Post-Initial-Public-Offering Takeovers of Firms Controlled by Private Equity: Is There Evidence of a Liquidity Conflict?

Abstract

We analyze third-party takeovers of listed firms in which private-equity sponsors retained substantial post-initial-public-offering block holdings. Targets obtain large gains in shareholder wealth that are shared pro rata between sponsors and other shareholders, even though Delaware law allows differential premiums for block holders. Targets’ gains are positively related to the size of sponsors’ holdings and negatively affected by having a special committee that excludes private-equity directors. After Delaware courts evinced concern about a liquidity conflict associated with large block holders, private-equity-controlled target firms became more sensitive to the risk of litigation, as indicated by an increase in the likelihood of a special committee and a go-shop clause as sponsors’ block size increases. Our evidence is not consistent with plaintiffs’ arguments that even when equal compensation is paid in third-party takeovers, private equity engenders a liquidity conflict with other shareholders that calls for heightened legal scrutiny.