Comparative Corporate Governance - Coursework Example

?The different approaches to the regulation of takeover defences in the UK and the US should not surprise us: they reflect the different approaches taken in the UK and the US to the balance of power between the board of directors and the shareholder body Introduction Business takeovers are a very common act amongst the corporations. A business takeover occurs when a company or an individual gets hold of the entire or a large portion of the equity share assets of a firm that is publicly listed, and largely undervalued or managed incompetently.1 In such cases, when there are on-going negotiations for a business takeover, evident attempts are made at training managers for producing maximum efficiency as there are chances that the group or individual bidder might wish to change the present management in order to increase operational efficiency, in order to make use of the new collaboration between the two organisations. During hostile takeovers, the acquirer during negotiations, may override the management and directly reach out to the firm shareholders. Such hostile takeovers, which existed for many years, are suddenly being highlighted as they have now come to involve business deals worth billions of dollars instead of the small firm takeovers that they earlier represented.2 Hostile bidders making offers for tenders often try to avoid negotiating with target firm’s managers and prefer taking control, thus potentially destroying the target firm’s normal functioning, which is a threat to its shareholders and management. Therefore, it is necessary that there are firm regulations within the market to control the arena of takeover and mergers. The regulations however tend to vary, as jurisdictions in different nations differ in the manner in which they aim to control the tenders or the negotiations for hostile takeovers. In this context, UK and US, both have enacted various legal measures to modulate the takeover exercises. In US, amongst the various regulations, the state of Delaware is especially important as it in direct contrast to the takeover defence regulations observed in UK. In UK, on 21st July 2011, amendments made by the Panel on takeovers on the ‘Takeover Code,’ (made effective from September 19th 2011), will have important effects in the manner in which the various corporations in U.K. deal with mergers and acquisitions and will further strengthen the differences that exist between US and UK takeover activities. The directors of target corporations in U.S. can make use of the available takeover defences to shift the hostile offers within the procedures of a conciliated acquisition that creates greater power for negotiation allowing the board to optimize the value of shareholders within M&A transactions. While the process of conciliation is on, the directors have the power to consolidate provisions within the M&A agreement under the deal protection measure, that goes on to elevate the prices and premium rates for the shareholders. Therefore, we find that in case of US target corporation as per the extensive rules established under the Delaware General Corporation Law and the Delaware common law the ultimate authority and power is wielded by the board of directors in case of selling the company. However, the board of directors in U.K. target corporations do not have similar powers to transfer the offers into the process of conciliation. Instead, in this case the takeover defences are face strict prohibition order in UK and the recent amendments made to the takeover code by the Panel impedes the use of any kind of deal protection measures. Therefore, by removing the deal protection measures and the takeover defences, the takeover code largely curbs the board’s power of negotiation. This article will examine the various differences that exist in the regulation of takeover defences in the UK and the US and how they reflect the different approaches taken in the UK and the US to the balance of power between the board of directors and the shareholder body. Discussion Antitakeover disposition used by target firms are defence measures adopted to avoid unwarranted hostile tenders presented by any future bidders. Some of the defence measures are used as pre-emptive strategies (in anticipation of future negotiation), while there are also a wide spectrum of complaisant defences available to organisations that find themselves as potential targets after the negotiations. Besides these, the defence strategies and the manner by which they can be employed differ widely between US (especially under Delaware law), and UK. As per the Delaware law while defending against a hostile takeover the directors of the target company may apply their ‘business judgment rule’ where they are allowed to show that after showing “good faith and reasonable investigation,” they felt a threat to the present policies of the corporation.3 Furthermore as per the awarded sentence in the case Unocal Corp v Mesa Petroleum Co, a judiciary review of any defensive takeover strategies looks towards whether the threat mentioned