Tender offers, proxy contests, and large-shareholder activism

The paper analyzes tender offers and proxy contests as alternative means of resolving corporate governance conflicts between dissidents and incumbent management. We show that when a dissident shareholder is sufficiently confident about the potential benefits from changing corporate policy, he will seek majority control by making a tender offer rather than initiating a proxy contest. When the dissident is relatively uninformed, however, he may opt for a proxy contest, thereby utilizing the information of other shareholders to implement the better policy. Consistent with empirical evidence, the model predicts that announcements of tender offers will tend to be associated with larger positive stock price reactions than announcements of proxy contests. The model is easily extended to allow for promanagement bias in proxy voting by institutional investors. Empirical observations that have been viewed as evidence of such promanagement bias are shown to be quite consistent with the absence of such bias. Policy issues are discussed as well. An interesting result is that even policies targeted at reducing the costs of conducting proxy contests may have ambiguous social consequences, given the possibility of substitution between tender offers and proxy contests.