Corporate Takeover Law and Management Discipline

Francis Okanigbuan Jnr

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429895784
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

This book examines the effectiveness of corporate takeovers.

The dominant ideologies of corporate takeovers include synergistic gains and its managerial disciplinary role. These dominant themes are being undermined by the challenges of costly acquisitions. The UK Takeover Code is a regulatory response to the role of managers of target companies only. Also, the regulatory framework for takeovers in the United States is largely focused on target companies. The book demonstrates that managements can influence the role of takeovers, thereby undermining its synergistic and disciplinary values. Presenting an identification and evaluation of the limits of current regulatory and judicial control over the role of management during takeovers in the UK and the US -Delaware, it will identify the relevance of institutional control as an effective mechanism for addressing the challenges of managerial influence over takeover functions. It will also identify how the role of managements can be addressed with the complementary benefit to shareholder and employee interests; thereby challenging the shareholder/ stakeholder primacy debate in corporate law, particularly in relation to takeovers.

This book will be essential reading for scholars and students interested in the market for corporate control, corporate law and company law.

Part I

1
General introduction

1.1 Introduction

A company is a complex whole, so are its challenges. Among the several challenges facing a modern corporation are conflict of interests¹ and issues of accountability. The existence of these challenges and the threats that they pose to corporate values led to the development of internal systems of corporate control, led by the board of directors of companies.² As an internal disciplinary mechanism, the board is expected to limit the incidence of conflict of interests through its effective monitoring and supervisory roles. However, despite the existence of boards of directors, these challenges have not been effectively addressed. Conflict of interests remains a serious problem, and it can be responsible for the poor performance of firms. For example, it may lead to the undervaluation of the assets of companies, exposing such companies to risks and external pressure from the market for corporate control.³ Corporate acquisition is one of the ways that the market for corporate control is exhibited. It has become a recurrent feature in exerting external pressure on companies, directly or indirectly.⁴ Even though a company is not a subject of a takeover bid, an indirect pressure may be signalled as soon as a competitor of similar economic strength becomes the target of a takeover bid.⁵

1 Corporate managers as agents can be influenced by personal interests in making investment decisions. See generally Ralph A. Walkling and Michael S. Long, ‘Agency Theory, Managerial Welfare and Takeover Bid Resistance’ (1984) 15 The Rand Journal of Economics 54.

2 Pieter W. Moerland, ‘Alternative Disciplinary Mechanisms in Different Corporate Systems’ (1995) 26 Journal of Economic Behaviour & Organisation 17, 25.

3 Henry G. Manne, ‘Mergers and the Market for Corporate Control’ (1965) 73 Journal of Political Economy 110, 112.

4 Note 2, 23. See generally, Henry G. Manne, note 3.

5 Barry M. Mitnick, The Political Economy of Regulation: Creating, Designing and Removing Regulatory Forms (New York, Columbia University Press, 1980) 328.

Traditional finance theory suggests that corporate entities that are ‘poorly managed’ are likely to become takeover targets, because external investors believe that at optimal management level, the value of the firm can be enhanced beyond its current level.⁶ This can be achieved through the synergistic objective of acquisitions, whereby the value of the combined entity is greater than the sum of the separate entities values.⁷ However, in light of the litany of challenges that occurs post-acquisition, namely, loss of value to acquiring companies and shareholders,⁸ and challenges to stakeholders, such as employee dismissal,⁹ the synergistic role of takeovers is being undermined.

6 Michael C. Jensen, ‘The Takeover Controversy: Analysis and Evidence’ in John C. Coffee, Louis Lowenstein, and Susan Rose-Ackerman (eds.), Knights, Raiders and Targets: The Impact of the Hostile Takeover (New York, Oxford University Press, 1988) 318; David Hirshleifer and Anjan V. Thakor, ‘Corporate Control through Board Dismissals and Takeovers’ (1998) 7 Journal of Economics & Management Strategy 489, 511.

7 Lynn Hodgkinson and Graham H. Partington, ‘The Motivation for Takeovers in the UK’ (2008) 35 Journal of Business Finance & Accounting 102. Even though takeovers appear to discipline ‘non-performing managers’, the quest for synergy remains the driving force for takeovers. See Michael Jensen, ‘Takeovers: Folklore and Science’ in Peter J. Buckley and Pervez N. Ghauri (eds.), International Mergers and Acquisition: A Reader (London, Thompson, 2002) 71; Peter Dodd and Richard Ruback, ‘Tender Offers and Stockholder Returns: An Empirical Analysis’ (1977) 5 Journal of Financial Economics 351; Michael Bradley, ‘Interfirm Tender Offers and the Market for Corporate Control’ (1980) 53 Journal of Business 345; Michael Bradley, Anand Desai, and Han E. Kim, ‘The Rationale Behind Inter-firm Tender Offers: Information or Synergy?’ (1983) 11 Journal of Financial Economics 183.

