Agents Unchained: The Determinants of Takeover Defenses in IPO Firms The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters Citation Brandon Gold, Agents Unchained: The Determinants of Takeover Defenses in IPO Firms (June 2013). Citable link http://nrs.harvard.edu/urn-3:HUL.InstRepos:10985171 Terms of Use This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Other Posted Material, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of- use#LAA AGENTS UNCHAINED: THE DETERMINANTS OF TAKEOVER DEFENSES IN IPO FIRMS Brandon S. Gold* May 2013 ABSTRACT Many companies continue to go public with takeover defenses even though institutional investors zealously oppose defenses in public companies. In this Article, I analyze the determinants of takeover defenses at IPO firms using an empirical analysis of 259 IPOs from 2008-12, interviews with numerous practitioners, and a survey of the corporate governance policies of significant investors. I find that the type of an issuer’s legal counsel’s M&A experience and the identity of pre-IPO shareholders explain much of the variation in takeover defenses at IPO firms. Companies advised by law firms with more target-side M&A experience adopt more defenses, while companies advised by law firms with more acquirer-side M&A experience adopt fewer defenses. Companies backed by venture capital funds are significantly more likely to adopt more takeover defenses. However, private equity backing has no effect on the pre-IPO adoption of staggered boards. Even though mutual funds and public pension funds are some of the most ardent opponents of takeover defenses in public companies, I find that issuers that they had invested in prior to the IPO almost always go public with robust takeover defenses in place. A comparison of issuers backed by Silicon Valley law firm Wilson Sonsini and New York law firm Simpson Thacher is particularly telling: Wilson Sonsini, a firm well known for its ties to the venture capital industry and its representation of targets, installed staggered boards in all of its IPO clients while Simpson Thacher, known for its private equity practice and acquirer representation, installed staggered boards in only 50% of its IPO clients. The lack of a consensus regarding the efficiency of defenses among the most experienced participants in the IPO market leads me to reject the idea that takeover defenses are generally optimal for pre-IPO shareholders. JEL Classification: D21, G23, G24, G34, G38, K22 * J.D., Harvard Law School; Fellow, Program on Corporate Governance. E-mail: [email protected]. I would like to thank Professor John C. Coates for his invaluable guidance and feedback throughout the drafting of this article. TABLE OF CONTENTS I. INTRODUCTION ............................................................................................................ 1 II. TAKEOVER DEFENSES IN PUBLIC COMPANIES.......................................................... 3 A. The Market for Corporate Control and Takeover Defenses at Public Companies .........3 1. Overview of classified boards and takeover defenses. ...................................................................4 2. Opposition to takeover defenses at public companies....................................................................8 B. Theories on the Determinants in Takeover Defenses at IPO Firms ...............................10 1. Law firm effects on IPO takeover defenses..................................................................................10 2. Institutional investors, financial sponsors, and IPO takeover defenses........................................14 3. Managerial entrenchment and private benefits.............................................................................24 III. DATA DESCRIPTION................................................................................................ 29 A. Dependent Variables .........................................................................................................29 1. Effective staggered board. ............................................................................................................29 2. E-Index. ........................................................................................................................................30 3. Dual class stock. ...........................................................................................................................30 B. Independent Variables of Interest ....................................................................................31 1. Law firm hypotheses.....................................................................................................................31 2. Private equity & venture capital hypotheses. ...............................................................................32 3. Management entrenchment hypothesis.........................................................................................32 C. Other Explanatory and Control Variables.......................................................................33 D. Description of Empirical Sample......................................................................................34 D. Qualitative Data ................................................................................................................35 IV. EMPIRICAL RESULTS .............................................................................................. 35 A. Descriptive Data ................................................................................................................35 1. Issuer characteristics.....................................................................................................................35 2. Issuer management. ......................................................................................................................38 3. Law firms......................................................................................................................................39 4. Private equity and venture capital.................................................................................................40 5. Takeover defenses. .......................................................................................................................40 B. Mean Comparisons and Univariate Regressions.............................................................44 1. Law firm identity and M&A experience. .....................................................................................44 2. Law firm location and PE/VC backing.........................................................................................46 3. Takeover defenses and PE/VC backing........................................................................................48 4. PE/VC backing and issuer characteristics. ...................................................................................52 5. Management characteristics..........................................................................................................53 6. Issuer size and takeover defenses: The “ISS Effect.”...................................................................54 7. Summary of mean comparisons & univariate regressions. ..........................................................56 8. Charter provisions in private equity backed issuers. ....................................................................56 9. Mutual funds and pension funds as pre-IPO shareholders. ..........................................................57 C. Multivariate Regressions and Analysis ............................................................................59 1. Law firm models...........................................................................................................................60 2. Private equity & venture capital models.......................................................................................65 3. Management entrenchment models. .............................................................................................71 4. Comprehensive models and dual class control model..................................................................74 D. Implications ......................................................................................................................77 1. Institutional investors should exercise their influence over general partners and reevaluate the separation of investing from governance. ............................................................................................77 2. Staggered boards should have sunset provisions..........................................................................78 V. CONCLUSION............................................................................................................. 79 INDEX OF TABLES AND FIGURES TABLE 1: OVERVIEW OF HYPOTHESES AND PREDICTED SIGNS .......................................... 28 TABLE 2: SUMMARY STATISTICS FOR THE COMPLETE SAMPLE.......................................... 37 TABLE 3: DEFENSES BY TOP LAW FIRMS ........................................................................... 45 TABLE 4: ESB INCIDENCE BY LAW FIRM’S M&A ROLE.................................................... 46 TABLE 5: ESB INCIDENCE BY NEW YORK LAW FIRMS & PE BACKING ............................. 46 TABLE 6: ESB INCIDENCE BY SILICON