such as two-tier tender offers to capture all the gains from a potential takeover for themselves. Antitakeover amendments by making it more difficult for such raiders to buy up the firm’s stock cheaply can improve stockholders’ bargaining power. If, however, these amendments make it too costly to takeover a firm, the effect on stockholder wealth would be deleterious, because it would reduce the incentive for managers to work in the interest of stockholders.

If the incumbent management is efficient and runs the firm for the benefit of existing stockholders, anti-takeover amendments will help in two ways – (1) it may relieve them of the distraction of unwanted takeover attempts and allow them to focus on maximizing cash flows and value, and (2) it may allow incumbent managers to extract a much higher price in the case of a hostile takeover.