!Корпоративное право 2023-2024 / Bargeron L._Do Shareholder Tender Agreements Inform or Expropriate Shareholders

Termination fees, lockup options, and merger agreements are also positively correlated with STAs, although the coefficient on termination fees is not statistically significant. These contracts are associated with strong management support of the deal and thus an increased likelihood of a negotiated STA. However, including these variables in the estimation does not affect the primary results.

A bidder toehold is associated with a lower probability of an STA. Two competing explanations may apply. If a toehold increases the probability of a hostile response from target management, then a negotiated STA would be less likely.22

Alternatively, if a toehold and an STA are substitutes in the sense that fewer outside shares are required to gain control, a toehold would also decrease the likelihood of an STA.

5.3. Two-step premium estimation

In the Heckman two-step estimation I incorporate several variables as instruments for the STA decision. Based on the hypotheses, proxies for the level of information asymmetry, ownership concentration, and agency conflicts are good candidate instruments. Potential proxies for information asymmetry include target size, the standard deviation of target returns, target dividends, and target age. While the first three, target size, standard deviation of returns, and dividends, contain information about the level of asymmetric information, they also interact with other factors that directly influence the bid premium, such as capital structure and predictability of asset returns. In addition, few of the targets in the sample paid dividends. I therefore use target age as an instrumental variable for the STA decision.

22 Betton, Eckbo, and Thorburn (2005) discuss the relation between a toehold and hostility.

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Variables detailing the holdings of large shareholders are potential proxies for ownership structure and agency conflicts. For this analysis, I employ the percentage ownership of the largest non-management target shareholder and the cumulative ownership percentage of the officers and directors of the target firm as instruments.23 As previously noted, these variables are relevant in both the certification hypothesis and the expropriation hypothesis.

Empirical evidence offers support for the appropriateness of the three instruments above. Ideal instruments should satisfy two conditions (see Wooldridge, 2002). First, the instruments should have predictive power in the first stage. The results of the probit estimation indicate that this condition is satisfied. The coefficients on all three instruments are significant in the first-stage estimation of the probability of an STA. Second, the instruments should be uncorrelated with the error term in the premium equation. To check this condition, I perform three separate estimations in which I include a different omitted instrumental variable as an independent variable in the premium equation. I then estimate the system using a Heckman two-step procedure. None of the coefficients on the instrumental variable are significant in the second-step premium equation in any of the three tests. These results suggest that the instrumental variables, age, ownership concentration, and management ownership, do not directly affect bid premiums. They affect premiums only through their affect on the STA decision. Therefore, the choice of instruments appears to be reasonable based on both empirical as well as theoretical grounds.

23 Two other measures of ownership concentration are also considered: the cumulative ownership of the largest three non-management shareholders and the cumulative ownership of all 5% non-management blockholders. The results are similar for all three measures.

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The last two columns in Table 5 report estimates from the second-step premium regression.24 The tabulated estimates use the final bid price in the calculation of premiums. Using premiums calculated from the initial bid price yields similar estimates. The results reinforce the evidence from the OLS estimation. An increased probability of an STA is associated with significantly lower premiums. In fact, the magnitude of the negative coefficient on STA is more than twice as large as in the OLS estimation. This suggests that the STA decision does affect the premium decision. Specifically, negotiating an STA leads to higher premiums than would be expected based on the nonSTA subsample. The significantly positive coefficient on the self-selectivity correction (the inverse mills ratio) strengthens the conclusion of endogeneity. This evidence is consistent with the certification hypothesis’ model of negotiation between the bidder and a large shareholder before the signing of the STA. The negotiation extracts a higher bid than would have occurred if the bidder could have succeeded without an STA.

In summary, the tests under each set of assumptions (unvariate, independent estimation, and two-step estimation) support the certification hypothesis and contradict the predictions of both the expropriation and the bargaining hypotheses. The results demonstrate that STAs are associated with lower premiums, greater information asymmetry, greater ownership concentration, and greater management ownership. This evidence supports each prediction of the certification hypothesis. In contrast, the premium evidence contradicts the bargaining hypothesis and the ownership evidence contradicts the expropriation hypothesis.

