Question 1

Corporate governance refers to the way firms elect CEOs.

Accepted Answer

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It includes aspects such as the board of directors, management accountability, shareholder rights, and transparency in financial reporting. While the CEO may be a key component of corporate governance, it is not solely focused on their election.

Question 2

Corporate anti-takeover defenses are necessarily a sign of bad corporate governance.

Accepted Answer

Corporate anti-takeover defenses can be a legitimate strategy to protect the interests of shareholders and ensure long-term success of the company. While some argue that such defenses can entrench management and limit shareholder democracy, their use does not inherently signify bad corporate governance. Ultimately, the effectiveness of anti-takeover measures depends on how they are implemented and whether they align with the interests of shareholders.

Question 3

By replacing the target's board members, proxy fights may be an effective means of gaining control
without owning 51% of the target's voting stock.

Accepted Answer

By replacing the board members, the winning side can influence the decisions of the target company and gain control, even if they do not own a majority of the voting stock. This is the basic idea behind proxy fights.

Question 4

The threat of corporate takeover has little impact on how responsibly a corporate board and management manage a firm.

Accepted Answer

The threat of corporate takeover can have a significant impact on how responsibly a corporate board and management manage a firm. When a company is vulnerable to a takeover, the board and management may be more likely to prioritize short-term gains, cut costs, and take other actions to boost the company's stock price in order to deter potential acquirers. This can lead to a neglect of long-term sustainability, ethical considerations, and stakeholder interests. Additionally, the prospect of a takeover can create pressure on the board and management to take steps to improve the company's financial performance, which may involve taking greater risks or engaging in more aggressive business practices.

Question 5

Tender offers always consist of an offer to exchange acquirer shares for shares in the target firm.

Accepted Answer

Tender offers can also involve a cash offer instead of an exchange of shares.

Question 6

In elections involving staggered or classified boards, only one group of board members is up for
reelection each year.

Accepted Answer

This is true. Staggered or classified boards have board members with different term lengths, and only one group is up for reelection each year. This helps ensure continuity and stability on the board.

Question 7

Corporate governance refers to a system of controls both internal and external to the firm that protects
stakeholders' interests.

Accepted Answer

Corporate governance is designed to ensure that the interests of all stakeholders, including shareholders, employees, customers, suppliers, and the wider community, are protected. This can involve a range of internal controls, such as board oversight, executive remuneration policies, and risk management processes, as well as external mechanisms like regulatory oversight and investor activism. The ultimate aim of corporate governance is to promote transparency, accountability, and long-term value creation for all stakeholders.

Question 8

Institutional activism has assumed a larger role in ensuring good corporate governance practices in recent years.

Accepted Answer

Institutional activism, which includes actions such as engaging with company management, voting on shareholder resolutions, and filing lawsuits, has become increasingly important in holding corporations accountable for their actions and promoting good governance practices.

Question 9

Tender offers apply only for share for share exchanges.

Accepted Answer

Tender offers can also involve cash offers for shares, not just share for share exchanges.

Question 10

All materials in a proxy contest must be filed with the SEC before they are sent to shareholders.

Accepted Answer

This is true. The Securities and Exchange Commission (SEC) requires all materials related to a proxy contest to be filed with them before they are sent to shareholders to ensure that they meet regulatory standards and provide adequate information for shareholders to make informed voting decisions.

Question 11

Poison pills represent a new class of securities issued by a company to its shareholders, which have no
value unless an investor acquires a specific percentage of the firm's voting stock.

Accepted Answer

Poison pills are defensive strategies used by companies to deter hostile takeovers. They involve issuing new securities to existing shareholders, which become valuable only if an outside party acquires a certain percentage of the company's stock, diluting the potential acquirer's stake.

Question 12

Poison pills are a commonly used takeover tactic to remove the management and board of the target firm.

Accepted Answer

Poison pills are a defensive tactic used by the target firm to make their stock less attractive to the potential acquirer or to make the takeover more expensive. It does not involve removing the management and board of the target firm.

Question 13

The threat of hostile takeovers is a factor in encouraging a firm to implement good governance practices.

Accepted Answer

The threat of hostile takeovers can make a company vulnerable to being acquired by another company against its will. To prevent this, a company may implement good governance practices such as having a strong board of directors, transparency in financial reporting, and accountability to shareholders. These practices can make the company more attractive to investors and reduce the risk of being taken over.

Question 14

Proxy contests and tender offers are often viewed by acquirers as inexpensive ways to takeover another
firm.

Accepted Answer

Proxy contests and tender offers can be expensive and time-consuming processes for acquirers, involving significant legal, advisory, and administrative costs, as well as potential premiums paid to shareholders.

Question 15

Federal and state laws make it extremely difficult for a bidder to acquire a controlling interest in a target
without such actions becoming public knowledge.

Accepted Answer

Federal and state laws require public disclosure of any acquisition of a controlling interest in a target.

Question 16

Golden parachutes are employee severance arrangements, which are triggered whenever a change in control takes place. They are generally held by a large number of employees at all levels of management throughout the firm.

Accepted Answer

Golden parachutes are typically reserved for top executives and are not common among the broader employee base at all levels of management.

Question 17

A standstill agreement prevents an investor who has signed the agreement from ever again buying stock in the target firm.

Accepted Answer

A standstill agreement is a legal agreement in which an investor agrees not to purchase any more shares in a company for a specified period of time. After this period, the investor may be free to purchase more shares. So, a standstill agreement does not prevent an investor from ever buying stock in the target firm again.

Question 18

Executive stock option plans have little impact on the way management runs the firm.

Accepted Answer

Executive stock option plans can incentivize management to make decisions that boost the company's stock price in the short term, but may not necessarily align with the long-term goals of the firm or benefit other stakeholders such as employees or customers. Therefore, they can have a significant impact on the way management runs the firm.

Question 19

The size of the target firm is the best predictor of the likelihood of being taken over by another firm.

Accepted Answer

Studies have shown that the size of the target firm is positively correlated with the likelihood of being acquired by another firm. Larger firms have more resources, capabilities, and market power, which make them attractive targets for strategic acquisitions. Smaller firms, on the other hand, are less likely to be targeted because they may not have the same level of assets or market position that would benefit the acquirer. However, there are many other factors that can influence takeover activity, including industry dynamics, economic conditions, and competitive pressures.

Question 20

Stakeholders in a firm refer to shareholders only.

Accepted Answer

Stakeholders in a firm refer to all individuals or groups who have an interest or are affected by the firm's actions, such as employees, customers, suppliers, local communities, and shareholders.

Quiz 3: The Corporate Takeover Market: