Student: D.J.F.A. Timmers ANR: 724053 U-number: 1251925 Master: International Business Law Supervisor: Patricia Gil-Lemstra Place: Tilburg University Date: July 3, 2018
The Takeover Landscape in the United Kingdom,
the Netherlands and the United States From Law on Paper to Law in Practice
Tilburg Law School
1 Acknowledgement
Despite the countless hours you work on a thesis on your own, it is never a journey you embark on alone. Without the invaluable support of several people I would not be able to submit this thesis today. Therefore, I want to use this opportunity to express my gratitude to them. First of all, I would like to thank the person who has always been there for me during my studies and who gave me the chance to write a thesis in the field of International Business Law: Miranda Kappé-Mes. Furthermore, I am very grateful for the time Ivona Skultétyová was willing to invest in me. Our meetings have not only resulted in a truly interesting topic, but also put me on the right track for developing my research. In particular, however, I want to proclaim my sincere gratitude to my supervisor Patricia Gil-Lemstra. Her constructive comments on my work, her useful insights into practice, and her continuous encouragement have brought me to the point where I am now. I cannot emphasise enough that without her efforts to convince me of my own capabilities, I would most likely not have finished this thesis. Last but not least, I would like to thank my parents for their never-ending patience, support, and willingness to lend a listening ear when needed.
Daniëlle Timmers
Kerkdriel, 28 June 2018
2 Abstract
In recent years, a significant increase in takeover activity has become visible. Not all these mergers and acquisitions are, however, mutually agreed on and friendly negotiated between companies. Especially in the European Union, more and more hostile takeovers have started to occur. Most often they involve acquirers from third countries that prey on well-known and established domestic companies, particularly incorporated in the United Kingdom and the Netherlands. This development has frightened numerous politicians that ‘national champions’ have targets on their backs and they have voiced their concerns about the consequences for the economy. It has prompted a lively debate on takeover regulation, revolving around the question whether or not companies need to be better protected against takeover attempts. This thesis aims to provide a perspective on the matter by evaluating the existing regulation and researching how it impacts target companies current chances of successful resistance in practice. By comparing these findings with the regulatory regime in the United States it also gives a foreign angle on resistance against takeovers. The question that ultimately will be answered is: ‘To what extent, from a regulatory point of view, are targets able to use effective takeover defences against hostile bids in practice in the United Kingdom, the Netherlands, and the United States?’ This thesis indicates that the existing takeover regulation in both the Netherlands and the United States provides target companies with considerable opportunities to effectively resist a hostile bidder. On the contrary, in the United Kingdom targets are severely restricted in their abilities to defend themselves and are, therefore, very open to hostile takeovers.
3 Table of contents
Acknowledgement 2
Abstract 3
Chapter 1: Introduction 6 1.1. Hostile takeovers 6 1.2. Main research question and sub-questions 7 1.3. Methodology 7 1.4. Delineation 8 1.5. Academic relevance 8 1.6. Outline of structure 8
Chapter 2: Takeover defences in context 9 2.1. Mergers and acquisitions 9 2.1.1. Rationale 9 2.1.2. Market for corporate control 10 2.2. Takeover attempts 11 2.2.1. Friendly and hostile bids 11 2.3. Board or shareholder decision-making 12 2.3.1. Director or shareholder primacy 12 2.4. Takeover defences 13 2.4.1. Pre-bid defences 14 2.4.2. Post-bid defences 14
Chapter 3: Existing takeover regulation 16 3.1. European Union 16 3.1.1. Takeover Bids Directive 16 3.1.2. Board neutrality rule 17 3.1.3. Breakthrough rule 18 3.1.4. Optionality and reciprocity 18 3.2. United Kingdom 19 3.2.1. City Code on Takeovers and Mergers 19 3.2.2. Post-bid defences 20 3.2.3. Companies Act 2006 21 3.3. The Netherlands 22 3.3.1. Civil Code 22 3.3.2. Post-bid defences 23 3.4. United States 24 3.4.1. Williams Act and States’ anti-takeover statutes 24 3.4.2. Delaware General Corporation Law 25 3.4.3. Post-bid defences 25 3.5. Comparative analysis 26
4 Chapter 4: Recent takeover attempts 28 4.1. Methodology 28 4.2. United Kingdom: Melrose v. GKN 29 4.3. The Netherlands: PPG v. AkzoNobel 31 4.4. United States: Broadcom v. Qualcomm 32 4.5. Comparative analysis 35 4.6. Evaluation 35
Chapter 5: Conclusion 37 5.1. Key findings 37 5.2. Further research 38
Bibliography 39
5 Chapter 1: Introduction
1.1. Hostile takeovers In recent years, the corporate world is experiencing an upward trend in takeover activity. In 2017, it was reported that globally the value of mergers and acquisitions (‘M&A’) surpassed the level of US$3 trillion once again.1 The United States (‘US’) is the most active jurisdiction, but takeover activity in the European Union (‘EU’) also surged with 16 per cent, representing a value of US$856.3 billion.2 Due to a rise in transactions in the United Kingdom (‘UK’), Germany, and the Netherlands, the value of M&A in the EU has more than doubled compared to years ago.3 As a result of the flourishing takeover market, the number of hostile takeover attempts has increased too. Especially in the EU, unsolicited bids by (mostly) foreign acquirers to take over well-established public companies have hit the headlines more frequently since the beginning of 2017. Although 57 per cent of hostile takeover attempts fail according to Dealogic,4 numerous politicians at national and EU level fear that ‘national champions’ have targets on their backs and they worry about the consequences for the public interest and the national economy. This has sparked a lively debate on takeover regulation. It has been argued that in the UK companies’ “doors are wide open” for hostile takeovers to occur.5 Ever since the highly criticised takeover of Cadbury by Kraft, a company from the US, the British government has been called upon time and time again to provide target companies in the UK with more opportunities to defend themselves against hostile bidders.6 The latest shopping spree of foreign acquirers in the EU has also led to unsolicited bids for PostNL, Unilever, and AkzoNobel in the Netherlands.7 This instigated a vivid discussion amongst politicians whether Dutch companies need to be better protected against takeover attempts.8 It even prompted the Dutch government to propose several legislative measures that would equip target companies with additional protection.9 But not only the UK and the Netherlands are concerned about the recent events. Several Member States, among which France, Italy, and Germany, have pressed for legislation at EU level that could block hostile takeovers by foreign acquirers under certain circumstances.10
1 Arash Massoudi, James Fontanella-Khan and Don Weinland, ‘Global M&A exceeds $3tn for fourth straight year’ Financial Times (28 December 2017)
6 Takeover regulation is, however, a highly sensitive topic.11 Therefore, not everyone is pleased with these calls for legislative change. Some opponents claim that discouraging takeover attempts is a company’s “chief executive’s job, not that of legislators”12 and others point out that far-reaching legislative measures could harm “good corporate governance, efficient financial markets, and sustainable value creation”.13 One should also keep in mind that there is only a fine line between protection and protectionism.
1.2. Main research question and sub-questions In light of this on-going political debate and taking into consideration that there are many proponents as well as opponents of legislative change, this thesis will try to provide a perspective on the matter. Therefore, the main research question of this thesis will be: ‘To what extent, from a regulatory point of view, are targets able to use effective takeover defences against hostile bids in practice in the United Kingdom, the Netherlands, and the United States?’ To be able to answer this research question, it is important to clarify first of all what is meant by, inter alia, takeovers, hostile bids, and takeover defences. Furthermore, how are takeover defences currently regulated in the UK, the Netherlands, and the US and what are the main differences between these regulatory approaches? To uncover how effective some defensive measures really are, it must be examined how target companies use them in practice.
1.3. Methodology To be capable to answer these sub-questions and finally the main research question, different types of legal research need to be combined and different methods have to be employed. In the first part of this thesis positive legal research will be the main approach: describing the status quo. Hence, the findings in the first two substantive chapters will result from legal-theoretical, descriptive, and comparative research. In contrast, in the last substantive chapter normative legal research will be carried out: evaluating practice and thereby evaluating the law to ultimately come to a conclusion. The method that I will use is analysis of legislative history, legislation, case law, literature, statistical data, and anecdotal evidence. Because comparative research is an essential part of this thesis and only an accurate analysis will help to develop a meaningful reply to the main research question, time and again the same reference points will be used while comparing the countries’ different regulations and the different takeover attempts. Both primary and secondary sources will be consulted to answer the questions. Among the primary sources are: inter alia, the Takeover Bids Directive, the City Code on Takeovers and Mergers, the Companies Act 2006, the Williams Act, States’ anti-takeover statutes, States’ corporate law, Delaware General Corporation Law, the Dutch Civil Code, and the case law of British, Dutch, and American courts. The secondary sources consist of, inter alia, legal books and articles, statistical data and newspaper articles.
11 Georgina Tsagas, ‘All companies are equal, but some companies are more equal than others’ (University of Bristol Law School Blog, 27 February 2017)
7 1.4. Delineation Due to the limited scope of this thesis, not every aspect of takeovers and takeover defences will be (extensively) discussed. For that reason, only the general features of takeovers will be set out to provide a basic but necessary background for the remainder of the thesis. Moreover, although takeover defences lie at the heart of this research, it is neither feasible nor imperative to provide an exhaustive overview of all existing defensive measures in the differing countries. In addition, although highly topical, I will not discuss the effects of shareholder activism on the use of takeover defences. I will also not examine to what extent defensive measures lead to value creation or destruction for targets and acquirers in practice. One of the elements in the main research question is ‘effectiveness’. It is important to state at the very beginning what is meant by this notion. In light of this thesis, effectiveness refers either to successfully preventing a hostile takeover from completing or bringing a hostile bid to an end.
