The Law and Economics of Takeovers: An Acquirer's Perspective

339 Pages·2008·1.7 MB·English

by  Athanasios Kouloridas

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THE LAW AND ECONOMICS OF TAKEOVERS
This book studies takeovers from the acquirer’s perspective. More pre-
cisely, the book focuses on the legal and regulatory treatment of the risks
faced by the acquiring company shareholders in takeovers. The identified
risks are categorised into two main groups: first, risks generated by
managerial choices and secondly, regulatory or external risks. The analy-
sis considers the legal context but also draws on the economic literature,
seeking to map the area under consideration and to suggest measures to
improve the present position from the perspectives of both law and
economics.
More specifically, the book examines various methods of protecting the
acquiring shareholders against value-decreasing or self-interested acqui-
sitions, such as the class transaction rules, fiduciary duties, the acquiring
directors’ responsibilities under the Takeover Code, the court scheme pro-
cedure, the role of institutional shareholders and reward strategies, and
methods of making the acquiring directors more exposed to the discipline
of the market. The effects of the choice of the medium of payment are also
covered.
In addition, it covers the Takeover Code’s position with regard to auc-
tion situations and seeks to identify ways of addressing the acquiring
shareholders’ interests in auctions, including auctions where buyout
teams or White Knights are involved. Moreover, it identifies situations
where deviations from horizontal equality rules, which increase takeover
premia, are or should be recognised. To that end the Code’s rules on
mandatory bids, the determination of the price and the form of payment
offered, partial offers and squeeze outs are considered.
The analysis covers both hostile and friendly situations. In relation to
hostile takeovers, the legal and regulatory framework of toehold strategies
is analysed (the Takeover Code’s requirements, the Disclosure Rules and
Companies Act disclosure requirements, etc). Market Abuse issues in
relation to stake-building are also highlighted. In relation to friendly
takeovers the operation of lock-up agreements and break fees (the
Takeover Code’s requirements, fiduciary law, financial assistance and
other contract law concerns), are also explored. Finally, the Takeover
Panel’s position on adverse changes, pre-conditions and conditions which
the offer can be subject to, and the bidder’s exposure to Material Adverse
Change risk are assessed.
The book discusses developments in the area under consideration
including the Takeover Code regime after the implementation of the
Takeovers Directive and the Companies Act 2006.
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CONTEMPORARY STUDIES IN CORPORATE LAW
Corporate law scholarship has a relatively recent history
despite the fact that corporations have existed and been subject
to legal regulation for three centuries. The modern flourishing
of corporate law scholarship has been matched by some broad-
ening of the field of study to embrace insolvency, corporate
finance, corporate governance and regulation of the financial
markets. At the same time the intersection between other
branches of law such as, for example, labour, contract, criminal
law, competition and intellectual property law, and the intro-
duction of new inter-disciplinary methodologies, affords new
possibilities for studying the corporation. This series seeks to
foster intellectually diverse approaches to thinking about the
law and its role, scope and effectiveness in the context of cor-
porate activity. In so doing, the series aims to publish works of
high intellectual content and theoretical rigour.
Titles in this series
Working Within Two Kinds of Capitalism: Corporate Governance and
Employee Stakeholding: US and EC Perspectives
Irene Lynch Fannon
Contracting with Companies
Andrew Griffiths
The Jurisprudence of the Takeover Panel
Tunde Ogowewo
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The Law and Economics
of Takeovers
An Acquirer’s Perspective
Athanasios Kouloridas
OXFORD AND PORTLAND, OREGON
2008
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Published in North America (US and Canada) by
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© Athanasios Kouloridas 2008
Athanasios Kouloridas has asserted his right under the Copyright, Designs and
Patents Act 1988, to be identified as the author of this work.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
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Foreword
One of the central curiosities of takeover rules across jurisdictions is that
they say virtually nothing about the position of the shareholders of the
bidding company or companies. Their focus is on the shareholders of the
target company, in relation to both the bidder(s) and the management of
the target company. It is well recognised that target company sharehold-
ers may incur agency costs in relation to their own company’s manage-