by the directors were viewed reasonably, and if the defensive strategies applied were feasible to the posed threat.4 In UK however, in direct contrast, the use of takeover defences to ward off hostile takeovers is restricted largely by the City Code on Takeovers and Mergers and make sit necessary that there is shareholder approval before the defensive strategies are exercised, as per Rule 21.1. Delaware law (US takeover defence strategies) A majority of the large business firms in US are associated with Delaware, which includes nearly “50% of all publicly-traded companies in the United States… [And] 63% of the Fortune 500,”5 and is “by far the most important source of regulation.”6 The tenders and mergers are to some extent regulated by the Securities and Exchange Commission or SEC,” however, the primary focus of this law is on matters of disclosure, and not the decisions taken the by the board of directors on hostile takeovers. Thus, Delaware courts remain the main regulatory source for the target corporation directors in their decision-making in cases of M&A, in cases that seek preliminary injunctions of takeover deals and derivative suit litigation and suits seeking elemental deal injunctions. Delaware’s Regulatory Scheme: as per the section 141(a) of Delaware General Corporation Law or DGCL, the board of directors control the corporation business affairs.7 Along with this, the Delaware law also imposes depository obligations on the directors as regards the firms and shareholders.8 Thus, during takeovers, the target firm directors owe a depository obligation to take care of the shareholders.9 Under the Delaware law, shareholders can confront the decisions taken by the directors’ and file a derivative case,10 which makes a leeway for the “shareholders to sue in the corporation’s name where those in controls of the company refused to assert a claim belonging to it.”11 In such cases, the shareholders bring forth a claim on the corporation’s behalf with the allegation that a lack of oversight or heedlessness on the art of the directors led to economic loss of the corporation.12 Such cases are filed in Delaware Court of Chancery with the Supreme Court of Delaware possessing the final appellate authority. Takeover defence measures: For a company to expand it must attempt for various kinds of M&As, and this makes it necessary for the company managers to stay alert for any risk of a hostile takeover. There are several safeguards used by the firms to counter this risk, and even though any of the defensive measure cannot be completely secure and carry or the other disadvantages, however each strategy applied accords some sort of a leverage during bidding while also giving time to create protective strategies. The takeover defensive measures can be adopted during the post-bid or pre-bid phase. Given below are the common strategies for fighting against hostile takeover bids. Poison pills: this is one of the most popular defensive measures used in US as anti-takeover defensive strategy, and is also known as the Shareholder Rights Plans. This plan offers protection against any unwanted tender bids,13 and is “the most powerful and effective of all defensive measures.”14 This plan accords protection to the target corporations from the most intimidating form of two-tier or partial bid offers. Here the company can offer dividends issued as new securities to the shareholders, that are adoptable prior to any approval from the corporation’s shareholders, as the board of directors retain their absolute powers for issuing the dividends. Owing to the absolute power of board, adopting the poison pill can take place even after there is a hostile takeover bid. Poison pills primarily come into action when a hostile bidder buys some percentage of the voting stock of the target corporation, owing to which the target shareholder is now commissioned to buy the new shares at a large discount, which in turn makes the shares of the target firm expensive, and the transaction then turns unappealing for the bidder. This entire process does not require votes from the shareholders for proclamation as the board retains supreme power over the distribution of shares as dividends.15 One of the primary problems associated with that of poison pills is that it assists to strengthen the board by providing a chance to increase the bid price, and deprecating a genuine bid for takeover that would otherwise be advantageous for the firm’s shareholders. Shark repellents: this is a form of defence mechanism, which involves the amendment of the company by-laws or the firm charter.16 This allows the board of directors of a corporation to control the process of takeovers.17 Various processes like Classified or the Staggered Board structure may be applied where some directors have a fixed term appointment while others are re-elected; hence, a hostile bidder often has to wait for an entire circle before he can assume complete board control.18 Shark repellents that restrain shareholder activities, like giving prior notice, arranging for special meetings, voting allowances with a super