The Regulation of Corporate Acquisitions: A Law and Economics Analysis of European Proposals for Reform

Sunday, January 1st, 1995 at 12:00 am by Clas Bergstrom, Peter Hogfeldt, Jonathan R. Macey, Per Samuelsson
Clas Bergstrom, Peter Hogfeldt, Jonathan R. Macey, Per Samuelsson, The Regulation of Corporate Acquisitions: A Law and Economics Analysis of European Proposals for Reform, 1995 Colum. Bus. L. Rev. 495

The central purpose of the unification of Europe is to create a regulatory environment in which the principle of free trade in goods, services, people, and capital is enforced. This is made clear in the Treaty of Rome, which established the European Economic Community in 1957. Regulation of the market for corporate control has attempted not only to harmonize the laws of the member states, but also, at least ostensibly, to facilitate hostile takeovers in Europe. Thus, for example, the Proposal for the Thirteenth Council Directive on Company Law, Concerning Take-overs and Other General Bids (the “Proposed Thirteenth Directive”) attempts to facilitate hostile takeovers. The reason given for the proposal is “the desire to alter the European corporate governance environment to encourage a corporate acquisition response to perceived changes in the economic environment that are believed to have changed the efficient boundary of the firm.”

A major pro-takeover element of the proposed directive significantly curtails the ability of target management to respond defensively after an outside bid has been made. While, for example, Delaware state law permits the issuance of special types of stock by incumbent management in the midst of a takeover bid in connection with a poison pill takeover defense, such action is prohibited under Article 8(1)(a) of the Proposed Thirteenth Directive. The proposed directive largely eliminates the possibility of European companies utilizing a poison pill in the face of target shareholder-friendly bids because it requires shareholder approval to issue any securities while a takeover bid is pending. However, the proposed directive does not prohibit adoption of a poison pill, by shareholder vote, prior to the receipt of a takeover bid. Other defensive tactics (such as issuing dual classes common stock or placing a ceiling on the number of shares that can be voted by a single shareholder), which are generally adopted prior to a bid being announced, are similarly regulated. However, the corporate laws of many EC member states, as well as other EC directives, do limit pre-bid takeover defensive measures.

The Proposed Thirteenth Directive is undergirded by the proposition that a well-functioning market for corporate control is considered an important method for monitoring incumbent management and for improving the allocation of resources within Europe. Takeover bids are common in the United States and the United Kingdom (“U.K.”), which has a relatively long history of pro-takeover corporate laws. Takeover bids are not so *498 commonplace on the European continent. In fact, because of more dispersed ownership and legislative restrictions on takeover defenses, the U.K. has been the pioneer in European takeover law. Because of these varied positions on takeovers, it is no surprise that the largely U.K.-inspired Proposed Thirteenth Directive has met opposition.

This article examines the regulation of corporate acquisitions in Europe from a law and economics perspective. It concludes that the reform proposals do not meet the stated goal of encouraging acquisitions. Rather, the proposed rules will inhibit acquisitions, which in turn will likely result in less exposure of incumbent management to market discipline and inefficiencies in the allocation of productive resources in Europe.

Section II of the article discusses the theoretical underpinnings of takeover law, with emphasis on Europe. Section III describes the principal regulatory and structural obstacles in the market for corporate control in Europe. Section III also argues that the European rules concerning takeovers are far more intrusive than they appear. Section IV examines regulations that should be implemented if Europe is to achieve a healthy and well-functioning market for corporate control.

Author Information

Bergestrom, Hogfeldt (Stockholm School of Economics, Finance); Macey (Cornell University, Law); Samuelsson (Stockholm School of Economics, Law)