Strong Managers, Weak Owners: The Political Roots of American Corporate Finance

By Mark J. Roe | Go to book overview

CHAPTER 16
An American Crossroads

MANAGERS MIGHT have sought financiers with big blocks of stock and a voice in corporate governance in the mid-1980s, when managers were seeking to stabilize their firms and boardrooms against takeovers. Managers and owners were at a crossroads: in seeking stability, managers could have shut owners out, or they could have stabilized the boardroom with big blocks. Managers' first efforts to stabilize their world were attempts to beat back hostile takeovers; managers' legal defenders in the early 1980s invented financial and legal devices designed to ward off hostile takeovers. Some devices were struck down by courts, but the most potent—mainly the poison pill—were upheld and then widely used.1 State legislatures in the later 1980s endorsed the pill and added to management's takeover defenses.

Had these transactional, judicial, and legislative defenses failed, managers would have looked for other ways to stabilize the firm at the top, and one likely way would have been to seek out “white squires”: friendly firms that took large, blocking positions. Indeed, many of Berkshire Hathaway's large positions and Tisch's position in CBS came to them because the targets in a hostile takeover wanted them in as big stockholders to block the hostile offerors.2 The antitakeover defenses in the Polaroid battle are illustrative of target management's creating a similar kind of big block intermediary to stymie a hostile takeover.3 There, to thwart the takeover, Polaroid used an ESOP, an employee stock ownership plan, which, like a pension plan, is for the employees' financial benefit and owns the firm's own stock.

____________________
1
Moran v. Household Management, 500 A.2d 1346 (Del. Sup. Ct. 1985). Moran held that a board issuing a poison pill did not breach duties to shareholders; later cases weighed whether target management had to yank the pill in the face of a tender offer at above the market's stock price.
2
David A. Vise, CBS Loses $114 Million in Quarter, A Record, Washington Post, Nov. 13, 1985, at E1 (“Loews Corp. Chairman Laurence A. Tisch was elected to the CBS board … [Loews's stock ownership] is expected to bring stability to a company that has been the subject of intense takeover speculation”); Vineeta Anand, Warren Buffett Effect: A Quick Jump in Stock Prices, Investor's Daily, Aug. 23, 1991, at 8 (“In September 1987, Buffett infused $700 million into Salomon, then facing a takeover threat from Ronald Perelman. He was rewarded with two seats on the board….”).
3
See Shamrock Holdings, Inc. v. Polaroid Corp., 709 F. Supp. 1311 (D. Del. 1989); see also Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985) (Grumman management tries to expand ESOP to fight takeover).

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