There can be confusion between takeovers and acquisition. Sometimes people think they are terms having the exact definition. However, there is a difference between the two. Acquisitions commonly occur when a company is acquired by another company with the acquired company Board’s permission. On the other hand, a takeover occurs when another company acquires a company without the acquired company Board’s permission. Therefore, the operating word delineating the differences between the two is the acquired company board’s consent.
Often, takeovers are known as hostile takeovers. This is due to the absence of consent. There are different ways through which a company might actualise a takeover. One is through the purchase majority of the target company stocks. This can be done through secondary markets or directly from the shareholders. Secondly, the company might engage in proxy fights, seeking the shareholders’ voting rights, in an attempt to win the shareholder’s approval and be the de facto and the de jure controller of the target Company’s Board of Directors.
As much as the UK and USA’s corporate governance systems are similar, the UK and the USA’s takeover laws are divergent in substance. The noticeable dissimilarities are between the systems that include the USA being tolerant towards derivative litigation. At the same time, the UK has a strong market where takeovers are less regulated. Moreover, the USA takeover market is significantly dominated by state governments. Therefore, the USA’s political forces that are united against takeover are pretty compelling, leading to the generation of judicial decisions and legislation that subdue takeover undertakings.
On the contrary, the UK market is unitary, unlike the USA. Therefore, in this system, the political environment is more accommodating as political forces span out differently. The systems thence generate rules that are more tolerant to hostile takeovers.
In the USA, the Delaware judicial system became the hostile takeovers authority that enforced hostile takeovers. The rules give the target companies boards’ considerable freedom of choice in reacting to takeover bids that are hostile. However, in the UK, a purely professional private body of relevant to takeovers was fashioned and designed to take on and put into effect regulatory regime of laws and rules pertaining to hostile takeovers. Unlike the USA, the UK takeover regime accords the shareholders the most critical decision-making capacity and competence regarding takeover attempts.
Hostile takeovers are generally seen as a way of rendering managers and boards accountable to a company’s isolated shareholders. Even so, attention should be drawn to the utmost protuberant practitioners of hostile takeovers, the UK and the USA.
As indicated earlier, escape manoeuvres in the USA is given to the managers to defend themselves and the target company against hostile takeovers, as Delaware law permits room for that. However, in the UK, protective strategies by managers of target companies are prohibited.
A Takeover market keeps corporate governance on its toes. One way is through a direct cause and effect connection where a bidder brings in better managers suited for the roles after the takeover bid, thereby improving the target company performance in different ways, including exploiting synergies between the two companies and asset reconfiguration. The second is an indirect effect. Suppose managers fear hostile takeovers where the bidder can take control of the company and run it poorly. In that case, they are kept on their toes, thereby ensuring the company progresses well to eliminate any crevice for a takeover.
It is, therefore, this paper’s intention to examine the differences between the two legal regimes with regards to hostile takeovers and argue that the divergence is brought about by the differences in the mode of regulation by the different authorities making the regulations.
Comparisons and Discussions
Takeover System in the USA and its criticisms
The USA takeover laws are heavily influenced by the Williams Act 1968, the Securities Exchange Act 1934 Improvements, amendments and revisions thereto, the Delaware law, precedents and anti-trust laws. It is even more complex as compared to the UK for the reason that individual states have their own authority legislatively. Even so, there are connections and similarities of rules across the states in dealing with takeovers, especially on essential principles, and there are differences too. More than sixty-three percent of fortune 500 companies and fifty percent of USA public companies are Delaware incorporated. Delaware law is, therefore, the most critical regulation cradle in the USA.
Takeovers in the USA are made through tender offers that directly target the shareholders of a target company in purchasing their individual shares. Unlike a single-step merger process, federal securities laws to some extent regulate tender offers. Additionally, takeovers transactions through tender offerings involve the fiduciary duty laws based on the state of incorporation of the target company.
In a tender offer, the acquirer first prepares and files a schedule TO that encompasses the filing of statements of disclosures with the Securities and Exchange Commission (SEC). The acquirer must also comply with the rules relevant to tender offers. Schedule TO should also be given to the target company on the tender offer’s commencement date.
The disclosures required of the Schedule TO include summaries of the tender offer: material terms; past relationship/corporate events/transactions between the target company and the acquirer; transaction backdrop including negotiations; purposes; source and amount of money that will be used to pay; directors and officers information; recent transactions in the securities of the target company by the acquirer; and acquirer’s financial statements.
It must be noted that in all-cash transactions, there is no need for clearance from SEC, although the SEC must still receive Schedule TO filing. In all-cash transactions, the acquirer commences by offering to purchase the shareholders’ shares even before receiving comments from the SEC on the Schedule TO. The comments are dealt with later through Schedule TO amendments.