majority, etc., all are strategic variations of this defence mechanism type. There are many disadvantages associated with the strategy of shark repellents and even though they accord strong safeguarding for the target corporation, however, these can be easily by-passed by changing the board size, or by obtaining ‘super-majority’ within a firm’s shareholding. In such cases, the corporate management also gets a wide safety-berth, so that even if negotiation fails it is placed comfortably and in case the bid succeeds, the management gets a large compensation. Dual-class/ dispute class stock: often referred to as ‘dispute-class’ stock, these are divided amongst the firm’s shareholders as a component of the exchange offer or as dividends.19 The dual class stocks have unjustifiably high rights for voting rights, however are poor in dividend or liquidity rights. Assets sale: Here the target corporation may sell some its valuable assets or in some cases the entire firm, making the target to appear as less appealing to the buyer. Friendly Hands – In case where it is perceived that there is an impending hostile takeover, the target firm may look for other investors seen as friends, and sell the form or a large amount of the company stocks to such friends. Post Bid Defences as per Delaware Law: when a target corporation is faced with a hostile or an unwanted bidder, there are various forms of defence strategies that may be used in deterring the impending takeover. Some of the more popular measures are: Greenmail: here an unwanted acquirer may be paid in order to stop it from bidding for the target corporation, and often this process comprises of buying back the company shares after paying a huge premium in return for an agreement (standstill agreements) from the potential acquirer to restrain from initiating a hostile takeover. Even though there are allegations of bias against shareholders who are ‘non-participating,’ the strategy varies from state to state. As for example, Delaware gives Greenmail legal sanctity as defence mechanism against hostile takeovers (under legally valid commercial reasons); however, on the other hand, the state of California finds Greenmail as a legal breach of “fiduciary responsibility.”20 White Knights: here the target corporation seeks assistance where it asks a friendly firm (white knight) to acquire it, instead of the bidder, from t perspective that that the alternative firm (white knight) is better suitor. Here the white knight must willingly buy the Target under better terms (not necessarily higher price, the white knight may simply allow the present management to remain intact after acquisition) than the offers made by the other bidder. In 2009, we find that Fiat acted as a White Knight by acquiring Chrysler, in order to save the latter from liquidation. Similar to this form of defence is another strategy known as the white squire defence, where instead of a majority stake, there is the exercising of a large amount of minority stake within the white squire measure.21 Pac-Man: An alternative to the strategy of white knight, in this takeover defence, trusts that hold the firm’s investment stocks for retirement policies of the employees are used. The Pac-Man strategic defence measure involves a process where a target firm when threatened with hostile takeover, instead tries to take control of the potential buyer. This was evident in the 1982 hostile takeover endeavour by Bendix Corporation where it attempted to acquire Martin Marietta. However using the Pac-Man strategic defence measure, Martin Marietta acquired Bendix’s stocks, which finally led to allied corporation coming in as a White Knight to assist Bendix.22 Recapitalisation: Here the target corporation endeavours to recapitalise by taking in large amounts of newly acquired debts, for buying back company stocks and financing shareholder dividends. Here the primary aim is be less appealing to the potential bidder as the newly acquired debt decreases borrowing latitude.23 Repurchase of Shares: when a target corporation faces an impending threat of a takeover often its main objective is to decrease the share quantities that can be acquired by the potential bidder, and it may implement the strategy by repurchasing its shares through direct purchases of tender offers.24 Takeover strategic regulations in UK In US, the judiciary framework and regulatory laws as regards takeover defence tactics render the entire process as one, which is largely driven by a firm’s management and board of directors of the target firms that play the main role in chalking out different and often aggressive defence strategies. In UK, on the other hand, relevant judiciary and regulatory laws consider largely the interests of investors;25 while the regulatory regime that governs takeovers in UK is “strongly weighted towards protecting the interests of shareholders.”26 Furthermore, it has also been claimed, “the most startling difference.... [Between US and UK takeover legal norms] comes in the context of takeover defences.” In UK, besides the Companies Act (1985) which was modified in 2006 (the