Full of Hot Air? Evaluating the Airgas Court's Reservations about Shareholders' Short-Term and Long-Term Interests in Takeovers

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ABSTRACT

This Note explores the incentives and preferences of shareholders in takeovers. This analysis is conducted in the context of the Delaware Chancery Court's February 2011 decision in Air Products & Chemicals v. Airgas. In that case, the court's decision largely turned on whether certain short-term and long-term shareholders have different preferences and incentives in takeovers. This Note adopts a similar focus but frames the question in terms of whether Hedge Funds, shareholders perceived as short-term motivated, and Institutional Investors, shareholders perceived as long-term motivated, evince different preferences and incentives in takeovers. This Note's analysis relies on both academic inquiries into the shareholders' investment strategies and empirical data about the shareholders' actual investment choices. This Note also compares and contrasts its findings with existing academic takeover analysis. Overall, this Note finds limited evidence of similarities between these shareholders' incentives and preferences in the takeover context.

TABLE OF CONTENTS

INTRODUCTION ......................................................................124

I. AIRGAS, ARBITRAGEURS, AND UNOCAL ....................125

A. THE UNOCAL STANDARD ..............................................125

B. AIRGAS ...............................................................................126

C. THE CONTROVERSY ........................................................128

II. WHAT ARE THE PREFERENCES AND INCENTIVES OF HEDGE FUNDS? .................................................................................................129

A. WHAT IS A HEDGE FUND? ............................................................130

B. COMMON HEDGE FUND STRATEGIES .........................................................131

C. TAKEOVER STRATEGIES: ACTIVISM AND MERGER ARBITRAGE ......................................................................................................134

1. Activism ..................................................................................................134

2. Merger Arbitrage .....................................................................................140

III. WHAT ARE THE PREFERENCES AND INCENTIVES OF INSTITUTIONAL INVESTORS? ..............................................................................145

A. WHAT IS AN INSTITUTIONAL INVESTOR? ........................................................145

B. COMMON INSTITUTIONAL INVESTOR STRATEGIES ...........................................147

/. Investment Characteristics ...................................................................148

2. Investment Approaches .........................................................................149

3. Strategies ................................................................................................150

C. TAKEOVER STRATEGIES ...............................................................................153

IV. HEDGE FUNDS AND INSTITUTIONS LACK SIMILAR ECONOMIC INTERESTS ...................................................................................................154

A. THE VALUE PROPOSITION ...................................................................155

B. RISK TOLERANCE .................................................................................155

C. INVESTMENT HORIZON .......................................................................156

D. INVESTMENT MANAGER COMPENSATION ................................................158

E. INTRA-SHAREHOLDER CONFLICTS ..............................................................159

V. HOW DOES THIS ANALYSIS COMPLEMENT OR REBUT EXISTING TAKEOVER ANALYSIS? ...............................................................................159

A. THE ACADEMIC CASE FOR REFORM LACKS SUPPORT .......... …

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