1.5. Academic relevance There is already a lot written about the regulation of takeovers at EU level. The effects, in theory, of the Takeover Bids Directive (the optionality of the board neutrality rule and the breakthrough rule) have been addressed and criticized extensively in literature. Also the differences between the Anglo- American regulatory approaches (UK v. US) to takeover defences have been the subject of many articles. In contrast to this existing body of knowledge and in light of the recent political debate, I will take a different approach to the topic of takeover defences: from the law on paper to law in practice. Thus, my main aim is to find out how the existing regulation is dealt with in practice. More specifically, how are boards of directors of target companies dealing with regulatory restraints on the use of takeover defences in real-life scenarios? And what can we learn from this? The UK, the Netherlands, and the US all have a different perspective on whose position should prevail when a hostile bid is made: the position of shareholders, stakeholders, or managers. For that reason, all three countries have very different regulations on takeover defences. By comparing the regulations and by studying actual takeover attempts in these countries, I want to uncover what practice ‘tells’ us about the existing regulation. On the basis of these findings, I will come back to the current debate at national and EU level and whether there is a need to better protect companies from hostile takeovers or whether existing protection measures are sufficient.
1.6. Outline of structure The second chapter will commence by providing a general framework to give readers a brief overview and basic understanding of key concepts in the field of takeovers and to place the topic of takeover defences in context. The third chapter will set out the takeover regulations adopted and implemented in the EU, the UK, the Netherlands, and the US. Subsequently, the main differences and similarities in the regulatory approaches of these jurisdictions will be addressed. In chapter four, several recent takeover attempts will be analysed to discover how the regulations influence the target companies’ boards of directors’ conduct when faced with a hostile bid. Lastly, chapter five will conclude by giving the key findings regarding the availability and effectiveness of takeover defences and will set out the implications for future policy- and/or law-making and will indicate where further research is needed.
8 Chapter 2: Takeover defences in context
Before delving into the regulations that shape the takeover landscape in the EU, the United Kingdom, the Netherlands, and the United States, it is useful to explore this very landscape first. For that reason, this chapter will provide some insight into the broader context of takeovers and the situations in which companies might resort to the use of defensive measures. It will also give some preliminary indications why exactly takeover regulation is such a sensitive topic. Furthermore, several key concepts and terms, which are frequently mentioned throughout this thesis, will be explained.
2.1. Mergers and acquisitions There are various ways for companies to increase in size, to gain market share and to achieve economies of scale. The two primary strategies to realize such growth are: organically, from within the company itself, for instance by hiring extra sales-people, or inorganically, by procuring another company.14 Perhaps the two most well known methods to effectuate inorganic growth are mergers and acquisitions, commonly abbreviated as ‘M&A’. Although the terms ‘merger’ and ‘acquisition’ are often used as two sides of the same coin, they are in fact distinct types of transactions. In a merger two or more companies unite, generally by means of exchanging shares, and become one bigger company.15 In contrast, acquisitions refer to the practice of one company (‘the buyer’) purchasing assets or shares from another company (‘the seller’).16 Notwithstanding the fact that mergers and acquisitions entail different courses of action, they do have the same end result: a transfer of control over either a company’s assets (all or part of them) or over the entire company.17 In other words, a shift of control is the common denominator of these transactions. In this thesis, the term ‘takeover’ will be used for both mergers and acquisitions, involving companies whose shares are traded on a national stock exchange (known as ‘listed’ or ‘public’ companies), commenced with the intent of acquiring decisive control.
2.1.1. Rationale Takeovers are conducted for a variety of reasons. The decision to engage in a merger or acquisition is often motivated by eagerness to grow, as mentioned above. Supplementary incentives can be: inter alia, the need to enlarge or vary the range of products and services currently offered, the wish to expand business activities to other geographic markets, the possibility to achieve horizontal and/or vertical operational synergies, the desire to lower the number of competitors, or just for tax benefits.18 All in all, they are a great opportunity to reduce costs, foster revenues and ultimately to generate more profit.19 On the basis of these motivations, one can say that value creation20 is the ultimate driving force for takeovers. Therefore, the public assumption is often that they are beneficial, not only for
14 Andrew J. Sherman, Mergers & Acquisitions: From A To Z (3rd edn, Amacom 2010) 1. 15 ibid 3. 16 ibid. 17 Kershaw (n 5) 31. 18 Sherman (n 14) 10-12. 19 ibid. 20 Kershaw (n 5) 3.
9 the companies involved but also for their shareholders and for economies as a whole.21 It is important to emphasise, however, that this will not always be the case. As pointed out by Kershaw, some takeovers destroy value rather than creating it.22 If a buyer enters into a transaction but did not pay enough attention to post-acquisition integration and the implications, not value creation but value destruction might characterize the aftermath of this merger or acquisition. Value destruction is even more likely when empire building, the desire to run a larger and higher-profile company,23 is the acquirer’s sole rationale for pursuing a transaction. Because takeovers can either be ‘good’ or ‘bad’, seen in light of their potential to create value and to destroy value, and that they are not always done for the correct reasons, are first indicators of the sensitive nature of this topic.
2.1.2. Market for corporate control The market place in which companies are bought and sold is known as the market for corporate control.24 As Kershaw explains, this market place “enables the efficient combining of assets which are worth more together than they are worth apart”.25 However, the market for corporate control is considered to be more than just an arena for transactions. Several authors characterise it also as a mechanism of external corporate governance.26 While contemplating acquiring a particular company, buyers not only review whether it would be a rational allocation of resources,27 but also whether there is room for improvement in the internal governance of the target. If a company is inadequately managed, it will fail to make the most of its resources and capabilities, which will be reflected in a lower share price.28 The buyer will make the necessary changes to improve the company’s performance and thereby increase shareholder value.29 In this light, Sudarsanam describes it as the market place “where the right to manage corporate assets is traded between competing management teams”.30 Already in 1965, Henry Manne introduced the concept of the market for corporate control and implicitly stated its disciplinary potential: “The lower the stock price, relative to what it could be with more efficient management, the more attractive the takeover becomes to those who believe that they can manage the company more efficiently. And the potential return from the successful takeover and revitalization of a poorly run company can be enormous.”31 To put it simply, the market for corporate control keeps management on its toes. The lurking threat of a takeover functions as a disciplinary mechanism: it incentivizes managers to maximize their efforts to keep the share price high and deters them from using corporate power for their own personal gain to the detriment of
21 Commission, ‘Report on the implementation of the Directive on Takeover Bids’ (Commission Staff Working Document) SEC (2007) 268, 3. 22 Kershaw (n 5) 4. 23 ibid 5. 24 ibid 1. 25 ibid 3. 26 Klaus J. Hopt, ‘Takeover Defenses in Europe: A Comparative, Theoretical and Policy Analysis’ (2014) 20 Columbia Journal of European Law 249, 266. 27 ibid. 28 Sudi Sudarsanam, Creating Value from Mergers and Acquisitions: The Challenges (2nd edn, Pearson Education Limited 2010) 75. 29 ibid. 30 ibid. 31 Henry Manne, ‘Mergers and the Market for Corporate Control’ (1965) 73 Journal of Political Economy 110, 113.
10 shareholder value.32 Thus, the theory behind the market for corporate control is that it ensures ex ante, before even an actual takeover attempt is made, that management acts in the company’s best interests.33
2.2. Takeover attempts When a company makes the decision to strive for inorganic growth, one of the first steps to set this strategy in motion is to search for potential takeover targets.34 After having identified an ideal target, the next step is to determine the best way forward: a bid strategy needs to be developed.35 This bid strategy can be seen as a “game plan” and the game itself has to be played according to certain rules.36 These rules will be dictated by the legal framework and the regulatory regime governing the conduct of bids applicable in the target company’s country of incorporation.37 An important consideration in choosing the bid strategy that will be employed is anticipating the likely response of the target to the bid.38 Because acquiring decisive control is the main objective of every takeover attempt, it is even more crucial to choose the optimal strategy when the target has not (yet) manifested itself as being for sale,39 since its bid will be an unsolicited one. Other pivotal factors identified by Sudarsanam, which will affect the choice of the strategy are: inter alia, how badly the buyer40 needs or wants the target, the relative strengths and weaknesses of the parties involved, and the complexity of the eventual acquisition.41
2.2.1. Friendly and hostile bids There are two general bid strategies a company can choose between: its bid can either be of a friendly or a hostile nature.42 This distinction is premised on the fact whether the target’s board of directors and management welcome the bid or not and whether they support the bid or not.43 Both approaches have their own benefits and drawbacks. If the company wants to negotiate a friendly transaction, it will first approach the target’s board with an offer in order to try to win its support for it.44 If the board is indeed welcoming to the offer, it will recommend the target’s shareholders to accept the bid.45 On the contrary, if the bidder approaches the target’s shareholders directly without prior consultation with or support of the board, it is characterised as a hostile bid.46 As a consequence, the incumbent directors will almost always severely object to the takeover attempt. Because there is no favourable recommendation on which the bidder can rely, it has to use other tactics to persuade the target’s shareholders to sell
32 Kershaw (n 5) 15-16. 33 ibid 16. 34 Sherman (n 14) 41. 35 Sudarsanam (n 28) 627. 36 ibid. 37 ibid. 38 ibid. 39 Sherman (n 14) 44. 40 The terms ‘buyer’, ‘acquirer’, and ‘bidder’ or any form thereof will be used interchangeably throughout this thesis. 41 Sudarsanam (n 28) 637. 42 ibid 641. 43 Kershaw (n 5) 39. 44 Sudarsanam (n 28) 641. 45 ibid. Because the primary focus of this thesis is the use of takeover defences in hostile takeover attempts, friendly takeovers as such are outside the scope of the research conducted. 46 Kershaw (n 5) 39.
11 enough of their shares to it to acquire decisive control over the company. Therefore, the offer often comprises a substantial bid premium,47 an amount per share exceeding the market price at which the target’s shares are currently trading. It should be noted, however, that choosing either the friendly or the hostile approach does not necessarily mean that the strategy cannot shift over time. It goes without saying that if a friendly bid is rejected by the target’s board and thus will not be recommended to its shareholders, this does not prevent the bidder in any way to approach the target’s shareholders directly. Likewise, a hostile takeover attempt may still result in a friendly negotiated takeover.48 According to Kershaw, in practice most takeovers of public companies are friendly as opposed to hostile in nature.49
2.3. Board or shareholder decision-making Seen in light of the fundamental difference between friendly and hostile takeover attempts, the involvement or absence of the target’s board in negotiating the transaction, it becomes clear that when a hostile bid is launched, friction might arise between the interests of the directors on the one hand and the interests of the shareholders on the other. As pointed out earlier, a takeover leads to a transfer of control over a company. In many instances this will bring about various changes, not only for the company itself but also for the people that work for it. This is where the potential clash of interests becomes visible: the target’s shareholders will be interested in maximising the return on their investment in that company, but the immediate objective of the incumbent directors might be to prevent losing their jobs and to entrench their positions.50 Due to this potential conflict of interests, there are opposing views on who should have the final say whether or not the takeover attempt will be resisted: the target’s board or its shareholders. The choice made between the two heavily influences the rules governing takeovers. This is another indicator why takeover regulation is such a touchy subject.
