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Takeover Litigation: the US Does It More Than the UK, but Why and Does It Matter?

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Takeover Litigation: the US Does It More Than the UK, but Why and Does It Matter? Durham E-Theses Takeover Litigation: the US does it more than the UK, but why and does it matter? MORLEY, SARAH,EMILY How to cite: MORLEY, SARAH,EMILY (2017) Takeover Litigation: the US does it more than the UK, but why and does it matter?, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/12228/ Use policy The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that: • a full bibliographic reference is made to the original source • a link is made to the metadata record in Durham E-Theses • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. Please consult the full Durham E-Theses policy for further details. Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: [email protected] Tel: +44 0191 334 6107 http://etheses.dur.ac.uk 2 ABSTRACT Name of University: Durham University Name: Sarah Emily Morley Degree Title: PhD Thesis Title: Takeover Litigation: the US does it more than the UK, but why and does it matter? Submission Date: March 2017 This thesis begins by describing the regulatory regimes of takeovers in the UK and US, and maps the litigation landscapes of both jurisdictions. In order to first map or describe the litigation landscapes, data was collected to reveal the extent of the UK’s propensity to litigate during takeovers. Although data ascertaining takeover litigation levels existed in the US no current study had yet established the levels in the UK. It is revealed that in the US 87 percent of takeovers are subject to litigation, whilst in the UK the figure is less than one percent. Current literature has not yet attempted to explain exactly why the US and UK differ so widely, considering their very similar market systems. The focus of this thesis is then to explain this difference and debunk some of the more obvious presumed explanations (i.e. “the US is just more aggressively litigious”) and identify some lesser known reasons. As the main instigators of US litigation are target shareholders alleging their directors have breached a fiduciary duty a number of explanations inevitably arise from this particular scenario. A simplistic uni-causal explanation is therefore rejected and instead this thesis offers four candidates for explaining the disparity. These are, firstly, that US shareholders benefit from more extensive “causes of action.” The second explanation encompasses the different “forms of action” that are available to shareholders in the UK and US to pursue these causes of action; in the US the class action is the favoured form whereas in the UK shareholders are limited to the derivative claim. The third explanation concerns the role played by the existence of the Code, and its administration by the Panel. It is argued that these UK institutions do much to suppress takeover litigation in general. The fourth and final explanation is the rather amorphous concept of “litigation culture.” Finally, the impacts of the diverging propensities to litigate on factors such as cost and speed on the takeover process are then evaluated. 1 Takeover Litigation: the US does it more than the UK, but why and does it matter? Sarah Emily Morley Doctor of Philosophy in the School of Law, Durham University 2017 2 TABLE OF CONTENTS Preliminaries List of Abbreviations 9 Declaration and Statement of Copyright 10 Acknowledgements 11 Chapter One: Introduction 1.1 Introduction 12 1.2 Thesis Outline 14 1.3 Methodology 16 Chapter Two: The Theory of the Market for Corporate Control 2.1 Introduction 19 2.2 The Merits of the Market for Corporate Control 21 2.2.1 Economic Efficiency 21 2.2.2 Disciplinary Device 23 2.2.3 Minority Shareholder Protection 25 2.3 Criticisms of the Market for Corporate Control 26 2.3.1 The Ideal Market and Stock Market Efficiency 26 2.3.1.1 Available Information 28 2.3.1.2 The Rational Investor 33 2.3.2 The Market for Corporate Control does not act as a Disciplinary Device 35 2.4 Alternative Disciplinary Mechanisms? 38 2.5 Conclusion 40 Chapter Three: UK Takeovers: Practices and Regulation 3.1 Introduction 42 3.2 Offers and Schemes of Arrangement 43 3.2.1 The Process of a Takeover Offer 44 3.2.2 The Process of a Scheme of Arrangement 48 3 3.3 UK Regulatory Regime: Company Law 50 3.3.1 Part 28 of the Companies Act 2006 51 3.3.2 The Panel 51 3.3.3 The Code 55 3.3.4 Enforcement of the Code 60 3.3.5 Change in the Legal Status of the Panel 61 3.3.6 Squeeze-out and Sell-out Rights 62 3.3.7 Part 26 of the Companies Act 2006 63 3.3.8 Directors’ Duties 64 3.3.8.1 Duty to Act Within Powers 65 3.3.8.2 Duty to Promote the Success of the Company 67 3.3.8.3 Duty to Exercise Reasonable Skill, Care and Diligence 69 3.3.9 Causes of Action under Company Law 69 3.3.9.1 Unfair Prejudice 69 3.3.9.2 Other Causes of Action under Companies Act 2006 70 3.4 Other Relevant Regulation 72 3.4.1 Other Legislation 72 3.4.2 Contract Law 73 3.4.3 Judicial Review 74 3.4.4 Common Law (non-directorial) Fiduciary Duties 74 3.5 Conclusion 75 Chapter Four: UK Takeover Litigation: Typology and Propensity 4.1 Introduction 76 4.2 Typology of Range of Complaints 77 4.2.1 Explanations 80 4.3 Causes of Action 82 4.4 Method of Search 87 4.4.1 Reported Versus Non-Reported Cases 87 4.4.2 Cases Recorded Since 1960 88 4.4.3 Jurisdictions 88 4.4.4 Substance of Claim 88 4 4.4.5 The Search 88 4.5 The Findings 89 4.5.1 Common Causes of Action 91 4.5.2 Propensity to Litigate 92 4.5.3 Instigator and Target of Litigation 93 4.5.4 Outcome of Litigation 96 4.5.5 Summary of Findings 97 4.6 The Code and Panel Decisions 98 4.7 Conclusion 106 Chapter Five: US Takeovers: Practices and Regulation 5.1 Introduction 107 5.2 US Practices: Single-Step Mergers and Two-Step Mergers 107 5.2.1 Single-Step Merger 108 5.2.2 Two-Step Merger (Tender Offer) 111 5.2.3 Stakebuilding 112 5.3 US Regulatory Regime: Federal Regulation of Takeovers 113 5.3.1 Federal Law 115 5.3.1.1 The Securities Act of 1933 116 5.3.1.2 The Securities Exchange Act of 1934 117 5.3.1.3 The Williams Act 1968 117 5.3.1.4 The SEC 118 5.3.2 Federal Regulation of Single-Step Merger Process 120 5.3.3 Federal Regulation of Two-Step Merger Process (Tender Offer) 121 5.3.4 Federal Regulation on Stakebuilding 123 5.4 US Regulatory Regime: State Laws 126 5.4.1 Fiduciary Duties 127 5.4.2 State Law: The General Corporation Law 128 5.4.3 Duty of Loyalty, Care and Disclosure 129 5.4.4 Duty of Good Faith 131 5.4.5 The Business Judgement Rule 133 5.4.6 Enhanced Fiduciary Duties 134 5 5.4.6.1 The Unocal and Revlon Standards 135 5.4.7 “Just Say No”: Managerial Discretion 140 5.4.8 Anti-takeover Statutes 143 5.5 Conclusion 145 Chapter Six: US Takeover Litigation: Typology and Propensity 6.1 Introduction 147 6.2 Typology of Range of Complaints 147 6.3 Typology of the Cause of Action 149 6.3.1 Federal Level Causes of Action 149 6.3.2 State Level Causes of Action 152 6.4 US Empirical Studies 158 6.4.1 Cain and Davidoff Solomon 158 6.4.2 Daines and Koumrian 158 6.5 Propensity to Litigate 159 6.5.1 Cain and Davidoff Solomon’s Findings 159 6.5.2 Daines and Koumrian’s Findings 163 6.6 Comparative Analysis 165 6.7 Conclusion 167 Chapter Seven: Explaining the Litigation Landscapes of the UK and US 7.1 Introduction 169 7.2 Differences in “Causes of Action” in the UK and US 172 7.2.1 Are the Obligations of (Target) Directors More extensive in the US than the UK? 172 7.2.1.1 A Red-herring: Some Additional, but Irrelevant, US Regulatory Obligations 172 7.2.1.2 Relevant Ways in Which Target Directors’ Obligations are More Extensive in US 175 7.2.2 The Key Difference: to whom are these Duties Owed? 180 7.3 Differences in the “Forms of Action” 183 7.3.1 Derivative Claims 184 7.3.2 Class Actions 190 7.3.2.1 Attorney Fees in Shareholder Class Actions 191 7.3.3 UK Group Litigation Orders and Representative Actions 196 6 7.3.4 Class Actions: Evidence from Australia 199 7.4 Presence of the Panel and the Code 200 7.4.1 The Panel as an Alternative to Litigation 201 7.4.2 The Courts’ Refusal to “Step on Toes” of the Panel 210 7.4.2.1 Courts Approach to Litigation in Schemes of Arrangements 212 7.4.3 The No Frustration Principle and Tactical Litigation 215 7.4.4 The Australian Takeover Panel: a Point of Comparison 219 7.5 Litigation Culture 220 7.5.1 Acceptability of Litigation 221 7.5.2 Positive Attitude towards Litigation 223 7.5.3 Behaviour and Takeover Etiquette 224 7.6 Conclusion 227 Chapter Eight: Impacts of the Propensity to Litigate 8.1 Introduction 230 8.2 Impact on Speed of Takeovers 231 8.2.1 Speed of Takeovers in UK 231 8.2.2 Speed of Takeovers in US 233 8.2.3 The Significance of the Speed of Takeovers 236 8.3 Impact on Cost of Takeovers 239 8.3.1 UK Costs 239 8.3.1.1 Panel Document Charges 240 8.3.1.2 Panel PTM Levy 241 8.3.1.3 Panel Exempt Status Charges 241 8.3.1.4 Costs Relating to Panel Complaints and Breaches of the Code 242 8.3.2 Costs of US Litigation 243 8.3.3 Distribution of Litigation Costs in the UK and US 244 8.3.4 The Significance of the Cost of Takeovers 246 8.4 Impact of Litigation on US Target Shareholders 246 8.4.1 Do US Target Shareholders Achieve Better Settlements from Litigation? 246 8.4.2 Do US Target Shareholders Obtain Better Disclosures from Litigation? 249 8.4.3 Agency Problems and Corporate Governance 255 7 8.5 Impact on the Market for Corporate Control 260 8.5.1 Does the Presence
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