Numerous academic studies present evidence that hedge fund activism campaigns can lead to both short- and long-run improvements in the values of target firms. Despite this evidence, managers of target firms do not typically embrace the appearance of an activist, perhaps because dealing with activists is time consuming and can lead to disruptive operating changes or even takeovers. In our paper, Hostile Resistance to Hedge Fund Activism, available on SSRN, we examine defensive actions that target firms take in response to activism. We find that most actions taken to resist hedge fund activists, such as poison pill adoption, are identical to actions firms take in response to takeover threats. A poison pill states that if any shareholder, or group of shareholders, acquires more than a specified trigger percent of shares (typically 10 to 20%), all shareholders, excluding the triggering shareholders, may buy deeply discounted shares. Poison pills were originally designed to force prospective acquirers to negotiate with the board of a firm, rather than conduct a hostile takeover. A perhaps less well known aspect of the poison pill is that it also inhibits communication between large shareholders, since the stakes of individual shareholders who are perceived by the firm to be working together as a group can be aggregated for the purposes of determining whether the pill will be triggered. Other resistance measures taken by target firms, such as making it harder for shareholders to act by written consent and harder to call special meetings, also interfere with activists’ ability to coordinate with other shareholders to accomplish activism objectives.
Posted by Nicole Boyson and Pegaret Pichler, Northeastern University, on Wednesday, September 28, 2016
Editor's Note: Nicole M. Boyson is Associate Professor of Finance and Pegaret Pichler is Assistant Professor of Finance at Northeastern University’s D’Amore-McKim School of Business. This post is based on a recent paper by Professors Boyson and Pichler. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.