2.3.1. Director or shareholder primacy The proper division of authority between a company’s board of directors and its shareholders in general, has taken a prominent place in the corporate governance debate for already many years.51 This is even more so for the appropriate balance of power in the case a company is faced with a hostile bid. The debate has led to different standpoints and diverging answers to the question whether a target’s board should be allowed to prevent its shareholders from responding to a hostile bid.52 Here the topic of takeover defences comes in: if a bidder wants to become a target’s new majority shareholder, it is up to the current shareholders to decide whether they wish to remain with the company or whether they prefer to sell their shares and cash in their investment.53 If the target’s
47 Sudarsanam (n 28) 656. 48 Xiaofan Wang, ‘Takeover Law in the UK, US and China: A Comparative Analysis and Recommendations for Chinese Takeover Law Reform’ (DPhil thesis, University of Salford 2013) 18-19. 49 Kershaw (n 5) 39. 50 Maximilian Rowoldt and Dennis Starke, ‘The role of governments in hostile takeovers – Evidence from regulation, anti-takeover provisions and government interventions’ (2016) 47 International Review of Law and Economics 1, 1
12 board in the meantime would opt to defend against the takeover, without consulting its shareholders and asking for their approval, the shareholders are denied the opportunity to decide what to do with their investment.54 Regarding who should have the ultimate authority to decide on the fate of a hostile bid, proponents of two schools of thought can be identified: ‘director primacy’ and ‘shareholder primacy’.55 Director primacy gives a target’s board discretion to use defensive measures against hostile takeover attempts.56 Because the directors oversee the company’s activities and are well informed about its performance, prospects and market circumstances, the board is deemed to be in the best position to determine whether a bid is beneficial for the company and its shareholders.57 In stark contrast, shareholder primacy is premised on the idea that the target’s shareholders should always have the chance to evaluate the merits of a takeover bid.58 Proponents of this school of thought are of the opinion that maximisation of shareholder value should be the central criterion while making the decision whether or not to resist the bid.59
2.4. Takeover defences Takeover defences can prove to be major roadblocks in hostile takeover attempts and might ensure the target’s independence. As noted above, whether a country adheres to director primacy or shareholder primacy will have a considerable influence on the extent to which a target’s board can avail itself of defensive measures. However, one should keep in mind that the simple permission to use them will not necessarily result in a successfully thwarted takeover. The chance of successful resistance is contingent upon several factors. Sudarsanam mentions the range of defences that a company has at its disposal, the regulatory and shareholder constraints on their utilisation, and the costs associated with their use as some of the most important determinants.60 As is the case with takeovers, takeover defences as well are not inherently ‘good’ or ‘bad’. It is true that resistance, in whatever form, can cause the defeat of a bidder in what would have been a value creating transaction for the target’s shareholders and thus be a way for the underperforming management to entrench themselves. However, if the resistance comes forth from the genuine belief that the offer significantly undervalues the target company, it can also force the bidder to come back with a higher offer and an increased bid premium.61 As a consequence, there is no scholarly consensus on takeover defences.62 Sudarsanam indicates that “being prepared” is the best defence available to target companies.63 Nonetheless, it might be necessary to utilise additional defensive measures when confronted with an actual takeover attempt.64 Accordingly, a distinction can be made between ‘pre- bid’ and ‘post-bid’ defences.65
54 ibid. 55 Wang (n 48) 198-199. 56 ibid 199. 57 ibid. 58 ibid. 59 ibid 198. 60 Sudarsanam (n 28) 669. 61 ibid 670. 62 Jordan M. Barry, ‘Takeover defenses: the lay of the land and disputed sign posts’ in Claire A. Hill and Steven Davidoff Solomon (eds), Research Handbook on Mergers and Acquisitions (Edward Elgar Publishing 2016) 181. 63 Sudarsanam (n 28) 670. 64 ibid. 65 ibid.
13
2.4.1. Pre-bid defences Pre-bid defences can be further subdivided in ‘internal’ and ‘external’ defences.66 In general, an internal defence modifies the company’s structure or its manner of operation.67 Actions taken to affect outsiders’ perception of the company (for instance, spreading information about the company’s financial prospects)68 are characterised as external defences.69 Bearing in mind the market for corporate control and its disciplinary potential (as discussed in paragraph 2.1.2), management should at all times work for a high firm valuation to not fall prey to hostile acquirers.70 If a company is active in several different industries, a divestment will lead to an improvement in strategic focus, which is often positively rewarded by the market. This is one way to get a higher firm valuation.71 Another example of an internal defence is changing the company’s ownership structure to make it more difficult for a hostile bidder to obtain decisive control. This can be done, inter alia, by the adoption of a poison pill or by initiating a share buyback.72 A poison pill can significantly increase the costs of an acquisition and thereby make it less attractive. When a hostile bidder acquires a certain percentage of shares in the company it targets, the poison pill will be triggered. It is a shareholder rights plan that subsequently gives the target’s shareholders (except the bidder) the right to acquire additional shares at a great discount in light of the current market price (also known as the ‘flip-in pill’).73 This will severely dilute the bidder’s prior share acquisition. A share buyback simply reduces the number of outstanding shares that can be acquired.74 Furthermore, a change in the company’s management structure, for instance by instituting a staggered board of directors,75 can materially prolong the timeframe for the hostile bidder to exercise control. A staggered board makes it impossible to replace the incumbent directors all at once, because only a few directors can be ousted each year.76
2.4.2. Post-bid defences Compared to the preventative nature of pre-bid defences, post-bid defensive measures are more tactical,77 they provide specific resistance to an actual takeover attempt. A target’s board can employ them with the goal to: inter alia, convince the current shareholders to not accept the offer but to stand by the incumbent directors, to coerce the hostile bidder to withdraw its bid, or to lobby regulatory authorities to block the proposed takeover.78 When confronted with a hostile bid, the first response of a target’s board is typically to dispute the offer on the table. The board can argue that the bid is too low and therefore undervalues the company and its potential, it might attack the bid logic by showing that operational synergies cannot be achieved, or it can discredit the bidder by using its track record to claim that it is only
66 ibid 671. 67 ibid. 68 ibid 672. 69 ibid 671. 70 ibid 671-672. 71 ibid 672. 72 ibid. 73 ibid 672-673. 74 ibid. 75 ibid 672. 76 ibid 673. 77 ibid 687. 78 ibid 675.
14 interested in a short-term profit and not in the company’s long-term viability.79 Another example of a post-bid defence is to search for a so-called ‘white knight’.80 The target’s board then approaches other companies to see whether others might be interested to engage in a friendly negotiated merger or acquisition. If the bidder is, in fact, only interested in acquiring a specific division of the target, the board can also try to sell this ‘crown jewel’ to another party.81 Without the crown jewel, the bidder might lose its willingness to take over the (rest of the) company and stop its pursuit. Additionally, the target’s board could also make an acquisition of its own in the meantime to increase the company’s size and value,82 which may cause the bidder to abandon its offer. In chapter 5 three recent takeover attempts will be analysed to show how, in practice, boards of target companies have reacted to unsolicited and hostile bids and which post-bid defences they have employed and what their effects were.
It must be emphasised, however, that not all of the defences mentioned in the previous paragraphs are available to targets in every single country. The reason for this is that country-specific obligations imposed on targets’ boards of directors might prohibit certain defensive measures or make them conditional. Specific regulatory constraints imposed at EU level, in the UK, the Netherlands and the US will be addressed in detail in the subsequent chapter.
79 ibid. 80 ibid. 81 ibid. 82 ibid.
15 Chapter 3: Existing takeover regulation
In order to fully comprehend the on-going political debate on takeover regulation in Europe, whether or not domestic public companies need to be better protected against hostile takeovers, it is necessary to know what exactly targets can and cannot do under the existing legislation. Therefore, the aim of this chapter is to provide an overview of the most noteworthy aspects of the legal framework and regulatory regime currently governing the use of takeover defences at EU level and in the United Kingdom, the Netherlands, and the United States.83 As indicated in the previous chapter, when a company is subjected to a hostile bid, a clash of interests can arise between the target’s shareholders and the board of directors. Taking this into consideration, this chapter will in particular examine the extent of the board’s freedom to avail itself of defensive measures.
3.1. European Union Before addressing the status quo in the UK and the Netherlands, it is indispensable to start first with the European Directive that has influenced the domestic regulation of takeovers in the Member States. This Directive, Directive 2004/25/EC on takeover bids84 (‘Takeover Bids Directive’ or ‘Directive’), has a very lengthy history. It is useful to briefly touch upon its drafting process, because it clarifies the ultimate impact this Directive has had and might serve as an indicator of the feasibility of new EU regulation potentially being adopted in this field.
3.1.1. Takeover Bids Directive The Takeover Bids Directive entered into force already many years ago, namely in 2004, but it was long awaited. Already in 1989, so 15 years before the final text was adopted, the European Commission (‘Commission’) proposed for the first time a Directive regulating takeover bids.85 Although the Commission was aware of the fact that takeovers are not always beneficial for some or all of the parties involved,86 the proposal was based on the presumption that in the long term, takeover facilitation is in the best interests of companies, shareholders and the European economy as a whole.87 For that reason, the proposal strived to foster an open European market for corporate control.88 Creating a level playing field between the Member States was deemed necessary for the facilitation of takeover activity in the entire EU. Therefore, harmonisation was needed to remove some of the main obstacles that were caused by national company laws: inter alia, the ability of companies to use takeover defences when faced with a hostile bid.89 However, the initial provisions of the proposed Directive, which were considered key for achieving an open market for corporate control, were heavily objected by several Member States.90
83 It is important to note at the outset that this chapter will focus only on the regulatory restraints regarding the use of takeover defences by boards of directors of target companies. The broader legal framework governing bids and takeovers as such will not be discussed as part of the chapter, due to the limited scope of this thesis. The information provided in this chapter is thus by no means meant to be exhaustive. 84 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids [2004] OJ L142/12 (Takeover Bids Directive). 85 Christophe Clerc and others, ‘A Legal and Economic Assessment of European Takeover Regulation’ (2012) 1,
16 There was no consensus among the Member States about the merits of facilitating takeovers,91 which severely prolonged the negotiation process and the eventual adoption of the Takeover Bids Directive. Finally, after three Commission proposals a compromise was reached in 2003: the so-called ‘Portuguese compromise’, because Portugal provided the solution.92 What the Portuguese compromise exactly entails will be discussed in the following paragraphs by addressing the Directive’s provisions on the usability of takeover defences, which caused the rejection of the Commission’s proposals time and time again.
