In a new article, Liberating the Market for Corporate Control, we recommend that state corporate law statutes be amended to include a safe harbor for hostile bidders who make all-cash, all-shares tender offers that include a guarantee of the same or higher price if a back-end or squeeze-out merger occurs. Thus, in the face of a non-coercive hostile bid, a board cannot use takeover defenses, such as a poison pill or other statutory defense, unless specifically provided for in the corporate charter. In this way, if the board and shareholders agree, a company can always use private ordering to trump the statutory safe harbor.
U.S. History
Many years ago, Henry Manne proposed a theory of the market for corporate control that provided a compelling argument for a vibrant hostile takeover market. He argued that “the control of corporations may constitute a valuable asset” if the acquirer takes control with the expectation of correcting managerial inefficiencies. In this way, it is the hostile takeover market and its lead actor, the hostile bidder, that acts as a corrective mechanism in corporate governance. A corrective mechanism is defined as a stakeholder, including shareholders, or potential stakeholders “of a public company, other than the current board of directors or executive management, which may have, from time to time, superior decision-making skills in the making of major corporate decisions.”
Unfortunately, while a vibrant hostile takeover market did exist in the United States during the 1960s, 70s, and 80s, this has not been the case for many years. In the early 80s, the success of the front-end loaded, two-tier, tender offer (“coercive two-tier tender offer”) to acquire the majority of voting stock of a target company, despite the target board’s opposition, led to a slew of antitakeover statutes and the development of shark repellents such as the poison pill, which greatly damaged the vibrancy of this market.
While it is true that the hostile takeover market in the U.S. has not totally disappeared, it has been greatly diminished. Moreover, when hostile tender offers do occur, it is usually in conjunction with a costly, difficult, and time-consuming proxy contest that may not succeed. In sum, the days of a straightforward hostile tender offer for a majority of or all shares of a U.S. public company are long gone.
U.K. Experience
By contrast, there is a very different story to be told concerning the historical development of the United Kingdom’s hostile takeover market. Despite having a capital market environment and corporate governance system broadly similar to America’s, the U.K. takes a different approach to conducting and regulating takeovers.
For a start, the U.K. has a much more vibrant hostile takeover market than the U.S., in terms of both the percentage of M&A deals that are contested and the proportion of hostile deals that are successfully completed. Of further interest from a U.S. perspective is that the British hostile takeover market developed without the notoriously coercive two-tier tender offer. Consequently, U.K. listed target companies have never had the same need for poison pills or other shark repellent devices. Nor has there ever been much of an appetite in the U.K. for introducing any form of U.S.-style anti-takeover statute.
Rather, structural takeover defenses have been effectively prohibited by the U.K.’s much more pro-shareholder (by U.S. standards) regulatory framework for the past half century. As an offshoot of this, bidders for U.K. listed targets have seldom had reason to trigger the arduous proxy contests that have become a fixture of the U.S. acquisitions landscape, on the premise that a substantially unimpeded road to gaining control over the target is available in less costly and time-intensive ways.
At the same time, like their U.S. counterparts, U.K. target managers have in general been at liberty to seek competing friendly bidders (so-called “white knights”) in response to actual or threatened hostile bids and to provide them with confidential information and deal inducements. This has enabled active multi-bidder contests for corporate control of U.K. targets, notwithstanding U.K. target managers’ practical incapacity to facilitate corporate auctions via the limited deployment of poison pills and other structural defenses in response to inadequate initial bids, as is generally permissible in the case of U.S. targets.
The U.K. experience is a practical illustration of Henry Manne’s model of the market for corporate control. Moreover, the British experience with hostile takeovers demonstrates that, despite what first appearances might suggest, there is another way for the U.S. to go in this regard.
Empirical Evidence
Empirical evidence on the aggregate wealth impact of change in control transactions appears broadly consistent across the U.S. and the U.K. In both countries tender offers have tended to produce statistically significant abnormal positive returns for target shareholders, which in general have not been offset by corresponding losses to bidder shareholders.
However, unsuccessful tender offers did not yield positive abnormal returns. Moreover, when unsuccessful tender offers did not ultimately result in a change in control, target shareholders suffered significant losses. This implies that the use of aggressive defensive measures is inconsistent with shareholder welfare. And, although empirical studies show that returns to shareholders of bidders from acquisitions have generally been negligible, it is nevertheless very clear that the aggregate combined value of targets and acquirers from these transactions increased relative to their stand-alone values.
Conclusion
The unintended consequence of the coercive two-tier tender offer was to severely diminish the vibrancy of the U.S. hostile takeover market. The U.K.’s successful experience with the non-coercive tender offer shows that there is another way. This approach has allowed a vibrant hostile takeover market to continue over the same period within a similar legal culture and capital market environment.
We acknowledge that many people are satisfied with the status quo. As a result, it may take a number of years before our recommendation gains momentum with state lawmakers. But at the very least, our article plants the seed for the development of something that will allow U.S. public companies to become more efficient: a vibrant hostile takeover market. Hopefully, that seed will take root sooner rather than later.
This post was originally published in the CLS Blue Sky Blog.
