How Independent Directors Promote Principal-Principal Conflict : The Case of Antitakeover Defense

Extant literature seldom explores the potential conflict of interest between large and small shareholders, or principal-principal conflict, in the context of antitakeover defense. Utilizing a merged dataset of 493 US firms in 1998 and 2000, we theoretically argue and empirically demonstrate that principal-principal conflict exists when firms choose to opt out of the protection of the control share acquisition laws. We find that controlling shareholders influence independent directors to the extent that independent directors act in favor of controlling but not small shareholders. Consequently, we argue that independent directors do not fulfill their fiduciary duties to all shareholders when they support opting out of the control share acquisition laws.