Beyond the Business Judgment Rule: Protecting Bidder Firm Shareholders From Value-Reducing Acquisitions

During the takeover transactions of the 1980s, bidder firms paid target firm shareholders average premiums of approximately 50% for their shares. Did the sizable premiums paid to target firm shareholders during the 1980s reflect post-takeover improvement in the target’s performance? Or were the premiums a result of the mismanagement of the bidder firms’ assets?

The answer will help determine whether additional legal mechanisms should be established to protect bidder firm shareholders from the threat of management’s consummation of value reducing acquisitions. Accordingly, this Note examines various studies which attempt to identify the source of the premiums paid to target firm shareholders. It concludes that additional protection for bidder firm shareholders is not necessary. The studies examined fail to demonstrate that premiums paid to target shareholders stem from mismanagement rather than from efficiency gains. Moreover, adequate mechanisms already exist to protect the economic interests of bidder firm shareholders.