3.1.2. Board neutrality rule Article 3 of the Takeover Bids Directive contains several general principles, which the Member States had to anchor in their national legislation to ensure the fulfilment of the Directive’s objectives. With regard to hostile takeover bids, the principle in paragraph 1, sub c, of Article 3 is perhaps the most important one. It firmly states that a target company’s board of directors “must act in the interests of the company as a whole” and, more significantly, that it “must not deny the shareholders the opportunity to decide on the merits of the bid”.93 The latter phrase indicates shareholder primacy and implicitly refers to a restraint on a target’s board to use, on its own accord, defensive measures when a takeover attempt has arisen. In Article 9 of the Directive a prohibition is further elaborated. Article 9 is considered to be the “cornerstone” of European takeover regulation.94 It contains the obligations of a target’s board when faced with a takeover bid and is commonly called the board neutrality rule (‘BNR’), but is also known as the non-frustration rule or passivity rule.95 It has been given these ‘nicknames’ due to the clear prohibition of frustrating action laid down in paragraph 2.96 Pursuant to this provision, a target’s board is not allowed to take “any action” that could potentially frustrate a hostile bid, unless it has received prior authorisation by the general meeting of shareholders for doing so.97 From the wording in paragraph 2 it becomes evident that this prohibition applies from the moment a hostile bid is made, thus, it only pertains to the use of post-bid defences (as explained in chapter 2). It must be noted, however, that Article 9 is not an outright prohibition and still leaves room for a target’s board to influence the outcome of a hostile bid. For instance, the board is obliged to publish its opinion regarding the bid that has been made.98 This gives the board the valuable opportunity to make known how itself evaluates the merits of the bid, whether or not it recommends current shareholders to accept or reject it, and if so, why it does not support the bid.99 In addition, Article 9 expressly permits the board to seek alternative bids100 when the hostile bid is already on the table. This means that it has the right to look for a white knight. Plus, however
91 ibid. 92 ibid. 93 Takeover Bids Directive, Art 3(1)(c). 94 Donato Romano and Stefano Casamassima, ‘European Directive 25/2004/EC and the Rules on Defenses in Takeover Bids’ (2016) 7 Bocconi Legal Papers 73, 79
17 unlikely, one should not forget that the board is allowed to take any action if the shareholders have given their explicit consent.101
3.1.3. Breakthrough rule Another fundamental provision of European takeover regulation can be found in Article 11 of the Takeover Bids Directive. This article is characterised as the breakthrough rule (‘BTR’) and aims to neutralise certain pre-bid defences during a takeover attempt. Therefore, it is also sometimes labelled the ‘neutralisation rule’.102 As the name suggests, it intends to break through obstacles that were already in place and which could successfully prevent a takeover from being completed. Yet, also the breakthrough rule is not foolproof: only a few pre-bid defences are mentioned in the Directive,103 thus others remain untouched by it. Paragraph 2 of Article 11 ensures that existing restrictions on the transfer of shares, either laid down in the target’s articles of association or in contractual agreements between the target and its current shareholders or among shareholders themselves, will not apply vis-à-vis the hostile bidder during the period the bid can be accepted.104 Furthermore, restrictions on voting rights, again either incorporated in the target’s articles of association or in the differing contractual agreements mentioned earlier, are not applicable at the general meeting of shareholders where a decision on the board’s authorisation for the use of takeover defences will be taken.105 At this particular general meeting of shareholders, multiple-vote shares will also carry only one vote each.106 If the hostile bidder obtained at least 75 per cent of the voting rights following its bid, Article 11 prescribes that “at the first general meeting of shareholders following the closure of the bid, called by the [bidder] in order to amend the articles of association or to remove or appoint board members” multiple-vote shares also will count for one vote each.107 On the basis of the Directive, when the restrictions and extraordinary rights of shareholders just mentioned are lifted, the holders of these rights must be given “equitable compensation” for any loss suffered by them.108 Although shareholders can thus expect pecuniary compensation for the neutralisation of their rights, Clerc points out that it can still be argued that this breakthrough rule violates the principle of shareholder decision-making: the very principle that is used to justify the board neutrality rule.109
3.1.4. Optionality and reciprocity Due to the differing views of Member States on the desirability of employing takeover defences in the case of an attempted takeover of a domestic company, the manner how they should be regulated in the Takeover Bids Directive proved to be a problematic barrier to reaching consensus for many years.110 As stated above, in the end the Portuguese compromise offered the solution, which can be found in Article 12(1) of the Directive.
101 ibid. 102 Romano (n 94) 81. 103 Takeover Bids Directive, Art 11(2)-(7). 104 ibid Art 11(2). 105 ibid Art 11(3). 106 ibid. 107 Takeover Bids Directive, Art 11(4). 108 ibid Art 11(5). 109 Clerc (n 85) 81. 110 ibid 77.
18 In order to avoid that the adoption of the Directive would be stalled any longer, Article 12 leaves it up to the Member States to decide whether or not they impose the board neutrality rule and/or the breakthrough rule on the companies incorporated in their country.111 In other words, the Portuguese compromise made Articles 9 and 11 optional:112 Member States are free to either opt-in or to opt-out of these provisions. Importantly, however, pursuant to the second paragraph of Article 12, if a Member State decides to make the rules not mandatory, it cannot prevent the general meeting of shareholders of companies incorporated in their country to still apply these rules on a voluntary basis.113 Finally, Article 12 contains one more nuance, which is deemed the reciprocity rule.114 As explained by Clerc, due to an exception laid down in the third paragraph, Member States can authorise a target company, which has voluntarily subjected itself to the board neutrality rule and/or the breakthrough rule, to cease applying them when confronted with a hostile bid from an acquirer that does not adhere to these rules too.115 Thus, the reciprocity rule provides target companies with the opportunity to still use takeover defences in such a situation.
In short, the key provisions of the Takeover Bids Directive regulating defensive measures, the board neutrality rule, breakthrough rule, and reciprocity rule, were introduced to boost takeover activity within the EU. However, the Commission’s goal of creating a level playing field between the Member States and thereby fostering an open European market for corporate control, has become practically unobtainable due to the optional application of these provisions.
3.2. United Kingdom Long before the Commission presented its first proposal for a Directive regulating acquirers’ and targets’ conduct in takeovers, the UK already had a regulatory regime in place, which has stimulated an open and prosperous domestic takeover market since 1968.116 In fact, the British regulation has even been used as a model for drafting the Takeover Bids Directive.117 Consequently, prior to its implementation in national legislation, target companies incorporated in the UK already had to adhere to provisions fairly similar to those found in the Directive.118
3.2.1. City Code on Takeovers and Mergers The most prominent feature of the British takeover regulation is that only the shareholders of a target company are entitled to decide how to proceed with a hostile bid and are thus in charge of the success or failure of a takeover attempt.119 This strong endorsement of shareholder primacy has
111 Takeover Bids Directive, Art 12(1). 112 Clerc (n 85) 1. 113 ibid 77. 114 Romano (n 94) 82. 115 Clerc (n 85) 77; Takeover Bids Directive, Art 12(3). 116 Alexandros Seretakis, ‘Hostile Takeovers and Defensive Mechanisms in the United Kingdom and the United States: A Case against the United States Regime’ (2013) 8.2 Ohio State Entrepreneurial Business Law Journal 245, 248. 117 ibid. 118 Simen H. Stokka, ‘Defence Tactics in Hostile Takeovers – An Analysis of the Rules Imposed on the Pursued Target’ (2013) 3 Southampton Student Law Review 1, 3
19 severely limited the possibilities for a target’s board to thwart a hostile offer that has been made.120 The cornerstone provision regulating the use of post-bid takeover defences can be found in the City Code on Takeovers and Mergers (‘City Code’ or ‘Code’).121 This provision, Rule 21.1 of the Code, resembles to a large extent the board neutrality rule in Article 9(2) of the Directive. However, the Code is much more explicit and informative on what exactly a target’s board cannot do and what its obligations are. It strictly forbids the board to take any action which could hamper the bid on the table without the prior approval of the general meeting of shareholders, and it is barred from denying the current shareholders, in whatever way, the opportunity to decide on the merits of the bid.122 In addition, the target’s board must refrain from taking such action when it “has reason to believe that a bona fide offer might be imminent”.123 Rule 21.1 also explicitly lists five board actions which would undoubtedly violate the prohibition of frustrating action: inter alia, engaging in a share buyback, acquiring assets of a material amount, or entering into contracts that are not in line with the ordinary course of business.124 Yet, this list is not exhaustive.125 If the target’s board is contemplating a specific action but lacks shareholders’ approval for it, and it is not entirely sure whether or not it would contravene Rule 21.1, the Code requires the board to consult the Panel on Takeovers and Mergers (‘Panel’) before going forward with it.126 This Panel is the competent authority in the UK to supervise and regulate takeovers.127 Based on this very brief explanation of the content of the British non-frustration rule, it will come as no surprise that the UK chose to opt-in the board neutrality rule of the Directive, due to the simple fact that Article 9 was modelled on the City Code’s decades-old policy.128 Not only did it opt- in, the UK also made it clear that it does not allow reciprocity,129 the exception that was provided for in Article 12(3) of the Directive.
