"Shark repellants," the devices corporations use to ward off hostile takeover attempts, have proven effective but permit company executives to insulate themselves from takeovers that might benefit shareholders, according to a study by the Investor Responsibility Research Center of Washington.
The IRRC, which is supported by institutional investment groups, found that the adoption of shark repellant provisions tended to help discourage takeover attempts and enabled target firms to better resist unwelcome advances. But where takeovers were successful, the presence of anti-takeover amendments did not necessarily give stockholders a better price than they would have received without the protective features, the study said.
John Pound, who directed the IRRC study, said, "All evidence seems to support the position that the anti-takeover amendments are, in fact, contrary to the shareholders' best interests and are instituted by management in order to insulate themselves from unwanted takeover attempts."
Pound said the same shark repellants that protect an efficient management also will help to protect an inefficient management and thereby hamper stockholders who want to make changes in management, either by their own action or with the help of an outside company.
IRRC subscribers include state, city and and union employe groups, universities, hospitals, banks and insurance companies. The subscribers have adopted a variety of positions on the use of shark repellants, Pound said.
The IRRC study found that about 400 corporations adopted anti-takeover strategies during 1983 and 1984. The most commonly used were the "supermajority amendment" and the "fair price provision."
Typically, a "supermajority amendment" requires approval from 80 to 90 percent of shareholders for any change in corporate control. In many corporations, only a two-thirds vote has been required.
A "fair price provision" requires that, in a takeover, all stockholders be paid the same price for their shares. The provision is used to prevent the two-tier tender offer in which an investor offers one price to gain control of a majority of the stock of a company and a lower price for the rest of the shares. The "fair price provision" thus makes it more costly to acquire a corporation.
The study concluded that in cases where takeover efforts succeeded despite shark repellants, the stockholders did not receive higher premiums than they might have otherwise -- either in relation to the price of the stock or the company's book value. Some companies have argued that the presence of the amendments would enable them to command higher prices, if the takeover bids were to succeed.