Abstract

This article argues that the conventional wisdom about corporate raiders and activist hedge funds — raiders break things and activists fix them — is wrong. Because activists have a higher risk of mistargeting — mistakenly shaking things up at firms that only appear to be underperforming — they are much more likely than raiders to destroy value and, ultimately, social wealth.

As corporate outsiders who challenge the incompetence or disloyalty of incumbent management, raiders and activists play similar roles in reducing “agency costs” at target firms. The difference between them comes down to a simple observation about their business models: raiders buy entire companies, while activists take minority stakes. This means that raiders are less likely to mistarget firms underperforming by only a slight margin, and they are less able to shift the costs of their mistakes onto other shareholders. The differences in incentives between raiders and activists only increase after acquiring their stake. Raiders have unrestricted access to nonpublic information after acquiring ownership of a target company, which allows them to look under the hood to determine whether changing the target’s business strategy is truly warranted. Activists, by contrast, have limited information and face structural conflicts of interest that impair their ability to evaluate objectively what’s best for the target company.

This insight has profound implications for corporate law and policy. Delaware and federal law alike have focused on keeping raiders outside the gates, but they ignore the real threat: activists that are already inside. This article proposes reforms to both state and federal law that would equalize the regulation of raiders and activists.

Paper

The paper can be found here. 

Practicalities

This event will be a hybrid event. The seminar will take place in Roeterseiland campus (REC) building A, room number A2.11 (on the second floor), and will also be streamed online via Zoom:

The Zoom link will be specified in the registration confirmation email upon registration for the event.

About the speaker 

Zohar Goshen serves as the Jerome L. Greene Professor of Transactional Law at Columbia Law School, where he teaches and writes on Corporate Law, Corporate Governance, Corporate Finance, and Securities Regulation. Between 2008 and 2011, in the midst of the global financial crisis, Goshen held the position of Chairman of the Israel Securities Authority, the Israeli equivalent of the SEC. While managing the crisis, he also spearheaded major corporate governance reforms in Israeli Corporate Law, set up a Specialized Court for corporate law and securities regulations, and incorporated Administrative Authority into the agency. Professor Goshen is among the select few who have won the best teacher award twice.

About ACLE

The Amsterdam Center for Law and Economics (ACLE) is a joint initiative of the Faculty of Economics and Business and the Faculty of Law at the University of Amsterdam. The objective of the ACLE is to promote high-quality interdisciplinary research at the intersection between law and economics.