3.2.2. Post-bid defences Although the strong wording of Rule 21.1 of the City Code might suggest otherwise, there are still several post-bid defences which a target’s board can employ, without shareholder approval, in an attempt to influence the outcome of a hostile bid. As Davies and Worthington indicate, first of all, the board can try to convince its shareholders that their prospects are better assured with the incumbent directors than with the bidder and should thus reject the bid.130 Secondly, it might persuade the competition authorities, either the national competition authority (‘NCA’) in the UK or the European Commission, that the offer must be referred on public interest grounds.131 Thirdly, the board is allowed to seek a white knight to provide its shareholders with an alternative (but likely
120 Stokka (n 118) 2. 121 The Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (The Code) (12th edn, RR Donnelley 2016) (City Code). 122 City Code, Rule 21.1(a). 123 ibid. 124 ibid Rule 21.1(a)(i), (iv), (v). 125 Stokka (n 118) 6. 126 City Code, Rule 21.1(b). 127 Panel (n 121) A1. 128 Paul L. Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (10th edn, Sweet & Maxwell 2016), 940. 129 ibid. 130 ibid. 131 ibid.
20 more board-friendly) offer.132 While persuading shareholders to not sell their shares to the hostile bidder seems to be a fairly straightforward possibility, one must keep in mind that the Code imposes some restraints on what the board can say and do in this regard.133 Due to the fact that targets’ boards in the UK are prohibited from employing some of the more well-known post-bid defensive measures (such as the sale of a crown jewel or making an acquisition of its own in the meantime),134 they will concentrate on: inter alia, issuing a strong defence document containing the board’s objections to the offer, lobbying major shareholders, and they often turn to financial analysts and the media.135 When an old, well-established domestic company is threatened by a hostile takeover by a foreign acquirer or when a takeover is expected to result in significant job losses, engaging the media might prove particularly useful.136 One can regard the defence document as the target’s board ‘formal channel’ of communication and the media as its ‘informal channel’.137 Pursuant to Rule 25 of the Code, the board must within 14 days after the bid has been made,138 present its own opinion on the offer and the advice of an independent adviser must be included in the defence document to guarantee an objective view.139 While a board is often inclined to attack the bid logic or to publicly discredit the bidder’s motives, it is of course not allowed to mislead its shareholders.140
3.2.3. Companies Act 2006 Only post-bid defences fall within the ambit of the City Code, as is discernible from the wording of Rule 21.1(a), thus the regulation of pre-bid defensive measures, which can still affect the success of future hostile takeover attempts, has to be sought somewhere else. Here the Companies Act 2006 (‘Companies Act’ or ‘CA 2006’) becomes relevant. The Companies Act contains a list of fiduciary duties that the board’s directors owe to the company,141 which under certain circumstances might have an impact on pre-bid defences.142 Of particular importance are: the duty to act within powers, laid down in Section 171 of the Companies Act, and the duty to promote the success of the company, provided for in Section 172 of the Companies Act.143 According to Section 171(b) directors are only allowed to “exercise powers for the purposes for which they are conferred” and is commonly called the “proper purposes doctrine”.144 If a company’s board engages in a particular action with the primary purpose of thwarting future takeover attempts, this will be in violation of the duty to act within powers.145 As emphasised by Seretakis, it is important to keep in mind that this doctrine only focuses on “the primary purpose” of the directors’ actions and not on their effect. Thus, if the directors can provide a plausible
132 ibid. 133 Stokka (n 118) 11. 134 These defensive measures have been addressed in paragraph 2.4.2 of chapter 2. 135 Stokka (n 118) 15. 136 ibid. 137 ibid. 138 City Code, Rule 25.1(a). 139 ibid Rule 25.2(a)-(b). 140 Stokka (n 118) 16. 141 Seretakis (n 116) 259; Companies Act, s 170(1). 142 Seretakis (n 116) 259. 143 ibid 260. 144 Companies Act, s 171(b); Seretakis (n 116) 261. 145 Seretakis (n 116) 262.
21 commercial justification for a certain action, this action will be valid even though it might be able to shield the company from hostile bids.146 In addition, Section 172(1) obliges a company’s director to “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to”, inter alia, “the likely consequences of any decision in the long term”.147 As a result, directors have discretion in what they consider, and not what a court might consider, is in the best interests of the company.148 According to Seretakis, the company’s board is thus protected by the business judgment rule.149 To come back to the Takeover Bids Directive, the UK decided to opt-out of the breakthrough rule,150 thus the fiduciary duties contained in the Companies Act 2006 are the only possible restrictions on the board’s pre-bid conduct. Also in this regard the UK chose to opt-out of the reciprocity principle.151
3.3. The Netherlands In stark contrast to the state of affairs in the UK, before the Takeover Bids Directive was implemented in national legislation, there was only minimal takeover regulation in place in the Netherlands.152 Furthermore, the Directive had to be transposed by the Member States no later than 20 May 2006,153 but it took the Netherlands much longer. Almost one and a half year after the deadline had passed, in late October 2007,154 the provisions of the Directive were finally implemented in the Dutch Offer Rules.155 The reason for missing the transposition deadline was the intense debate that had arisen on how the provisions on takeover defences, in particular the breakthrough rule, would be implemented.156
3.3.1. Civil Code Of the now existing body of Dutch takeover regulation (collectively named the ‘Offer Rules’), the Civil Code, and especially Book 2 of it,157 is the most important source of regulation on the usability of takeover defences by target companies incorporated in the Netherlands.158 The board neutrality rule, the breakthrough rule, and the reciprocity rule of the Takeover Bids Directive have all been implemented by the introduction of one single article in Book 2 of the Civil Code, namely Article 359b.159 The Netherlands eventually decided to opt-out of both the board
146 ibid. 147 Companies Act, s 172(1)(a). 148 Seretakis (n 116) 260. 149 ibid. 150 Davies and Worthington (n 128) 944. 151 ibid. 152 Alessio M. Pacces, Rethinking Corporate Governance: The law and economics of control powers (1st edn, Routledge 2012) 396. 153 Takeover Bids Directive, Art 21(1). 154 M.J. van Ginneken, Vijandige overnames: De rol van de vennootschapsleiding in Nederland en de Verenigde Staten (79, Kluwer 2010) 80. 155 Stefano Cacchi Pessani and others, ‘Guide to Public Takeovers in Europe’ (2016) 1, 32
22 neutrality rule and the breakthrough rule,160 but it did chose to opt-in the reciprocity rule.161 As Van Ginneken points out, the key feature of Article 2:359b is that a public company has full discretion to decide, if and to what extent, the company’s articles of association provide for defensive measures.162 That a public company is not subjected to the board neutrality rule and the breakthrough rule, but itself has the right to decide whether or not to voluntarily adhere to those rules, is evident from the wording used in the provisions of Article 2:359b: “The company’s articles of association can determine (…)”.163 Thus, the use of takeover defences by targets’ boards is allowed. If a legal claim arises pursuant to the application of Article 2:359b, the Enterprise Chamber of the Amsterdam Court of Appeal (‘Enterprise Chamber’) is the competent Court to take cognisance thereof.164
3.3.2. Post-bid defences That a public company’s board has the freedom to avail itself of defensive measures when faced with a hostile takeover attempt, does not necessarily mean that the possibilities to employ them are endless. In the Dutch case law, the Court has formulated various standards that the board must comply with and conditions that the takeover defence must meet in order to be considered justified.165 Contrary to the status quo in the UK, where the target’s shareholders and their interests are at the centre stage in each takeover attempt,166 the Netherlands strongly abides by the “stakeholder approach”.167 As a consequence, a target’s board is obliged to consider the interests of all stakeholders (inter alia, employees, suppliers, customers, banks and so forth)168 and not just the shareholders’ interests. Furthermore, it is the task of the board to preserve the continuity of the company’s operations.169 As Buijn and Storm indicate, one way to fulfil this task is to ensure that the company remains independent.170 Here the issue of post-bid takeover defences comes in. Whether or not the use of takeover defences is justified in a particular hostile takeover attempt, will depend on whether the criteria set out in the Dutch Supreme Court’s judgment in the RNA case171 are fulfilled.172 In a nutshell: “under certain circumstances the utilisation of a post-bid defensive measure will be permitted, if the particular measure is necessary to preserve the company’s continuity and to protect the interests of all stakeholders. Hereby, the specific circumstances of the situation need to be taken into account. The Court will examine, inter alia, whether the target’s board evaluation of the necessity of the defence seems reasonable. In addition, only a temporary measure will be accepted: in principle, the Court does not allow a measure which
160 Cacchi Pessani (n 155) 400. 161 Civil Code Book 2, Art 359b(4); Van Ginneken (n 154) 86. 162 Van Ginneken (n 154) 80. 163 Civil Code Book 2, Art 359b(1)-(2). 164 ibid Art 359b(6). 165 Van Ginneken (n 154) 48. 166 Davies and Worthington (n 128) 944. 167 Robbert van het Kaar and Jan Cremers, ‘Chapter 12: Implementation of the Takeover Bids Directive in the Netherlands’ in Jan Cremers and Sigurt Vitols (eds), Takeovers with or without worker voice: workers’ rights under the EU Takeover Bids Directive (ETUI series – Workers’ rights in company law, ETUI 2016) 185. 168 Cacchi Pessani (n 155) 396. 169 F.K. Buijn and P.M. Storm, Ondernemingsrecht BV en NV in de praktijk (ONR 4, Kluwer 2013) 693. 170 ibid. 171 HR 18 April 2003, ECLI:NL:HR:2003:AF2161, NJ 2003/286, m.nt. Maeijer (RNA). 172 Buijn and Storm (n 169) 695.
23 will remain in place for an indefinite period of time. Whether the creation and subsequent enforcement of the defence is justified, will be scrutinised in light of the ‘margins of an adequate and proportional response to the imminent risks of an unwanted takeover’.”173 If all the criteria have been met, the target’s board resistance against a hostile takeover attempt will most likely be upheld by the Court and not be seen as mismanagement by the board,174 provided it is in compliance with the ‘elementary principles of good business judgment’.175 In short, target companies incorporated in the Netherlands have thus considerable room for manoeuvre to resist a hostile takeover attempt.