There are traffic rules that acquirers must follow too. The acquirers are subject to the following substantive additional rules: the acquirers are permitted to offer a share consideration or cash consideration or an amalgam thereof; the acceptance timeline for the tender offer is at least twenty business days; the acquirer is not obligated to bid for minimum or maximum percentages of common shares of the target company; partial bids whereby the acquirer doesn’t intend to seek a hundred percent of the target company’s common shares is permitted; withdrawal rights must be made available by the acquirer through the offer; the acquirer is prohibited from purchasing any target shares other than the ones according to the tender offer from the first public announcement of the tender offer; Lastly the acquirer must extend the tender offer to all shareholder of the target company and offer the same consideration across.
The acquirer can also receive advance binding commitments from significant shareholders of the target company.
The UK’s regulatory system was channelled differently as most shareholders were institutional investors and could be trusted to make reasonable decisions regarding their companies on their own. In the UK, the role of shareholders that were institutions played a more significant role in the progression, development, and advancement of their Takeover norms than in the USA. In the USA, investors are different as there are few institutional investors as compared to the UK. During the shaping of takeover laws, most investors were retail investors who didn’t trust insiders in the financial institution control companies in their interests. And therefore, the UK statutory system isn’t preferred by shareholders from the USA. It is hard to find institutional shareholders or self-regulation at the centre of the USA takeover regulation.
In the USA, series of banking and securities laws in the 1930s laid a basis for USA takeover regulations. Thirty years later, hostile takeovers emerged even before the 1980s Delaware Takeover cases.
By 1985, a plethora of defensive tactics were used by directors in a bid to complicate the takeover processes in the USA, and one of the most common was the greenmail and poison pill. The poison pill is similarly known as the Shareholder rights plan. It is calculated to water down the hostile bidder’s stake if the bidder intends and indeed obtains further shares than the agreed and specified target stock percentage, which is typically a percentage of between 10-15%. Poison pill achieves this result by, for instance, the directors calling upon all the shareholders in the absence of the bidder in order for them to buy two shares for the price of one.
The Supreme Court of Delaware also delivered breakthrough judgments on regulations for defensive measures that could be taken by the directors in the face of a looming takeover. For instance, in Moran v. Household Int’s, Inc., the Delaware Supreme court stated that the poison pill was permissible even though it discriminated between the tender offer bidder and the other shareholders of the company that is targeted. Moreover, the case of Unocal Corp. v. Mesa Petroleum Co. came up with a two-part test that enabled directors to establish defensive measures countering hostile takeover bids. First, the directors must reasonably perceive a threat to the target company. Second, the directors must prove good faith regarding the defensive measure taken by them concerning the threat perceived. The directors’ defensive actions must show corporate governance where reasonable inquiries were conducted by them that led to the conviction that the tender offer was a threat to the effectiveness and existing corporate policy. In the Unocal case, the court peddled the notion of payment to the shareholders to exclude the acquirer. The poison pill was accepted as a defence in the USA against takeovers.
As held in the case Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc . Directors were allowed to negotiate in order to get the premier share price for shareholders using defensive tactics once they agreed to a takeover.
By 1990, over forty states had copy-pasted Delaware’s Jurisprudence and enacted laws that majorly borrowed from Delaware style in employing defensive takeover measures. There was the birth of tools to resist hostile takeover bids.
In USA takeover legislation, the directors are bonded fully with the business affairs under Delaware laws which is seen when they exercise their powers regarding tender offers, as shown by the Revlon and Unocal cases.
From the discussions above, Delaware laws allow directors to be defensive against takeovers if they believe that it postulates a threat to the target company’s existing corporate governance and there are diminished forecasts of the future benefits to the shareholders.
Additionally, constituency statutes in most states in the USA allow the directors to discourage the takeover bid to protect shareholders if they believe that it would overstep the interests of the stakeholders. An example of this is the poison pill tactic.
Specifically in Delaware, the law thwarts hostile takeover bidder from effecting a back-end merger for three years with a target company after having bought more than fifteen percent of the shares unless they get the Board’s prior approval, or the bidder increases to more than eighty-five percent single tender offer ownership, or the bidder also buys two-thirds of the disinterested shares if he has more than fifteen percent shares.
The USA acceptance and practice of defensive measures in takeovers has an advantage over the UK. The target company directors are given the power to fight for higher premiums for their shareholders. This also enables the directors to give shareholders more informed advice to make more informed choices regarding the takeover offer.
In preventing the directors from abusing their negotiating powers of fighting during takeovers, the Delaware Law forbids directors to accept lower bids even with better long-term prospects. The law only allows higher bids. Moreover, if the directors decline an offering for the reason that they fear being removed from their directorship positions by the bidder, the Delaware laws allow the shareholders to sell the company in their own right. Furthermore, directors are bound by fiduciary duty to the company. Therefore, they ensure that shareholders get a fair deal and the bidder pays for the target company’s intrinsic value.
