Document Type



Harvard Business Law Review




Many public companies have shed takeover defenses in recent years, on the theory that such defenses reduce share price. Yet new data presented here shows that practically all new public companies--those launching their initial public offering (IPO)--go public with powerful takeover defenses in place. This behavior is puzzling because the adoption of takeover defenses presumably lowers the price at which the pre-IPO shareholders can sell their own shares in and after the IPO. Why would founders and early investors engage in this seemingly counterproductive behavior? Building on prior attempts to solve this mystery, this Article claims that IPO firms adopt takeover defenses, at least in part, so that they can remain independent indefinitely and create corporate legacies that last for generations.

Throughout human history, people have sought to overcome the human condition and achieve the only form of immortality reasonably available to us: a legacy that "lives on" after we are gone. Legacies can be established in countless ways, including art (Leonardo da Vinci), literature (William Shakespeare), and athletics (Babe Ruth). The corporate form, though not previously recognized as such, can likewise serve as a vehicle for achieving an enduring legacy because corporations are endowed by the law with "perpetual existence."

Publicly traded corporations in particular are well suited for this purpose, given the significant social and cultural role they play. Once a company goes public in an IPO, however, it suddenly becomes vulnerable to takeovers, which can end its corporate existence and thereby any hope of an enduring legacy. This unwelcome fate can be avoided, however, if a company goes public with powerful takeover defenses in place--which practically all do, according to the data. Mature public companies, by contrast, are controlled by people who joined the board long after the IPO. These directors lack the same passion for the company's independent existence because, unlike the pre-IPO shareholders, their legacy is not tied to the company. Accordingly, a mature public company may be amenable to abandoning its takeover defenses.