Academic

I just attended an enjoyable and informative talk by friend and neighbor J. Harold Mulherin and Audra Boone titled Conflicts of Interest in Corporate Control Transactions: The Role of the Disinterested Special Committee.  It's not available on SSRN yet, but here's the abstract:

 We study the use of special committees of disinterested members of the board of directors in corporate takeovers. Within our sample of 845 takeovers from the 2003 to 2007 time period, we find that special committees are used in 25 percent of the deals. Special committees are typically composed of 3 to 4 of the target firm?s board members who are not only independent of the target firm and but also do not have a connection with the bidder and do not have an equity interest in the continuing firm after the takeover. The use of a special committee is negatively related to independence of the firm?s overall board of directors, is positively related to officer and director ownership, block holdings by families, parent firms or the bidding firms, and is positively related to rollover equity participation by members of management. We conclude that special committees are a response by target firms to the potential conflicts of interest in corporate control transactions.

So in changes of control, more special committees of disinterested directors are used if:

• the overall board is less independent, or
• there's a high level of ownership of the target by directors and officers, family blockholders, and parent firms. 

Only what you'd expect?  Maybe, but empirical work is welcome in this area.  Fama and Jensen among others have pointed to outside directors as a mechanism for addressing the agency costs that can arise in situations of conflict like a sale of corporate control.  Here's some proof that companies really do use special committees more in conflict-rich situations.  It makes sense, right?  You've got insiders or family blockholders or parent firms doing the bidding, and the courts are going to be worried about sweetheart deals that enrich the controllers at the expense of the average shareholder.  Enter the special committee to provide reassurance that, although the foxes are in the hen house, they're using outside parties to negotiate. 

As an educator/former deal lawyer, the next question for me is, why don't all firms in these situations use special committees?   It would seem to be crazy not to do so, since setting up a special committee is relatively cheap safeguard against litigious shareholders. I look forward to hearing more from Mulherin & Boone on this interesting topic.  My hunch is that it's unsophisticated lawyering that's to blame, but maybe that's just because I'm a lawyer...