3.4. United States At first sight, it might seem odd to a reader of this chapter that the next couple of paragraphs will address takeover regulation of a third country, due to the fact that the current political debate in Europe forms the foundation for this thesis. Nevertheless, because the fundamental question in this debate is whether or not public companies must get more power or more possibilities to thwart hostile takeovers, it is useful to look into the regulatory regime of a country which gives targets’ boards of directors almost unfettered power: the United States.176 The US has also been identified as the jurisdiction whereof the number of attempted hostile takeovers of domestic companies accounts for 24 per cent of worldwide hostile activity.177 For these reasons, this particular country’s regulation has been chosen to compare the British and Dutch takeover regulations to.
3.4.1. Williams Act and States’ anti-takeover statutes In 1968, coincidentally the same year in which the City Code was introduced in the UK, the Williams Act178 was enacted in the US to respond to the undesirable way in which hostile takeovers were conducted at that time.179 The Williams Act has a limited scope, however, imposing only disclosure and procedural requirements on acquirers.180 The regulation of the conduct of target companies’ boards has been left to the States, which started to adopt anti-takeover statutes at roughly the same time.181 As their name already might suggest, these statutes provide target companies with opportunities to fruitfully resist a takeover attempt.182 A telling example is the ‘control share acquisition’ statute.183 Even if a hostile bidder obtains a substantial amount of the target’s shares, it will not be able to exercise control by voting those shares, unless the other shareholders allow its shares to be voted.184 In addition to the anti-takeover statutes, the States’ corporate laws permit
173 ibid. 174 Van Ginneken (n 154) 40. 175 Pacces (n 152) 200. 176 Celia Taylor, ‘The European Takeover Directive: a US Comparison’ (2016) University of Oslo Research Paper Series No. 2016-14, University of Denver Working Paper No. 16-33 50, 50
24 companies to include in their charter various pre-bid takeover defences.185 A staggered board, as explained in chapter 2, is a typical example of a defensive measure laid down in the company’s charter.186
3.4.2. Delaware General Corporation Law Among scholars, the law of the State of Delaware is regarded as the most prominent source of regulation for public companies in the US,187 due to the extremely high number of companies that decide to incorporate in Delaware.188 Therefore, the remainder of this chapter will focus on Delaware’s common law. Pursuant to Section 141(a) of the Delaware General Corporation Law (‘DGCL’),189 it is the task of the board of directors to govern the management of the company’s business and affairs.190 In performing its task, the company’s board is susceptible to the fiduciary duties of care and loyalty.191 If the shareholders believe that the directors mismanage the company and have thus breached their fiduciary duty, they can file a derivative suit against the board at the Delaware Court of Chancery, with the possibility of appeal at the Delaware Supreme Court.192 In general, however, the board is entitled to the protection of the business judgment rule.193 In the Unocal case, the Delaware Supreme Court defined the business judgment rule as: “(…) a presumption that in making a business decision the directors of the corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. A hallmark of the business judgment rule is that a court will not substitute its judgment for that of the board if the latter’s decision can be attributed to any rational business purpose.”194 As Taylor points out, the business judgment rule largely concentrates on the boards’ process of reaching a particular business decision.195 If the directors exercised due care in their decision-making process, they will not be held liable for a breach of the fiduciary duty of care, regardless what the impact has been on the company and its shareholders.196
3.4.3. Post-bid defences As already indicated several times, in the situation of a hostile takeover attempt, a clash between the interests of the target’s shareholders on the one hand and the interests of the target’s board on the other might arise. This can have an impact on the ‘good faith’ of the directors, an important element of the business judgment rule.197 Fully aware of the potential conflict of interests, the Delaware Supreme Court formulated a heightened standard specifically for cases concerning the possible
185 Taylor (n 176) 56. 186 Practical Law (n 184) 9. 187 Albert O. “Chip” Saulsbury, IV, ‘The Availability of Takeover Defenses and Deal Protection Devices for Anglo- American Target Companies’ (2012) 37 Delaware Journal of Corporate Law 115, 118; Taylor (n 176) 60. 188 Saulsbury (n 187) 118. 189 Delaware General Corporation Law Title 8 (DGCL). 190 ibid s 141(a). 191 Taylor (n 176) 61. 192 Saulsbury (n 187) 119. 193 Taylor (n 176) 61. 194 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985) (Unocal). 195 Taylor (n 176) 61. 196 ibid. 197 ibid.
25 violation of the fiduciary duty of care in the context of takeovers.198 In subsequent case law this ‘enhanced’ business judgment rule has been further refined and elaborated on. A comprehensive and in-depth analysis of all the case law is, unfortunately, outside the scope of this thesis. Therefore, this paragraph will briefly address the key aspects of the enhanced business judgment rule to give a general idea when the Delaware Supreme Court thinks it is justified for a target’s board to use takeover defences when faced with a hostile bid, without being in breach of its fiduciary duty of care. In the Unocal case, the Delaware Supreme Court stated that the directors have the burden of proof: “they must show that they had reasonable grounds for believing a danger to corporate policy and effectiveness existed”,199 due to the hostile bidder obtaining shares in the company. This requirement will be fulfilled if the board can demonstrate “good faith” and “reasonable investigation”.200 Secondly, if the board can prove that its defensive measure was “reasonable in relation to the threat posed”201 by the hostile bidder, it will enjoy the protection of the business judgment rule. Because Unocal left open what exactly a ‘reasonable’ takeover defence is, the Delaware Supreme Court articulated in the Unitrin case when board actions will fall within the range of reasonableness.202 This will be the case, as long as the defence is not “draconian”:203 it must not be preclusive or coercive.204 Furthermore, if the hostile bidder still has a “mathematical” or “realistic” chance of success after the board has adopted a defence, the board’s action will be permitted under the Unocal/Unitrin standards.205 Due to this malleable reasonableness standard,206 a target’s board in the US has a lot of discretion to adopt takeover defences.
3.5. Comparative analysis Seen in light of all the information above, considerable differences but also some similarities can be identified in the regulatory approaches at EU level and in the UK, the Netherlands, and the US. First of all, both the European Takeover Bids Directive and the British City Code firmly proclaim shareholder primacy regarding the decision to adopt defensive measures to resist a hostile takeover attempt. In contrast, both in the Netherlands and in the US there is no (mandatory) board neutrality rule. Secondly, within the Directive and under the rules in the UK still some post-bid defensive measures are expressly allowed: inter alia, publishing the board’s opinion (and thereby trying to convince the shareholders to reject the hostile bid), and looking for a white knight. In the Netherlands and in the US, target’s boards have considerable more opportunities for effective resistance due to more lenient standards laid down in the case law. Furthermore, the breakthrough rule in the Directive explicitly nullifies the effect of certain pre-bid defences when an actual bid is made. However, in the British, Dutch and American takeover regulation there is no such rule. In the UK, the only potential limit on pre-bid defences is provided by the board’s fiduciary duties to act within powers and to promote the success of the company. On the basis of the Dutch Civil Code, public companies have full discretion to include defensive measures in
198 ibid. 199 Unocal (n 194) 955. 200 ibid. 201 ibid. 202 Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995) (Unitrin). 203 ibid 1388. 204 Taylor (n 176) 63. 205 ibid 64. 206 Saulsbury (n 187) 161.
26 their articles of association. And in the US, the States’ anti-takeover statutes explicitly provide companies with tools to resist hostile takeovers and the States’ corporate laws as well permit the implementation of defensive measures in the companies’ charters. Lastly, compared to the situation in the UK and the US where maximisation of shareholder value is the essential consideration while reviewing a hostile bid, in the Netherlands the approach is more stakeholder-oriented: not just the interests of the shareholders have to be taken into account, but those of all stakeholders of the company.
27 Chapter 4: Recent takeover attempts
The preceding chapters aimed at providing a bird’s eye view of the legal takeover landscape in the EU, the United Kingdom, the Netherlands, and the United States. In order to clarify the background against which the on-going political debate on takeover regulation in Europe takes place, the previous paragraphs sought to examine why exactly takeovers and the use of defensive measures by target companies are such sensitive topics and how these are currently regulated in the abovementioned jurisdictions. By analysing and comparing three recent takeover attempts (i.e. Melrose v. GKN, PPG v. AkzoNobel, and Broadcom v. Qualcomm), this chapter will add to the foregoing insights. The objective is to show how actual takeover attempts in the UK, the Netherlands, and the US have played out and to uncover how boards of directors deal with regulatory restraints on the use of takeover defences in practice. Chapter 3 zeroed in on the law on paper: it reviewed to what extent existing takeover regulation empowers targets to employ defensive measures when faced with a hostile bid and it indicated what kind of takeover defences are possible under the rules. This chapter will supplement these findings by evaluating the law in practice: it will reveal how effective some of the defences are in real-life scenarios and, as a result, it will give an indication whether or not there might be a need to better protect public companies against hostile takeover attempts.
4.1. Methodology The takeover attempts that are discussed in this chapter are not randomly chosen. To get useful insight into practice and for a meaningful contribution to this thesis, enough information about the attempts had to be available. Therefore, I used the website of the Financial Times (the international edition) to search for attempts which were covered as an indicator. The terms I used for the search were ‘hostile takeover’ and ‘takeover defence’, because only unsolicited and hostile attempts are relevant for this thesis. In order to be able to add something to the already existing body of knowledge, I preferred attempts that had taken place as recently as possible. For that reason, I delineated the search on the Financial Times’ website by using the timeframe 1 January 2012 until 1 May 2018. After making a list of all unsolicited and hostile takeover attempts that were covered by a Financial Times article more than once, I made a selection on the basis of several criteria. First of all, I needed attempts whereby the target company was incorporated in either the UK, the Netherlands, or the US. Secondly, the attempt had to be of significance. As a first indicator, I used the number of Financial Times articles that were devoted to that particular attempt. Thereafter, I handpicked the attempts that either led to a public outcry, or in which a domestic court or another authority got involved, or in which the government intervened. Lastly, I chose the attempt that was most recent. This resulted in the following three scenarios: for the UK, I will analyse the takeover of GKN by Melrose, for the Netherlands, I will delve into the takeover attempt by PPG for AkzoNobel, and for the US, I will scrutinise the attempt of Broadcom to take over Qualcomm. It is important to note at the outset, however, that due to the limited span of this chapter not every aspect of the three attempts can be discussed. Because each takeover battle lasted several months, I will only address the most noteworthy means the targets’ boards used to resist the hostile bidder and the most significant events that occurred in the meantime.