Companies Act 2006 or CA 2006), takeovers in UK are primarily governed by the City Code on Takeovers & Mergers, better known as the ‘Code,’ is supplemented by the CA 2006. The Code curtails the powers of the board of directors of a firm during a takeover offer bid, and restrains the defences that can be made applicable in case of hostile takeovers. The board of directors are legally prohibited from engaging in activities that may lead to “any offer or bona fide possible offer being frustrated or in shareholders being denied the opportunity to decide on its merits.”27 Therefore, it is clear from this rule that in an M&A, once a tender offer is close to being submitted, shareholder approval is a necessary factor in the application of any takeover defence strategy. Furthermore, the Code also guarantees that the Target firm’s shareholders are accorded a full right to analyse and adjudicate whether to go ahead with an offer for takeover. In case of issuing new shares, or while creating multiple and dual share classes, directors must necessarily (legal obligation) seek prior authorisation of the shareholders through a general meeting.28 Besides the Code, various other authorities regulate takeovers under varying situations. For the companies that are listed, United Kingdom Listing Authority (UKLA) guideline norms apply, as are found in the ‘Listing Rules’. Other acts that regulate takeovers in UK are the Financial Services and Markets Act 2000 or FSA 2000, which governs the regulation of financial activities; the Competition Commission and the Office of the Fair Trade (OFT) for anti-trust related issues; and the Criminal Justice Act of 1993. The Panel that deals exclusively with takeover issues is a completely separate body comprising of professional members acting as regulatory officials who all engage in various takeover activities, occurring in UK as in London Stock Exchange, Bank of England, within members of the prominent UK M&A legal firms, and financial organisations. Even though the Code directives may not be applicable within the precincts of UK courts, it serves its purpose as a soft-law, for regulating and guiding takeovers in UK. Differences between the defence takeover strategies of US and UK Largely, regulations for monitoring and controlling takeover activities in a country are based on prevalent government policies and the maturity of the existent market. In some cases, the jurisdictions choose the theory of laissez-faire that has very little control and freely allows market forces to regulate takeovers, while others may be protective towards the firm’s stakeholders. In case of hostile takeovers, we find that UK policies are ruled by business strategies that promote competition and equity, hence safeguarding shareholder in interests to the optimal. On the contrary, US based Delaware law leaves a large scope for flexibility for all the entities that are involved in takeover activities. Under the Delaware laws, no limitations are placed on share percentages that a bidder can bid on, and unlike UK, US has no ‘mandatory bid rules’ where the acquirer (of some share percentage of target firm) must necessarily request to buy all shares from the shareholders of the target corporation.29 However, in US, the bidders while going ahead for large acquisitions, must necessarily make public offers, and offer same prices at the same time and provide the same notice to all the shareholders of the target firm. While the Delaware laws appear friendly to the bidding firm’s shareholders, the target firm’s shareholders are not equally favoured under the same laws, by way of statute. In UK, the management responsibilities are much higher while handling target offers, than in Delaware. The board of directors in target firms following the Delaware law can freely use defensive strategies (as mentioned in the previous segments) against hostile takeovers. The substantial discretionary powers provided to board directors (management) of a target firm under Delaware laws is the main reason as to why Delaware laws are highly popular for corporate incorporation. These laws give a wide scope to the board management for negotiating and defending against hostile takeovers to an optimal level, the board can also refuse any transaction by defence strategy of “just say no,” if the board of directors feel that somehow the bidder’s offer does not spell good for the shareholders or the firm. However, in this context, Armour & Skeel claims that even in US, the discretionary powers granted to the board management under Delaware laws is not absolute.30 In some cases, the board of directors must necessarily adopt defensive strategies only after receiving approval from the shareholders, and in such cases the shareholders are even allowed to take the call. The Delaware legislations seemingly approve the theory of ‘management entrenchment.’31 In some of the situations, managers must show a certain degree of business acumen, responsibility, and trust towards the firm’s shareholders. However, recently it has been observed that despite the freedom accorded to the board of