"Breach of Trust" in Takeovers and the Optimal Corporate Charter

The paper analyzes how takeovers, various takeover defences, and golden parachutes affect the value of target companies, using an incomplete contracts framework. We consider a raider who can improve the efficiency of production and appropriate rents of stakeholders of the company. Anticipating the expropriation of his rents, the manager's relationship specific investments will be too small, which may offset the value increase through the takeover. The simultaneous use of poison pills and golden parachutes can solve the underinvestment problem without forgoing profitable takeovers. However, the privately optimal level and composition of takeover defences need not be socially efficient.