Severely Obstructive Resistance in Takeover Bids: Is a Board Passivity Rule Effective?

The “board passivity rule” in 19 E.U. countries and the U.K. requires target firm boards to remain neutral in the event of a takeover bid, with all resistance actions formally needing ex ante shareholder consideration and approval.We empirically investigate post-bid transactional takeover resistance in the U.K., a legal environment that also precludes generic structural anti-takeover provisions like poison pills. We focus on whether or not the takeover resistance strategy includes retaliation with a severely obstructive operational and/or financial transaction intended to frustrate the takeover bid. More than 40% of hostile bids in our 15-year sample involve such a “frustrating” action. We find that, relative to more passive resistance, a frustrating action is associated with significantly lower target undervaluation, lower target-firm performance, and greater target-management preference for control. We further find that a frustrating action can be causally linked to a greater likelihood of the CEO being fired subsequent to the bid, and to abnormally negative stockholder wealth effects. Overall, our empirical findings are suggestive of a frustrating action being motivated more by managerial entrenchment than by the objective of maximizing shareholder price improvement, thereby raising serious doubts about the effectiveness of the board passivity rule.