ment and face coordination problems when dealing with the bidder which
wishes to acquire their shares – though the answers to the questions of
what should be done about these issues are controversial. The lack of
attention paid to the agency and other problems of the bidding company’s
shareholders is surprising, for, as is well known, the empirical data sug-
gests that target company shareholders do well out of takeover bids,
whereas the successful bidder (and its shareholders) are much less likely
to be financially better off in consequence.
The traditional answer to the point just made is that the agency and
other problems of the bidding company’s shareholders can be dealt with
through the general mechanisms of corporate governance applicable to all
major decisions taken by company managements, whether involving a
takeover bid or not. One of the several merits of this book is that it subjects
that proposition to a wide-ranging appraisal: what are these general mech-
anisms and how precisely and how well do they function in the case of a
decision by a company’s management to launch a takeover bid? A second
great merit of the book is that it takes the point that it is wholly unrealistic
to treat the regulation of the target shareholders’ agency and coordination
problems as without impact on the issues facing the bidding company’s
shareholders. Protecting the interests of the target company shareholders
may have an adverse impact on the interests of the bidding company’s
shareholders (for example, by reducing the bidder’s freedom of manoeu-
vre) or, conceivably but less likely, may promote those interests (for exam-
ple, by discouraging potential bidders from launching an offer). A second
main area for study in this book is thus the impact of takeover rules, osten-
sibly aimed at target shareholder protection, on the interests of the bid-
der’s shareholders, an approach which sheds new light on the operation of
those rules.
Third, but certainly not the least among the book’s merits, is its concep-
tual and methodological approach to the above topics. Firmly grounded in
the ‘law and economics’ school of legal analysis, the book uses the insights
from that approach to generate novel perspectives on the legal rules in this
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area – but without losing the lawyer’s respect for the legal rules as impor-
tant things in themselves. The bringing together of the legal literature on
control shifts with the writing from the social sciences more broadly is
something which the book achieves with sophistication and thorough-
ness. I am sure that this work of Athanasios Kouloridas will prove a mile-
stone in the takeover literature and I commend it to readers with great
enthusiasm.
Paul L Davies
Cassel Professor of Commercial Law at
the London School of Economics and Political Science.
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Acknowledgements
I am very grateful to my supervisor, Professor P L Davies, for his invalu-
able direction and near-inexhaustible patience throughout my research
and writing at London School of Economics. I also owe a particular debt
to the Hellenic Observatory of the European Institute of London School of
Economics and Political Science without which it would not have been
possible to have access to up-to-date information in order to transform my
dissertation to this book. I am also most grateful to my viva examiners
Professors Eva Lomnicka and Eilis Ferran for their invaluable comments
and their appreciation of my work in their report that permitted this
thesis to be published as a book.
None of the above is, of course, responsible for the defects in this work.
I am thankful to my publisher for his hard work in publishing this book.
I also owe an enormous debt to my fiancée Despina for her tolerance,
support, encouragement and active assistance in completing this work
and to my parents, Stefanos and Despina Kouloridas. I can only express
my gratitude to them by the token of dedicating this first book to them.
Athanasios Kouloridas
London, 2007
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Table of Contents
Foreword vii
Table of Figures and Tables xv
Table of Cases xvii
Table of Statutes and Statutory Instruments xxxiii
Table of Rules of the Takeover Code xxix
Table of FSA Rules xxxiii
Chapter 1: Introduction 1
I The paradox of corporate acquisitions and the need to shift
attention to acquirers 1
II Scope and structure of the thesis 5
Chapter 2: The acquiring shareholders’ internal risks 9
I Introduction 9
II Agency risk 10
A Incentives for return maximisation 11
(i) Empire building 11
(ii) Free cash flows 12
B Incentives for risk reduction 13
(i) Diversification 13
(ii) Takeover deterrence 16
III Financial Risk 16
A Debt-financed acquisitions and financial leverage 17
B Equity financed acquisitions—dilution risk and market
volatility 18
IV Business risk 21
A Synergy risk 21
B Overpayment risk 22
V Conclusion 24
Chapter 3: Market control 27
I Introduction 27
II The functions of the Capital Market 27
A Exit rights 27