5.4. Further tests and robustness checks

24 The coefficients from the first-step estimation of the STA decision within the Heckman procedure are identical to the coefficients from the independent STA estimation in models 1 and 2 of Table 5.

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5.4.1. Premiums when a manager signs an STA

Do premiums in offers that include an STA signed by an officer or director differ from premiums in offers in which the STA is signed exclusively by non-managers? If managers are complicit in the expropriation of shareholders, we should observe lower premiums when a manager signs the STA. To test this prediction, I define the indicator variable O&D STA equal to one if an officer or director signs the STA and zero otherwise. Model 1 of Table 6 reports the OLS estimates of the premium equation when

O&D STA is included as an independent variable.25 The results do not support the expropriation hypothesis. The positive coefficient on O&D STA of 8.6% is significant. Premiums are actually higher when an officer or director signs the STA. However, premiums in STA offers including an officer or director signature are still significantly lower than non-STA premiums.

These results offer further indirect support for the certification hypothesis. Presumably, certification by an outside shareholder is more convincing than certification by insiders with greater potential conflicts of interest. In the context of the certification hypothesis, STAs without management signatories are more likely to accompany bids that require the greatest certification, namely, the lowest bids.

5.4.2. Employment agreements and STAs

Frequently, prior to a tender offer announcement bidders negotiate employment or consulting contracts with target firm managers. These contracts, which guarantee future income to particular managers at the bidder’s expense, are potential mechanisms to

25 Two-step estimation yields similar results.

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expropriate the other shareholders.26 In particular, bidders could bribe target managers to sacrifice shareholder value by offering employment contracts in return for lower premiums.

The last two columns of Table 6 investigate employment agreements by including two additional terms in the basic specification of the premium regression. The indicator variable STA & EMPLOYMENT equals one if both an STA and an employment contract are included in the offer. The indicator variable O&D & EMPLOYMENT equals one if an STA is signed by an officer or director and an employment contract is included in the offer. Model 2, which adds only the variable STA & EMPLOYMENT to the premium analysis, fails to support the expropriation hypothesis. The positive coefficient on STA & EMPLOYMENT indicates that STA offers that include an employment contract do not have lower premiums.

Model 3 incorporates both STA & EMPLOYMENT and O&D & EMPLOYMENT into the analysis, allowing the effects of employment contracts to differ between management and non-management STA deals. The coefficient on O&D & EMPLOYMENT is positive but insignificant, suggesting that employment contracts for deals in which managers sign an STA do not result in lower premiums than non-STA deals. Again, the results fail to support the expropriation hypothesis.

5.4.3. Distinguishing the conflicting effects of non-management ownership

This section clarifies the potentially conflicting effects of increased nonmanagement ownership concentration on the probability of an STA. Based on the

26 Alternatively, the expertise of the target managers may increase the value of the combined firm. As a result, the employment agreement may benefit all shareholders through a higher premium. Hartzell, Ofek, and Yermack (2004) investigate the relation between acquisition premia and target firm CEO benefits.

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expropriation hypothesis an increase in non-management ownership concentration increases the monitoring of target management, thereby decreasing the probability of an STA. In contrast, according to the certification hypothesis, an increase in ownership concentration increases a shareholder’s willingness to incur the costs of an STA, thereby increasing the probability of an STA. To isolate these conflicting effects and focus exclusively on monitoring, I examine the subsample that excludes all STA offers signed by a non-manager. Because no non-mangers signed the STAs in this subsample, the link between non-management ownership concentration and the probability of an STA within the certification hypothesis is broken. Thus, the effect of non-management ownership comes exclusively from the expropriation hypothesis. Accordingly, within this subsample an increase in non-management ownership should increase monitoring and unambiguously decrease the probability of an STA.