directors by law statutes, more often than not, the courts, in the form of various case laws, now assist shareholders in restraining the board of directors (management); and presently with increasing number of takeovers, the scope of depository duties of management towards firm’s shareholders is being reviewed. On the contrary, in UK firm’s shareholders are accorded a great deal of protection through various legal statutes. Takeover defence strategies in UK are largely restricted, while before adopting any of the defence measures, there must be prior approval from the firm’s shareholders, and the management is barred from applying strategies like shark repellents or poison pills.32 Under the English law, the shareholders receive maximum chances where they are allowed to decide whether to reject or accept any proposed takeover offer, and decide the manner in which they wish to manage their shares while there is a takeover bid underway. As per the English company law, the board while issuing new shares or creating dual and multiple share classes, must have prior approval from the shareholders via a general meeting.33 Under the UK rule, all shareholders in the target firm must receive equal treatment, while there is also the rule of ‘mandatory bid’ where any bidder acquiring voting stock of a firm that is greater than 30%, then there must be an offer to buy all shares of that target firm.34 Owing to this legislation, all bidders in UK must necessarily have the necessary amount of funds to be able to work out a deal where they can purchase the entire share percentage of the target firm, instead of buying just a part of in the way of ‘controlling interest.’35 Conclusion From the above discourse it is clear that the various available ranges of takeover defense strategies and the deal protection measures, and their legal applicability provides the US board of directors of target firms the power to yield control over each takeover deal and aim to derive higher premiums for the firm’s shareholders when compared to their UK counterparts. Since the Delaware law gives more power to the board of directors in target firms of U.S. they also have greater power to negotiate and maneuver selling of the company, resulting in higher premiums for the shareholders. Use of flexibility in the standard for reasonableness allows the board of directors to appropriately depending on the facts and circumstances surrounding a deal, while also allowing courts to hold the directors’ actions accountable under an analysis of the depository duties. The DGCL and the Delaware law provide the board of directors with supreme authority to handle any form of takeovers. In UK under the Takeover Code, the scenario is in stark contrast, where we find the board stripped of any powers to take help from takeover defense strategies and ne amendment even prohibits application of deal protection measures. Here the control and authority during a takeover rests in the hands of the firm’s shareholders. With the mew modifications made to the Code the negotiating power of the management has been further reduced. Various researches have shown that allowing the board of directors to judiciously use takeover defense strategies and the deal protection measures allow scope for negotiation that ultimately brings in higher premiums for shareholders. Thus, here one can safely derive that U.S. has a better administrative system, where it gives a free hand to the target firm’s board of directors to shift takeover offers into a process of negotiated acquisition, and bring in added values (higher premiums) for the firm’s shareholders. References Armour, J., &. Skeel, D., Jr. Who Writes the Rules for Hostile Takeovers, and Why?—The Peculiar Divergence of U.S. and U.K. Takeover Regulation, 95 Geo. L.J. 1727, 1733-1745, 2007. Aronson v. Lewis, 473 A.2d 805, 811 [Del. 1984]. Bebchuk, L., Coates, J., Subramaniam, G. The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence and Policy. Stanford Law Review, Vol. 54, 887-951, 2002. Bebchuk, L. The Case for Increasing Shareholder Power. 118 HARV. L. REV. 833, 847-50, 2005. Del. Code. Ann. tit. 8, § 141(a), Supp. 2010. DePamphilis, D. Mergers, Acquisitions, and Other Restructuring Activities. Boston: Elevier Academic Press, 2005. City Code Infra Part II.B. Kenyon-Slade, S. Mergers and Takeovers in the US and UK. Oxford: Oxford University Press, 2003. Moore, K. Risk arbitrage: an investor's guide. NY: John Wiley and Sons, 1999. Peacock, A., Bannock, G., and Joseph Rowntree Foundation. Corporate Takeovers and the Public Interest. Aberdeen: Aberdeen University Press, 1991. Skeel, D., and Armour, J. Who Writes the Rules for Hostile Takeovers, and Why?-The Peculiar Divergence of US and UK Takeover Regulation. Centre for Business Research, working paper no. 331, University of Cambridge, September 2006. retrieved from,  http://www.cbr.cam.ac.uk/pdf/WP331.pdf. [Accessed 21st December 2011] State of Delaware, About Agency, retrieved from, http://corp.delaware.gov/aboutagency.shtml (Accessed 19th December 2011). Supreme Court of Delaware, 493 A.2d 946 [Del. 1985] Read More