American Stockholders: Time to Vote

AS HAPPENS WITH CONTRACTS FOR THE COMPENSATION OF EXECUTIVES, US MERGERS AND ACQUISITIONS SHOULD BE SUBJECTED TO MANDATORY VOTING BY SHAREHOLDERS. IN FACT, A STUDY SHOWS IN THAT CASE US COMPANIES WOULD MAKE FEWER ACQUISITIONS RESULTING IN DESTRUCTION OF EQUITY VALUE AND MAJOR LOSSES FOR SHAREHOLDERS

by Stefano Rossi, full professor at Department of finance

Shareholders lost billions of dollars invested in US corporations for acquisitions they never approved. A prominent example occurred on April 24, 2019, when Occidental Petroleum waged a bidding war with Chevron, a bigger company, over the acquisition of Anadarko Petroleum. The CEO of Occidental structured the offer entirely in cash and was thus able to circumvent approval by the shareholders' meeting, which would have taken place had Occidental issued new shares. In the months following the announcement, Occidental shares fell by 20% relative to the S&P 500 Index.
This outcome was not inevitable. For example, it wouldn't have happened in the UK. The reason being that, for listed companies, British regulators impose that the buyer's shareholders always have a say over acquisitions and their vote is binding. If Occidental Petroleum had been listed on the London Stock Exchange, its shareholders would have voted on the proposal to acquire Anadarko, and most likely they would have rejected it. Is it time for US shareholders to have a say on mergers and acquisitions, too?

The debate on the introduction of mandatory voting for M&As has been going on for decades in American law schools. Legal scholars agree with the premise that mergers and acquisitions can be a potential source of losses for the buyer's shareholders, and cite the relevant literature. Nonetheless, at this point the legal literature splits into two groups: one group argues that the vote of shareholders is a potential solution to the problem (for example, Coffee, 1984; Black, 1989; Black and Kraakman, 2002). A second group argues instead that voting would impose substantial costs and limited benefits (Dent, 1986 and Afsharipour, 2012) and propose alternative solutions. Such solutions rely on giving the courts the power to act to prevent acquisitions whose announcement would cause a "material decline" in the buyer's stock price.

Another proposal sees the buyer issuing options to its shareholders, up to 20% of the circulating stock, which would confer the right (but not the obligation) to resell the shares to the company doing the acquisition for cash at a price determined prior to the announcement of the acquisition. Many US lawyers reject the idea of ​​introducing compulsory shareholder voting as "politically unfeasible" because the Delaware Supreme Court has a long history of depriving the buyer's shareholders of voting rights, and because US commercial law favors managerial prerogatives over shareholders’ interests.
In an article recently published in the Journal of Applied Corporate Finance (with M. Becht and A. Polo) we intervene in this debate with our data and empirical identification. A cross-Atlantic comparison of mergers and acquisitions indicates that if US shareholders had a say with their vote, US companies would make fewer acquisitions that destroy stock value and their shareholders would suffer fewer losses. We also find a significant difference in the UK, where major acquisitions subject to mandatory voting generate higher returns than those that are not. We conclude that the time is ripe for a reform of US corporate governance. The United States has already introduced mandatory voting on executive compensation contracts; we believe it is time to introduce it also for M&As.