A supermajority provision is an amendment to a company’s corporate charter that often requires obtaining two-thirds or three-fourths of the majority of votes to approve important corporate changes such mergers and acquisitons. This can sometimes be as high as 90%. Any hostile takeover approach would need to control the voting interest a large number of shares in order to proceed with the takeover. This is in contrast to a simple majority, usually defined as 50% plus one share to make these types of decisions. This action is sometimes called a “supermajority amendment” and frequently used in politics, and when establishing certain laws.
This action, known as a shark repellent has been studied for some time. a 1987 study entitled “The Effects of Antitakeover Amendments on Takeover Activity: Some Direct Evidence“, by John Pound, analyses the effect of this and other shark repellent tactics on takeovers in the U.S.
The supermajority amendment is a defensive tactic, making hostile takeovers much more difficult to perform. However, in most existing cases, the provision has a “board-out” clause that provides the board of directors with the power to determine when and if the supermajority provisions will be put into effect. Were these provisions to be used indiscriminately, management’s ability to negotiate could be severely impaired. As with any situation where a successful takeover is less likely, the merger arbitrage spread will be widen accordingly.
Supermajority Provision Criticism
The supermajority vote can take place at the company’s annual general meeting of shareholders or an extraordinary general meeting. This depends on the nature and urgency of the matter being voted upon such as a proposed takeover.
A supermajority voting provision is intended to ensure that a large majority of shareholders are on board with the corporate action at hand. It may however ultimately cause gridlock among shareholders and adversely affect the corporate efficiency of the company by making a resolution more difficult to pass. A supermajority provision allows for a minority of shareholders to block the proposed action of the majority thus handing them a greater degree of control.
Another criticism is the use of the provision to help entrench management and the board. This can be seen in the case of Tesla (TSLA). CEO and co-founder Elon Musk, owns approximately 22% of the firm. However, with a two thirds super majority provision, almost 90% of the remaining votes would be required to pass a motion if Musk and his insiders were not in support. Thus, a takeover of the firm becomes more difficult as the majority is raised and may deter bidders from entering the contest. This is rarely in the best interests of shareholder.