28 4.2. United Kingdom: Melrose v. GKN At the beginning of 2018, Melrose Industries PLC (‘Melrose’) made an unsolicited offer for GKN plc (‘GKN’), which marked the beginning of the biggest hostile takeover in the UK in nearly ten years.207 This attempt also proved that not just foreign acquirers can experience severe backlash for targeting a well-established national company, but domestic acquirers as well. Melrose, a British company skilled in buying and then improving underperforming manufacturing companies before selling them on,208 made its first offer for GKN, a British engineering group,209 on 8 January 2018.210 It valued GKN at £7 billion and the offer comprised a 24 per cent bid premium.211 A sharp fall in GKN’s share price, which did not recover much over the course of several months,212 made it an attractive target for Melrose. GKN’s board, however, rejected the offer by firmly stating that it was “entirely opportunistic” and that it “fundamentally undervalued the company and its prospects”.213 In an effort to keep Melrose at bay, the board promptly presented its own plans to improve GKN’s performance: a new chief executive was appointed, a transformation plan (called “Project Boost”) was launched, and the separation of the company’s aerospace and automotive divisions was announced.214 Unimpressed with the board’s rejection and confident of its ability to persuade GKN’s shareholders, Melrose responded with a hostile bid (with a premium of about 32 per cent) soon after.215 In an endeavour to convince its shareholders to reject the bid on the table, the board quickly put forward its evaluation of the offer to show that it was not in their best interests: inter alia, it argued that the bid premium was “fake” and that Melrose had made “inaccurate and misleading” statements about GKN.216 After Melrose’s offer document became public at the beginning of February, the ‘battle of words’ between the two companies rapidly intensified,217 with pledges and accusations being made by both on almost a daily basis. Not only tried GKN’s board to win its shareholders’ support by promising substantial future returns that would follow from Project Boost,218 it also aimed to discredit Melrose by referring to its track record and its experience in these kind of deals.219 In
207 Peggy Hollinger and Michael Pooler, ‘GKN shareholders accept Melrose £8bn hostile takeover offer’ Financial Times (29 March 2018)
29 addition to all these efforts, the board’s resistance heavily relied upon and revolved around three elements: it concluded a deal with a company from the US, its biggest customer voiced serious concerns about the potential takeover, and due to severe political opposition even the British government intervened. In March, GKN’s board was able to clinch a deal with Dana in a US$6 billion transaction.220 On the basis of this deal, GKN’s automotive business would be combined with Dana, leaving GKN with only its aerospace division.221 The reason for the board to engage in this particular transaction was to get rid of the conglomerate share price discount that was heavily weighing upon the company and thereby providing its shareholders with more value.222 Furthermore, Airbus, GKN’s biggest customer, proclaimed that “it would be ‘practically impossible’ to award new work to GKN” if it would be taken over by Melrose.223 Airbus’ resistance against the takeover was based on Melrose’s track record, which indicated only a ‘short-term’ relationship with the companies it acquires before selling them on again.224 Over the course of several weeks, political opposition against the takeover also gathered pace and proved to be another major roadblock for Melrose to overcome. The UK’s business secretary Greg Clark had been called upon numerous times by various politicians to block the potential takeover,225 and even the Prime Minister announced that the government was “watching the outcome closely”.226 Two days before GKN’s shareholders were scheduled to vote on Melrose’s offer, on 27 March 2018, this culminated in the government publicly intervening in the takeover battle to demand various binding undertakings from Melrose in case the shareholders would vote in favour of the transaction.227 Not only had Melrose to promise that it would “keep GKN British” and to not sell the aerospace division within five years,228 it even had to provide the government with a veto in any future sale of GKN’s defence business.229 Despite GKN’s board strong opposition against Melrose and its offer and the fact that Airbus, politicians, and other parties publicly spoke out against the takeover, the board still lost “the fight for independence” when a small majority of its shareholders voted in favour of Melrose’s offer.230
220 Peggy Hollinger, ‘GKN seals $6bn deal with Dana in blow to Melrose bid’ Financial Times (9 March 2018)
30 4.3. The Netherlands: PPG v. AkzoNobel When PostNL, a Dutch postal company, received an unsolicited offer from its Belgian counterpart Bpost in late 2016, this seemed to have kicked off a series of attempts by foreign acquirers to take over well-known companies in the Netherlands. Soon after Bpost, Kraft Heinz made an unsolicited bid for Unilever, an Anglo-Dutch consumer goods group.231 Although both Bpost and Kraft Heinz failed miserably in their endeavours, this did not prevent US-based PPG Industries, Inc. (‘PPG’) from pursuing its rival AkzoNobel, a Dutch paints and coatings maker.232 Despite obtaining the support of several of AkzoNobel’s shareholders over time,233 PPG’s repeated attempts to take over the Dutch company proved to be fruitless. On 2 March 2017, PPG sent AkzoNobel’s boards a letter containing its first unsolicited offer for the company.234 It valued AkzoNobel at €20.9 billion and comprised almost a 30 per cent bid premium.235 As was the case with GKN, AkzoNobel’s shares were also trading at a lower price when PPG decided to draw up an offer.236 Shortly after, the boards rejected the offer by claiming that it “substantially undervalued AkzoNobel and its future prospects”, that the transaction would bring about “unacceptable uncertainties and risks”, and they indicated numerous times the negative impact a takeover would have on the company’s stakeholders.237 What’s more, after formally rejecting the bid, AkzoNobel wasted no time to publicly announce that it was examining the possibility of spinning off its speciality chemicals business.238 However, PPG was not defeated that easily and within weeks it came back with an improved offer of €22.4 billion.239 Once again the boards were quick to reject this offer too and reiterated several of their previous arguments (inter alia, too low an offer and not in the best interests of the stakeholders) as grounds to not enter into negotiations with PPG.240 Furthermore, they emphasised that their own plans for the company, reducing the number of divisions from three to two and introducing a new cost structure, would safeguard long-term value creation.241 Nevertheless, several investors started to voice their discontent about the boards’ unwillingness to engage with PPG in the meantime.242 In
231 Menno Tamminga, ‘Ook AkzoNobel is nu in het vizier van een buitenlandse koper’ NRC (9 March 2017)
31 an effort to persuade the shareholders to stand by the boards, they pledged that €1.6 billion in dividends would be returned to the shareholders.243 In a last endeavour to sway AkzoNobel’s boards to come to the negotiation table to agree on a friendly transaction, on 24 April 2017 PPG announced a third offer valuing the company at €26.9 billion and including a 50 per cent bid premium.244 Two weeks later, however, the boards rejected the latest offer as well and presented a long list of reasons why this was the case. According to the boards, PPG’s offer: inter alia, still undervalued AkzoNobel, would result in “significant and value-eroding disposals” to obtain anti-trust approval, and provided no adequate answer to some of the key stakeholder concerns.245 This third dismissal prompted one of AkzoNobel’s largest shareholders, Elliott Advisors, to take legal action by filing a suit with the Enterprise Chamber of the Amsterdam Court of Appeals.246 Yet, the judgment was not what the shareholder had hoped for: the Enterprise Chamber ruled that AkzoNobel “was not obliged to involve shareholders in its decisions regarding the PPG bid and was not required to start talks”.247 Although PPG still had the possibility to approach AkzoNobel’s shareholders directly with a hostile bid, a few days later it declared that it would abandon its pursuit and withdraw its offer.248 PPG’s decision to not pursue a hostile takeover was perhaps influenced by a peculiar Dutch takeover defence that AkzoNobel has had in place since 1926.249 As the Financial Times clearly explains: “This is a foundation consisting of four Akzo directors who hold 48 priority shares in the group, and have the right to use this stock to make binding nominations to the management and supervisory boards in any situation where the independent body deems the interests of the company and its stakeholders to be at risk.”250 If PPG would have launched a hostile bid, however appealing to the shareholders, it is likely that the foundation would have declared the interests to be at risk. As a consequence, the shareholders in favour would not be able to oust the incumbent directors and appoint new directors that would be welcoming to a transaction with PPG.251
4.4. United States: Broadcom v. Qualcomm As was mentioned in the previous chapter, the number of hostile takeover attempts of companies incorporated in the US composes 24 per cent of worldwide hostile activity.252 The recent hostile offer
243 Michael Pooler, ‘Akzo Nobel offers €1.6bn divi sweetener to fend off PPG takeover’ Financial Times (19 April 2017)
32 by Broadcom, a company from Singapore (at that time), for Qualcomm is a very noteworthy example of a takeover attempt in the US. Not only can Qualcomm’s board’s actions be qualified as ‘odd’ in hindsight, it also involved a very rare instance of “presidential action” in a takeover.253 After some speculation that a bid was imminent, Broadcom made an unsolicited offer for Qualcomm Incorporated (‘Qualcomm’), a semiconductor company based in San Diego, on 6 November 2017.254 It valued Qualcomm at US$130 billion and the offer comprised a 28 per cent bid premium.255 Qualcomm became an attractive prey due to the fact that it was the only top-30 semiconductor company that experienced a drop in its share price in 2017.256 A week later its board rejected the offer arguing that it “dramatically undervalued Qualcomm” and that a transaction would be surrounded with “significant regulatory uncertainty”.257 Furthermore, because of its strategic position in several sectors, it stated that the company could “create significant additional value” on its own for the shareholders.258 In December, however, with an eye on the upcoming annual general meeting of shareholders at Qualcomm in 2018, Broadcom employed an additional strategy: it put forward 11 new directors that would replace all incumbent directors and thereby marked the beginning of a proxy contest.259 The current board quickly responded by pointing out that the “nominees were inherently conflicted” because Broadcom was only after acquiring the company at a low price and would thus not maximise Qualcomm’s shareholder value.260 In the weeks after that, the board tried to convince its shareholders that the company should remain independent and disputed the offer on the table, calling it “opportunistic”.261 In addition, the board was able to secure the support of several Chinese smartphone manufacturers, which all publicly spoke out against the potential takeover,262 and it formed a new alliance with Samsung.263 In response, Broadcom significantly increased its offer to US$146 billion, representing a 54 per cent bid premium.264 This second offer was also rejected by
253 Richard Waters and Eric Platt, ‘Trump blocks Broadcom’s $142bn hostile bid for Qualcomm’ Financial Times (13 March 2018)