Even so, there is still a threat of breaching the fiduciary duties in the USA takeover laws as directors may subtly be motivated to preserve their positions in the target company. Another criticism is that defensive takeover mechanisms discourage takeovers, thereby stemming the development of the market. Besides, USA shareholders whine about their unequal treatment in some takeover defences like poison pill and greenmail, and the USA director’s positions are secured more than the UK’s. Researchers have critiqued the structures for their laxity in the accountability of directors’ choices on defensive measures. They reduce the shareholder’s power in removing the Board of directors in proxy wars.
The USA takeover laws facilitate the balance of rights and interests between directors and shareholders and between minority and majority shareholders, as witnessed in the Unocal case where directors ought to show good faith and reasonable inquiries to guard against takeovers where there is an existence of conflicts between the managers/directors and the shareholders.
The existence of defensive measures and the strict SEC requirements, lack of mandatory bid, staggering board changes, or issuance of preferred stock to ‘friendly’ shareholders as delay tactics, and even the greater possibilities of litigation delays in the USA as compared to the UK encumbers the target company’s hostile takeover.
Takeover System in the UK and its criticisms
In the UK, Takeovers are regulated by the Companies Act 2006 and the Takeovers and Mergers Panel that oversees and manages the Takeovers and Mergers City Code. The City code entrenches the principles to be followed in takeovers and mergers. The objective principles of the City code can be compressed to the following principles: same class target company shareholders are equal and deserve equal treatment and have informatory data empowering them to arrive at a decision that is informed; false markets are prohibited in the securities of the target company or the bidder; without the shareholders’ consent, the target company management should refrain from taking any actions that would frustrate an offer.
Unlike the USA, the panel doesn’t involve itself with the commercial/financial benefits of the takeover as it regards those matters to be of the shareholders and the companies themselves.
The UK Listing Authority Rules applies in the takeover of one of the listed parties or is seeking to be listed in the London Stock Exchange. If the bidder is listed, consent from the bidder’s shareholders is mandatory if the takeover is a significant acquisition comparatively. If the listed bidder offers own securities as consideration, the Authority’s rules prescribe the prospectus document contents.
Takeovers can happen when the bidder offers to acquire the shareholder’s shares or when a scheme of arrangement through the courts is initiated. The city Codes are then modified appropriately. Within twenty-eight days, the bidder is mandated to send an offer document to the shareholders, and it must be accepted within twenty-one days by the shareholder.
Schemes of arrangements are generally used in offers where there is no likelihood of a competing bid. They are, however, formal arrangements between the shareholders and the target company and need to be approved by seventy-five percent of the shareholders’ votes cast and the High Court. The arrangement, once approved, is binding.
The UK’s types of consideration for bid offers include cash, shares, warrants, loan notes or convertible bonds. And generally, the bidder has the discretion to offer whatever bid price. However, the City Code has placed mandatory minimum prices on certain occasions.
The UK’s mandatory bid rule aims at safeguarding minority shareholders by cataloging situations where the bidder ought to make a general offer. It includes a situation where the bidding company acquires a thirty percent interest in the target company’s shares and voting rights. This, therefore, ensures that before control is achieved by the bidder, a satisfactory premium is paid. The equal treatment principle also guarantees that the minority shareholders profit from the premium similarly.
In the early, to mid-1950s the boardroom revolution happened in the UK and the birth of hostile takeovers threatened corporate directors and managers’ positions. The takeovers would be seen as a danger to the managers’ positions. This would compel the managers to put the shareholder’s interests at a pedestal when executing takeover deals since the directors are given power and protection corresponding to their interest in corporate businesses. This was also due to the fact that shareholders had the capacity and power to appoint and remove the Board, obtain any information on the company, and even attend meetings. The rights seemed adequate for the shareholders to manage the company.
Scholars also opine that defensive mechanisms created a leeway for managers to sacrifice the shareholders’ interests and benefits concerning their selfish interests of securing their company positions. If law permitted the Board to adopt defensive measures, then it means that most takeover bid would fail. Moreover, the discretion that would be given to the directors to use or not to use defensive measures would delay takeovers or reduce the bidder numbers. Therefore, in a market where takeover activities are encouraged, like the UK market, corporate control of the activities needs to be minimal. A lively market would then need a limit to the use of defensive measures. Hence, directors’ defensive measures are prohibited in the UK since 1968. This means that the UK directors do not have the significant authority to negotiate over the company’s takeover. This is the essence of the UK shareholder-friendly takeover regulatory regime.