8 Sara B. Moeller, Frederik P. Schlingemann, and René M. Stulz, ‘Do Shareholders of Acquiring Firms Gain from Acquisitions?’ (2003) National Bureau of Economic Research Working Paper Series, 9523 www.nber.org/papers/w9523 accessed 8 May 2018; Mahendra Raj and Michael Forsyth, ‘Hubris among UK Bidders and Losses to Shareholders’ (2003) 8 International Journal of Business 1, 8–15; Elazar Berkovitch and M. P. Narayanan, ‘Motives for Takeovers: An Empirical Investigation’ (1993) 28 Journal of Finance and Quantitative Analysis 347, 351; Robert F. Bruner, ‘Does M & A Pay? A Survey of Evidence for the Decision Maker’ (2002) Journal of Applied Finance 48, 64–65; Michael Firth, ‘Corporate Takeovers, Stockholder Returns and Executive Rewards’ (1991) 12 Managerial and Decision Economics 421, 425–427.

9 Myeong-Gu Seo and N. Sharon Hill, ‘Understanding the Human Side of Merger and Acquisition: An Integrative Framework’ (2005) 41 The Journal of Applied Behavioral Science 422.

Several studies have examined the role of acquisitions as it affects the interests of shareholders of target¹⁰ and acquiring¹¹ companies. Others have examined the extent to which the interests of other stakeholders, such as employees, can be protected.¹² These studies address the challenges of takeovers from the separate viewpoints of shareholder value and stakeholder value. These approaches have largely been influenced by the dominant argument in the corporate law literature, that is, whether the corporation, as a going concern, should be run for the interests of shareholders or stakeholders. The restricted scope of these theories has failed to provide a comprehensive approach to the challenges of corporate acquisitions.

10 James F. Cotter, Anil Shivdasani, and Marc Zenner, ‘Do Independent Directors Enhance Target Shareholder Wealth during Tender Offers?’ (1997) 43 Journal of Financial Economics 195, 196; Blanaid Clarke, ‘The Takeover Directive: Is a Little Regulation Better Than No Regulation?’ (2009) 15 European Law Journal 174, 188; Peter Holl and Dimitis Kyriazis, ‘The Determinants of Outcome in UK Takeover Bids’ (1996) International Journal of Economics and Business 165; Darren Henry, ‘Directors’ Recommendations in Takeovers: An Agency and Governance Analysis’ (2005) 32 Journal of Business Finance & Accounting 129; Noel O’Sullivan and Pauline Wong, ‘Board Composition, Ownership Structure and Hostile Takeovers: Some UK Evidence’ (1999) 29 Accounting and Business Research 139; Gregg A. Jarrell, James A. Brickley, and Jeffry M. Netter, ‘The Market for Corporate Control: The Empirical Evidence Since 1980’ (1988) 2 The Journal of Economic Perspectives 49, 58.

11 Paul Mason et al., ‘Does Shareholder Voting Matter? Evidence from the Takeover Market’ (2018) 53 Wake Forest Law Review 157; Donald C. Langevoort, ‘The Behavioural Economics of Mergers and Acquisitions’ (2011) 12 Tennessee Journal of Business Law 65; Afra Afsharipour, ‘Reevaluating Shareholder Voting Rights in M&A Transactions’ (2017) 70 Oklahoma Law Review 127; Marco Becht, Andrea Polo, and Stefano Rossi, ‘Does Mandatory Shareholder Voting Prevent Bad Acquisition?’ (2016) 29 Review of Financial Studies 3035.

12 See Chapter 4, section 4.4, Chapter 5, section 5.5.

This book adopts a different approach. It provides important analysis on the complementary protection of shareholder value and stakeholder interests in the administration of corporate acquisitions. The book addresses the challenges of inefficient outcomes in corporate acquisitions. It identifies the extent to which the interests of shareholders and stakeholders such as employees can be complementarily protected.

The effects of acquisitions and the interests that are affected are similar across jurisdictions. For example, shareholder value, employee interests and corporate value are similarly affected in different jurisdictions. Hence, further to the objective of this book, the regulatory control over the role of corporate managements in acquisitions in the United Kingdom and the United States–Delaware General Corporations Law–are examined. Companies in the United States and the United Kingdom concluded the most expensive acquisition deals globally.¹³ Thus, it is justifiable to ascertain the extent to which managements can influence acquisition activities in these jurisdictions, relative to the role of the regulatory framework for acquisitions.

13 See the analyses in Chapter 8, section 8.2.

The remainder of the chapter is structured as follows. First, the persistent challenges of acquisitions are identified. Next, the theoretical perspectives of corporate acquisitions are briefly illustrated. Then, the aim and scope of the book are outlined. Finally, an outline of the chapters with the relevant scope is presented.

1.2 The persistent challenges of corporate acquisition

The key participants in a corporate entity are: shareholders, creditors, employees, directors and managers.¹⁴ Viewed from the lens of the contractual theory, the nature of a corporation as a going concern constitutes a nexus of contracts¹⁵ amongst these corporate actors. These contracts are embodied in the relationships which exist among the key participants. Among these participants, the interests of managements and creditors may be protected without specific reference to takeover regulations. Company directors and managers are directly involved in the negotiation process during takeovers. They have the capacity to negotiate their compensation packages. Also, creditors can be protected by secured credit. The combination of the assets of firms through takeovers can enhance the security of the credit facilities that unsecured creditors provide to companies. Shareholders and employees may not have the capacity to protect their interests, except by reference to specific regulations. For example, shareholders of target companies are mainly protected by the regulatory framework of takeovers in the United Kingdom and in European Union countries. Corporate managements are required not to act in the manner...