Paola Lucantoni Financial Market Law and Regulation

Definitions ‘takeover bid’ or ‘bid’ shall mean a public offer (other than by the offeree company itself) made to the holders of the secu-rities of a company to acquire all or some of those securities, whether mandatory or voluntary, which follows or has as its objective the acquisition of control of the offeree company in accordance with national law

Hostile control is supposed to change hands without the consent of the existing directors, managers, or controlling shareholders defensive measures by the existing controlling group i.e. selling the crown jewels”, which consists of selling (possibly to a related party) some important assets of the corporation may affect the value of the target corporation, especially in the medium-term On the other hand, if the takeover bid succeeds, as a result the shareholders may realize, through the changing of control, a better governance ot their investment or friendly control is supposed to change hands with the consent of the existing directors, managers, or controlling shareholders directors, managers and controlling shareholders might accept a lower-than- optimal price per share, or the transaction can occur outside the market, through a private exchange of a block holding participation

‘offeree company’ shall mean a company, the securities of which are the subject of a bid; ‘offeror’ shall mean any natural or legal person governed by public or private law making a bid; ‘persons acting in concert’ shall mean natural or legal persons who cooperate with the offeror or the offeree company on the basis of an agreement, either express or tacit, either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid;

‘securities’ shall mean transferable securities carrying voting rights in a company; ‘parties to the bid’ shall mean the offeror, the members of the offeror’s board if the offeror is a company, the offeree company, holders of securities of the offeree company and the members of the board of the offeree company, and persons acting in concert with such parties; ‘multiple-vote securities’ shall mean securities included in a distinct and separate class and carrying more than one vote each.

Why do we need to regulate takeovers? Market for corporate control Managers’ market

Value-maximizing explanation: inefficient managing of the corporation drop in the market price of the shares market price might raise again once the corporation will ne properly managed In the long run, the value of the bidding corporation is positively affected by the announcement of a takeover, even if less significantly that the one of the target corporation in the short run, shareholders’ target company’s wealth increase minority shareholders of a target corporation benefit from a successful takeover when the battle for control is fought “on the market”

Non-value-maximizing explanation: Takeovers are manifestations of the desire of managers, directors or controlling shareholders to extract private benefits at the expenses of investors and other stakeholders.

Financial approach Shareholders are investors Changes of control is a crucial change in the investment Takeovers are a way out for investors at an adequate price

Prisoner's dilemma the bidder offers an inadequate price for the shares of the target corporation shareholders don’t know whether to accept the proposed conditions becuase If the accept they get an inadequate price they contribute to the takeover’s success If they don’t accept and the takeover succeeds, and it’s a non-value-maximizing takeover shareholders’ price after the takeover will decrease (could result lower than the inadequate price offered during the takeover bid)

Aim of the regulation in every takeover a conflict of interest arises among who will be prejudiced by the success of the acquisition and who will benefit from it. Takeover regulation addresses this conflict, defining a difficult balance between favoring takeovers and allowing the implementation of defensive measures when appropriate Takeover wealth redistributions will be Kaldor-Hicks efficient as long as the gains exceed the losses

Aim of the european regulation cross-border transactions, takeover regulation become more central but less clear because the different stakeholders are not all located in one jurisdiction In this context, it is possible that most of the subjects that can be prejudiced by a takeove r (i.e., the controlling shareholder and employees) are located in one state, and the subjects who can be advantaged from the success of the takeover are foreigners (i.e., the bidder, potentially some minority shareholders if the corporation is listed on an international financial market). In this context, the legislature of the state of the target corporation have an incentive to allow defensive measures, regardless of whether they maximize the value of the firm, in order to favor its national constituencies or, more precisely, some of them (usually the ones that are politically more influential).

Path dependence the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant corporate control is characterized In Europe by the presence of controlling shareholders owning either de facto or absolute control of the corporation In USA by the presence of dispersed ownership of the corporations takeover regulation is not neutral

Defensive Measures vast array of techniques that a target corporation or its directors or controlling shareholder can adopt to repel a hostile takeover issuing new shares issuing shares with increased voting rights triggered by a hostile acquisition purchasing a corporation’s own shares launching a counter-attack on the bidding corporation (the so-called “pac-man defense”) soliciting a friendly offer from a “white -knight” allied to the existing controlling group selling, possibly to a complacent counterpart, strategic assets of the target – such as a patent or a trade-mark – that the bidder whish to obtain through the acquisition offering benefits to the shareholders that will not sell their shares to the bidder; amending the corporation’s bylaws introducing staggered board or other poisonpills providing“golden -parachutes”–i.e.,very high liquidation bonus for directors and managers in case of takeover

legal “barriers” the degree of concentration of ownership of listed corporations the efficiency and liquidity of financial markets the access to the credit market in order to finance hostile acquisitions

Takeover Regulation in the United States Takeovers are regulated both at the state and federal level Federal regulation of tender offers introduced with the Williams Act of 1968 in response to a wave of tender offers in the 1960s and it deals primarily with information in a takeover context.

section 13(d) of the Williams Act, any substantial acquisitions of shares that might lead to a takeover (so-called “street-sweep”) trigger specific disclosure duties when certain applicable thresholds are satisfied, which are deemed to signal an attempt to obtain control over the issuer

section 14(d) of the Williams Act anyone intending to launch a “tender offer” shall publicly disclose this intent and inform inform investors of the terms and conditions of the offer so that they can make informed decisions about whether or not to accept it.

the secondary regulation enacted by the SEC, as well as other Federal regulations, center principally on disclosure, but they also regulate several substantive aspects concerning the actions of the bidder and the target during a takeover.

state legislatures Fiduciary Duties Anti-Takeover Statutes

Fiduciary Duties fiduciary duties imposed on corporate officers and directors by state law ex post liability Any adoption of defensive measures must be compatible with those duties, as interpreted in the relevant scenario of a takeover directors’ duties in the context of takeovers should attempt to strike a balance between, on the one hand, improper use of defenses to preserve directors’ own positions and; proper uses on the other hand, such as the use of defenses to avoid a takeover predicated on an under- valued price balance between essential freedom of action and its possible abuses

Cases Unocal v. Mesa the Delaware Court of Chancery held that that defensive measures can only be taken when directors have reasonable grounds to believe that the takeover would result in a prejudice for the corporation or its shareholders, and that the defenses shall be “proportionate” to the threat in order not to dilapidate the wealth of the corporation. This case was particularly significant because it represented a recognition that the inherently self-interested nature of defensive measures required a difference balance for fiduciary duties are evaluated in other contexts.

Revlon v. MacAndrews & Forbes Delaware courts once directors understand that the takeover will be successful, their duty is simply to obtain the best price for the shareholders, which may be described as a sort of duty to “negotiate the surrender.”

Anti-Takeover Statutes Statutes specifically designed to help resident or incorporated corporations in fending off hostile attacks mechanisms they employ to protect resident corporations and the nature of challenges to them by foreign bidders whose efforts to acquire an out-of-state corporation

The first generation disclosure requirements and a “merit” evaluation of the fairness of the bid, usually by a state authority, as a condition to acquire the corporation A second generation based on corporate governance principles: i.e. an Ohio statute providing that acquisition of control over an Ohio corporation was possible only upon approval of the shareholders’ meeting A third generation of anti-takeover statutes, enacted from the end of the 1980s, finally, provided for statutory limitations to certain post-bid transactions, often necessary from a financial standpoint in order to complete an acquisition. The most common solution of these so-called “business-combination statutes” is to prohibit a post-acquisition merger in case of hostile takeover for a certain number of years after completion of the tender offer, a limitation that might prevent leveraged buy-outs.