33 Qualcomm’s board by indicating that it still “materially undervalued” the company.265 However, a slight change of stance was observable, because the board announced that it was willing to meet with Broadcom to discuss the valuation.266 In late 2016, Qualcomm had concluded a deal with NXP Semiconductors, a Dutch company. Because it had not yet obtained all necessary regulatory approvals, this deal was still open. In an effort to either persuade Broadcom to abandon its bid or to force it to offer a higher price, Qualcomm’s board agreed to raise its own bid for NXP Semiconductors.267 However, this had not the desired effect: in light of the warnings that Broadcom had made earlier to Qualcomm about its bid for NXP, it prompted Broadcom to lower its offer.268 The board immediately hit back by proclaiming that Broadcom had made “an inadequate offer even worse”.269 What happened next constituted a surprising turn of events. With the annual general meeting of shareholders coming closer, Qualcomm’s board seemed to have a change of heart: it stated that it was not only receptive to a deal, it was also willing to open its books.270 However, Broadcom could not have predicted what would happen next. Exactly two days before the general meeting of shareholders would take place and Qualcomm’s shareholders would vote on Broadcom’s nominees, it was informed that at the end of January 2018 the board had “secretly filed a voluntary request with the Committee of Foreign Investment in the US (‘Cfius’) to initiate an investigation”,271 regarding potential risks for the national security. As a result of Qualcomm’s request, the US government ordered that the general meeting of shareholders had to be postponed for at least a month.272 A week later Cfius announced that its evaluation of the potential takeover had shown that national security was indeed at risk and that it was up to President Trump to decide whether or not to allow the takeover.273 Shortly afterwards, it became clear that President Trump prohibited the takeover of Qualcomm.274 Two days later, Broadcom had no other choice than to formally withdraw its offer.275
265 Jessica Dye, ‘Qualcomm rebuffs revised Broadcom bid’ Financial Times (8 February 2018)
34 4.5. Comparative analysis Chapter 2 touched upon the market for corporate control. Based on Manne’s description,276 a company’s share price is a signalling factor for takeovers. Taking this into consideration and looking back at the three takeover attempts analysed in the previous paragraphs, all three target companies (i.e. GKN, AkzoNobel, and Qualcomm) suffered from a weakened share price before they received the first unsolicited offers. This confirms the disciplinary function of the market for corporate control. Furthermore, it can be said that takeover attempts serve as “wake-up calls”.277 When faced with an unsolicited bid, a target company’s board of directors often responds with its own plan or strategy to enhance shareholder value.278 This can also be observed in the three scenarios above. GKN’s board immediately launched “Project Boost” and announced the separation of the company’s aerospace and automotive divisions. The boards of AkzoNobel issued a public statement that they explored the possibility to spin off its speciality chemicals business. And Qualcomm’s board reported that due to its strategic position the company would be able to create significant value. Lastly, in an endeavour to convince the target’s shareholders to not accept the bid on the table, the board will almost always dispute the offer price and thereby the company’s valuation. During the takeover battles for GKN, AkzoNobel, and Qualcomm the most frequently used and reiterated argument by the boards was that the offer undervalued the company.
4.6. Evaluation The ambition of this chapter was to get insight into the conduct of target companies’ boards of directors when an unsolicited or hostile bid has been made. Examining the law on paper, the existing regulations governing the use of takeover defences, gives only one perspective: what in theory can and cannot be done. By reviewing how actual takeover attempts have played out you get a deeper understanding of the limits of the law: you see which means of resistance are employed and you uncover how effective they are in thwarting takeovers. The findings of this chapter have, however, no authoritative value due to the limited scope of the analysis. Because only three takeover battles have been researched not all situations and not all takeover defences are covered. Therefore, these findings should only be relied upon as first indications and further research will be needed. With regard to the situation in the UK, the hostile takeover of GKN by Melrose illustrates that the target’s board really had not a lot of room for manoeuvre due to the board neutrality rule. Its resistance was completely dependent upon its own power of persuasion, its ability to provide the shareholders with an alternative transaction, and the public opposition of several other parties towards the takeover. None of its efforts had the ability to prevent the takeover from succeeding. In the end, although only a minor majority, its shareholders voted in favour of Melrose’s offer. The attempt of PPG to take over AkzoNobel had a very different end result. Because there is no mandatory board neutrality rule in the Netherlands and a target’s board needs to take into account the interests of all stakeholders when reviewing an offer, AkzoNobel’s boards could time and time again effectively reject the offers on the basis that a takeover by PPG would not be beneficial for the stakeholders. Furthermore, PPG’s unsolicited offers never developed into a real hostile bid. Broadcom’s takeover attempt of Qualcomm was complicated by certain case-specific circumstances. Therefore, it is not really possible to come to a general conclusion. Having said that,
276 Manne (n 31) 113. 277 Baixiao Liu, ‘The Disciplinary Role of Failed Takeover Attempts’ (2016) XXXIX Journal of Financial Research 63, 65
35 this takeover attempt has illustrated that when a foreign acquirer targets a US company, it might prove fruitful to file a voluntary request with Cfius for an investigation into the potential risks for the national security.
36 Chapter 5: Conclusion
In recent years, a significant increase in takeover activity has become visible. Not all these mergers and acquisitions are, however, mutually agreed on and friendly negotiated between companies. Especially in the European Union, more and more hostile takeovers have started to occur. Most often they involve acquirers from third countries that prey on well-known and established domestic companies, particularly incorporated in the United Kingdom and the Netherlands. This development has frightened numerous politicians that ‘national champions’ have targets on their backs and they have voiced their concerns about the consequences for the economy. It has prompted a lively debate on takeover regulation, revolving around the question whether or not companies need to be better protected against takeover attempts. This thesis aimed at providing a perspective on the matter by evaluating the existing regulation and researching how it impacts target companies current chances of successful resistance in practice. By comparing these findings with the regulatory regime of the United States it also gives a foreign angle on resistance against takeovers. The question that ultimately will be answered is: ‘To what extent, from a regulatory point of view, are targets able to use effective takeover defences against hostile bids in practice in the United Kingdom, the Netherlands, and the United States?’
5.1. Key findings Takeover defences can be subdivided in two broad categories: pre-bid and post-offer defences. As the name already suggests, pre-bid defences are already in place before even a hostile bid has been made and their aim is twofold: either to make a takeover attempt less attractive or to make it more difficult for the bidder to eventually obtain control. Post-bid defences on the other hand, produce specific resistance to an actual hostile bidder. By whom and to what extent these defensive measures can be employed, depends heavily upon whether a country adheres to director or shareholder primacy. The aim of the European Commission with the Takeover Bids Directive was to introduce in all Member States shareholder primacy with regard to the utilisation of post-bid defences and to further facilitate takeovers by neutralising several pre-bid defences that a company could have in place. However, the Commission’s goals were never fully realised due to the optional nature of this board neutrality rule and breakthrough rule. In the United Kingdom, a strong endorsement of shareholder primacy in Rule 21.1 of the City Code on Takeovers and Mergers severely restricts a target’s board of directors’ possibilities to use post-bid defences to thwart a hostile offer. It is prohibited from taking any action that could hamper the bid on the table, unless it has obtained the prior approval of the general meeting of shareholders. Nonetheless, the board is allowed to influence the outcome of a hostile bid by either convincing its shareholders to reject the bid, to lobby competition authorities, or to seek a white knight. On the contrary, pre-bid defensive measures are more loosely regulated under the fiduciary duty to act within powers and the fiduciary duty to promote the success of the company, which are laid down in the Companies Act. The Netherlands does not mandatorily impose either the board neutrality rule or the breakthrough rule, but gives in Article 2:359b of the Civil Code public companies full discretion to provide for defensive measures in their articles of association. One of the peculiarities of the Dutch regulation is that a target’s board has to take into account the interests of all stakeholders and not just the interests of its shareholders when evaluating a takeover offer. With regard to the use of
37 post-bid defences, the Dutch Supreme Court has formulated several conditions that a takeover defence must meet to be considered justified. These are: necessity, specific circumstances of the case, reasonableness, temporary nature, and adequacy and proportionality. In the United States, there is no federal regulation restricting the conduct of target companies’ boards, the States’ legislation becomes relevant here. States’ anti-takeover statutes often provide the board with specific means to successfully resist a takeover attempt. Furthermore, the States’ corporate laws allow companies to incorporate various pre-bid takeover defences in their charter. As is the case in the Netherlands, also in the United States criteria relating to post-bid defences can be found in the case law, which revolve entirely around reasonableness. The board must have reasonable grounds to believe that a danger to the corporate policy and effectiveness exists and the defensive measure must be reasonable in relation to the threat posed. The latter indicates that the defence can neither be preclusive nor coercive, and the bidder must still have a mathematical or realistic chance of success even after the defence has been adopted.
5.2. Further research An evaluation of three recent takeover attempts in the United Kingdom, the Netherlands, and the United States confirms and further underlines the restraints and possibilities under the existing regulation in these countries. The takeover of GKN by Melrose clearly showed that due to the board neutrality rule in the UK, the board only can rely on ‘softer forms’ of defensive measures. Because the shareholders have the decision-making power, the board is not able to use effective takeover defences. The takeover attempt by PPG of AkzoNobel demonstrated the usefulness of the stakeholder approach. A target’s board can rely on far more grounds to reject a takeover offer than on just the claim that it does not maximise shareholder value. Broadcom’s attempt to take over Qualcomm revealed the potential effectiveness of filing a voluntary request with the Committee on Foreign Investment in the US when the hostile bidder is a foreign acquirer. Based on these scenarios there seems to be no immediate necessity to better protect target companies in the Netherlands and the United States. On the contrary, it can be argued that in light of the strong opposition by several parties towards Melrose’s takeover of GKN, this indicates that British target companies might need additional protection. That being said, the analysis of practice in this thesis is very limited due to the fact that only three takeover attempts have been examined. It does not encapsulate all different scenarios and takeover defences, therefore further research is needed to confirm the views above, before legislative measures are adopted.
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