To test the expropriation hypothesis in this setting, I use the above subsample to estimate the coefficients in the STA decision. The results, listed in Table 7, fail to support the expropriation hypothesis. The coefficient on TOP NON-O&D OWNERSHIP is still not negative, suggesting that greater monitoring does not decrease the probability of an STA.

5.4.4. Bidder characteristics

This section incorporates bidder characteristics into the premium analysis. Because many bidders are foreign or private, CRSP data are only available for only 287 bidders. The first model in Table 8 controls for whether bidder data are available on CRSP. The indicator variable CRSP BIDDER is equal to one if CRSP data are available. The resulting coefficient on CRSP BIDDER is insignificant and the other coefficients are

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relatively unaffected. Model 2 controls for the ratio of the size of the target and bidder firms, RELATIVE SIZE. The coefficient is insignificant and the other variables are again qualitatively unchanged. These results suggest that bidder characteristics are not driving the premium results. The probit analysis of the STA decision is also robust to the inclusion of bidder characteristics.

5.4.5. Non-monotonic agency conflicts

One further concern, addressed in untabulated results, deserves mention. I consider a non-monotonic relation between management ownership and agency costs. Using ownership cutoffs defined in Morck, Shleifer, and Vishny (1988), I find no evidence of non-monotonicity between management ownership and STAs. Alternatively, including management ownership squared, in the spirit of McConnell and Servaes (1990), also fails to indicate a non-monotonic relation.

6. Summary and concluding comments

The prevalence of Shareholder Tender Agreements (STAs) demonstrates their importance in the tender offer process. However, to date, no study has systematically investigated these contracts. To address this gap in the literature, this paper asks the following questions. Do STA offers differ from non-STA offers? Why are costly STAs included in 60% of tender offers? Are STAs distinguishable from other contractual features in mergers and acquisitions?

Empirically, STA offers differ markedly from non-STA offers. STAs are associated with lower premiums, greater ownership concentration, greater management ownership, and greater information asymmetries. Tests of the data suggest that an STA

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certifies the bid quality to uninformed shareholders. This certification benefits all shareholders by facilitating a value-increasing takeover. The evidence further suggests that STAs are not simply an instrument for self-dealing between the bidder and a few shareholders. These results are robust to alternative specifications and the assumption of endogeneity.

Comparison of the STA results to results for termination fees and lockup options highlights an important distinction between these contractual features commonly employed in mergers and acquisitions. As representatives for all of a firm’s shareholders, target firm managers negotiate termination fees and lockup options with a bidder. As a result, all of the target’s shareholders bear the financial risks of these contracts. In contrast, only the signatory shareholders bear the financial risks of an STA. Because the party committing to an STA bears all of the risk of the commitment, an STA is a superior certification mechanism.

Consistent with this logic, the evidence indicates that the motivation for STAs differs from the motivations for termination fees and lockup options. As documented in Bates and Lemmon (2003), Officer (2003), and Burch (2001), termination fees and lockup options are both associated with higher premiums, while STAs are associated with lower premiums. This suggests that a bargaining-type hypothesis applies to termination fees and lockup options, but certification motivates STAs. Notably, however, despite the contrasting motivations, none of these studies support managerial expropriation as the primary motive for the respective contract.

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Appendix A: Sample summary of STAs

The following excerpt is from the August 14, 2001 Schedule TO filing relating to

the tender offer for all shares of XTRA Corporation made by BX Merger Sub Inc., a

wholly owned subsidiary of Berkshire Hathaway. This section summarizes the associated

Stockholder Agreement. Note that the agreement satisfies the criteria of an STA.

The Stockholders Agreement

The following is a summary of the Stockholders Agreement, a copy of which has been filed as an Exhibit to the Tender Offer Statement on Schedule TO filed by Purchaser and Parent with the SEC in connection with the Offer. Such summary is qualified in its entirety by reference to the Stockholders Agreement. See Section 8 for information on how to obtain a copy of the Schedule TO. Capitalized terms not otherwise defined in the following description of the Stockholders Agreement have the respective meanings ascribed to them in such agreement.

