Security Voting Structure and Bidder Screening

Abstract : This paper demonstrates that non-voting shares can promote take- overs. When the bidder has private information, shareholders may refuse to tender because they suspect to sell at an ex post unfa- vourable price. The ensuing friction in the sale of cash flow rights can prevent an efficient change of control. Separating cash flow and voting rights alters the degree of cross-subsidization among bidder types. It can therefore be used as an instrument to promote takeover activity and to discriminate between efficient and ineffi- cient bidders. The optimal fraction of non-voting shares decreases with managerial ability, implying an inverse relationship between firm value and non-voting shares.