As majority shareholders in the UK, institutional investors would rather trust themselves than directors in finally deciding takeover matters. For instance, in the cases of Hogg v. Cramphorn Ltd. and Howard Smith Ltd. v. Ampol Petroleum Ltd. the courts ruled that the reason behind the directors’ deployment of defensive measures must be established first. In both cases, the court found that the Board’s intentions were improper. This created mistrust between the directors and their shareholders.
The Takeover panel encourages swift takeover processes by dealing pre-emptively with activities that might hinder takeovers.
The UK system, on the face of it, has advantages when compared to the US system. The UK system is more efficient, cheaper, particular, and quicker than the USA system that is majorly predicated on litigations.
The UK’s city code protects dispersed shareholders as it grounds equal treatment and procedural protection to the shareholders. The City Code has been good for corporate governance, and from a financial standpoint, it has received support from economists.
There have been criticisms of the UK regime too. It has been argued that the City Code and the general prohibition of directors’ defensive mechanisms were introduced because the common law was unable to put forward a system that ensured the feasibility of takeovers on the one hand without forgetting the corresponding managerial accountability on the other hand. It is also argued that the UK system fails to protect minority shareholders against controlling majority shareholders who might abuse their rights in takeover sell-outs.
By City Code strips any defences and deal protection devices that the directors can invoke. In this sense, the decision for a takeover solely lies upon the shareholders. It, therefore, eliminates the directors’ powers in the takeover negotiating table and may reduce premiums for the shareholders.
The city code provisions are solutions to market failure as they ensure the accountability of directors and managers to shareholders without the creation of spatial relations for third parties. The shareholders, as mentioned, have the right to decline or accept the offers of takeovers when faced with a bid of trading their shares at a premium.
Outstandingly, the Takeover Code has even placed the directors under a fiduciary duty higher than the common law one. It is of the spirit that during takeover negotiations, the directors should represent the shareholders’ interests as they only act as shareholders’ agents during the negotiations. It has been contested that the UK company law only obligates directors of a company to act for the benefit of the company as a whole, and this doesn’t protect the shareholders adequately. An improvement was then suggested whereby minority shareholders are protected by the law buttressed the obligation of promoting the company’s success to consequently benefit the members rather than the company as a whole. Therefore, under the Takeover Code Rule 21, there is a stipulation of the non-frustration rule. This means that before the directors take any actions to frustrate the takeover, consultations and prior consent must be obtained from the shareholders.
The UK mode of takeover regulation is flexible in nature. In using the Panel to enforce the City Codes on takeovers, the UK has an upper hand as it adjusts itself and the regulatory reactions on the parties that is before it at a particular point in time, and also the exigencies of business within the country. The panel meets severally a year with an aim of discussing the market, recent developments and come up with amendments, if need be, to the Takeover City Code in response to changes in the market. However, the USA court only makes rules in a reactive manner. This means that in the USA, market changes lead to litigations from which the courts set precedents and the rules to be followed.
From the above discussions, it is evident that the USA and UK’s takeover processes are different. For the USA, the regulations are seen to be shareholders-friendly, while for the UK is shareholder-oriented. Unlike the USA, the UK directors are prohibited from adopting defensive measures without the shareholders’ consent in an effort to thwart the takeover once it has materialised defences such as poison pills are prohibited.
It is also evident that the UK takeover system is self-regulated. The country has been able to kind of ‘Privatise’ their regime in the Takeovers and Mergers Panel’s coming up, whereas the USA regime is not self-regulated.
There are suggestions that the USA introduce federal legislation that is a contextualised hybrid of the UK’s Code. Conventionally, the comparative analysis has shown that the USA system is predicated on a top-down approach encompassing mandatory legislation coupled with the courts’ decisions as the only way to regulate the takeover transactions. The UK has proven this wrong. The USA needs an effective uniform government regulator once a takeover tender offer has materialised together with a robust and efficient court system.
The USA and the UK are appropriate examples of a divergent system of Takeovers that work as the lawmakers in the countries have considered the difference between their markets, their market features, developmental chart in making regulations and adopting practices that would suitably fit their systems. For instance, the anti-trust effect on Takeovers cannot be ignored in the USA.
In both legal systems, the directors’ motivations for their decisions are always central when scrutinising their actions and conduct during takeovers, and the courts usually are very keen. To this effect, the directors have a duty to be well informed and can even pursue independent advice from financial advisors regarding offers.
However, it must be noted, and as mentioned in the discussions above, the takeover regime in the UK is relatively easy as there is an identical system that guides Takeovers in the country. However, the USA has a complication as the Takeover activities are determined by references to federal laws and the different state laws. Subsequently, takeover answers to the same takeover issue might vary between the diverse states.
In both systems of corporate governance, UK and USA featuring dispersed ownership characteristic, hostile takeover operates as a mechanism that disciplines target companies’ managements even though the rules and regulations in the different systems are divergent.
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