Concurrently with the execution of the Merger Agreement, Parent and

Purchaser entered into the Stockholders Agreement with Tiger Management L.L.C. and Tiger Performance L.L.C. (the "Tiger Advisers"), and with Tiger Management Corporation and Julian H. Robertson, Jr. (collectively with the Tiger

Advisers, the "Signatory Holders"). The Tiger Advisers are the beneficial owners of 3,175,594 Shares, or approximately 30% of the issued and outstanding Shares.

Pursuant to the Stockholders Agreement, the Signatory Holders have agreed to tender in the Offer, prior to the initial expiration date of the Offer, all

Shares owned beneficially and of record by the Tiger Advisers. The Signatory Holders have also agreed to vote the Tiger Advisers' Shares in favor of the Merger and the Merger Agreement, against any Takeover Proposal and against any proposal for action or agreement that would result in a breach of any covenant

or agreement of the Company under the Merger Agreement or which is reasonably likely to result in any of the Company's obligations under the Merger

Agreement not being fulfilled, any change in the directors of the Company (except as contemplated by the Merger Agreement), any change in the Company's capitalization, corporate structure or business, or any other action which

could reasonably be expected to interfere with, delay or materially adversely affect the likelihood that the transactions contemplated by the Merger Agreement will be consummated. The Signatory Holders have also agreed to vote in favor of any other matter necessary for the consummation of the

transactions contemplated in the Merger Agreement. The Signatory Holders have also granted to Parent and Purchaser, or any of their nominees, an irrevocable

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proxy with respect to the Tiger Advisers' Shares to demand that the Company call a special meeting to consider the Merger and the Merger Agreement and to vote such Shares in respect of such matter at every meeting of the Stockholders, however called.

In addition, the Signatory Holders have covenanted and agreed not to transfer or consent to the transfer of any of the Tiger Advisers' Shares, enter into any contract, option or other arrangement with respect to the transfer of such Shares, grant any proxies with respect to such Shares, deposit such Shares into a voting trust or enter into any voting agreement with respect to such Shares, take any other action that would make any representation or warranty of the Signatory Holders contained in the

Stockholders Agreement untrue or have the effect of preventing the Signatory Holders from performing their obligations under the Stockholders Agreement.

The Signatory Holders have also agreed that they will not, directly or indirectly, solicit, initiate, knowingly encourage or take any other action designed to facilitate any inquiries or the making of any proposal relating to the acquisition of the Tiger Advisers' Shares or any transaction that constitutes a Takeover Proposal. The Signatory Holders have agreed not to participate in any discussions (except with Parent and Purchaser) regarding, or furnish to any person (other than Parent or Purchaser) any information with respect to, or otherwise cooperate with, or assist or encourage, any attempt by any person (other than Parent or Purchaser) to make, any transaction that

may constitute a Takeover Proposal. The Signatory Holders have also agreed to immediately cease any existing discussions or negotiations with any person (other than Parent or Purchaser) with respect to the foregoing.

The Signatory Holders have also granted to Parent and Purchaser an irrevocable option (the "Company Securities Option") to purchase the Tiger Advisers' Shares at a price per Share equal to the Offer Price or any higher price paid or to be paid by Parent or Purchaser pursuant to the Offer or the

Merger. The Company Securities Option becomes exercisable, in whole but not in part, for all Shares subject thereto at the earlier of (i) the termination of

the Merger Agreement (a) by the Company if it concurrently enters into an agreement providing for a Superior Proposal, or (b) by Parent if the Board shall have withdrawn, modified or failed to reconfirm its recommendation of the Transactions prior to the Expiration Date or (ii) the Expiration Date. The Company Securities Option shall remain exercisable for 15 days, provided that its exercisability shall be automatically extended if any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") or other applicable laws have not expired or terminated (but in no event for more than an additional 15 days).

The Stockholders Agreement also provides that if Parent or its affiliates exercise the Company Securities Option and then sell any of the Shares purchased pursuant to the Company Securities Option to an unaffiliated party prior to the earlier of the effective time of the Merger or eighteen months

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