Private Benefits of Control, Antitakeover Defenses, and the Perils of Federal Intervention

This Article develops a theory that sheds light on recent evidence, which shows that high quality issuers are the ones that adopt defenses during an IPO, and keys this behavior to the existing literature on private benefits of control. The Article then analyzes the decision of the pre- IPO owners concerning takeover defenses. Their decision is shown to be influenced by the quality of the venture that goes public. High quality in firms that go public often means an abundance of growth and business opportunities, rather than sizeable existing assets. In such ventures, managers are unlikely to consume much harmful control benefits. Nevertheless, managers derive a great deal of non-monetary control benefits from their stint in the promising entity. Consequently, takeover defenses help the pre-IPO owners to preserve their non-monetary control benefits without causing too much harm to the value of the enterprise. The Article also shows that even if the conventional assumption that takeover defenses are harmful to shareholders is taken as given, then the inimical influence of takeover defenses is hard to trace, since the issuers that adopt them are those in which ATPs' influence is the least harmful. Finding a matching sample for the adopting issuers, as some tried before, may therefore be an impossible task. Finally, the Article considers possible extensions that result from complications of asymmetric information, and finally concludes with the perils of federal intervention.