Corporate Governance in Negotiated Takeovers: The Changing Comparative Landscape

Abstract

This chapter considers how corporate governance concerns are reflected in the approach to regulating friendly takeover transactions in two countries with similar capital markets and institutional frameworks, the United States (U.S.) and the United Kingdom (U.K.).

With respect to friendly transaction, the U.S. and U.K. approach corporate governance concerns and the balance of power between the board of directors and shareholders in increasingly divergent ways. The U.K. is noted for takeover rules that constrain managerial power and favor shareholder voice. Significantly for friendly deals, in 2011 the U.K. revised its rules to dramatically constrain the power of directors to negotiate deal protection mechanisms. A key principle in this new approach is rejection of the idea of the board as chief architect and negotiator of deal protection. The U.S. has historically emphasized the interplay between ex ante protections (i.e. disclosure and shareholder voice) and ex post policing (i.e. litigation) in ways that reflect a significant director-centric approach. Shareholder voice is more constrained than in the U.K. and directors have wide latitude to design deal protection measures. In fact, over the past decade, deal protection mechanisms have become stronger with a proliferation and expansion of a variety of mechanisms that provide management with tools to protect its preferred deal.

While directors have wide latitude in designing a deal, historically, U.S. shareholders have been able to check these powers through both fiduciary duty and appraisal litigation. Since the mid-2010s, however, the Delaware courts have moved away from ex-post policing through litigation. Instead, Delaware jurisprudence now emphasizes the value of ex ante methods—such as deal process or deal-requirements like shareholder voting—to address corporate governance concerns. The shifts in Delaware have been depicted as elevating governance and procedure over costly and uncertain litigation. Some commentators have even argued that these moves recognize increased shareholder power in the U.S. and bring Delaware closer to the U.K. model.

This chapter argues that once we take into account the significant power and leeway that boards have in designing a deal and putting into place a wide variety of deal protection mechanisms, the U.S. move toward expanding the value of ex ante shareholder voice and devaluing ex-post litigation in reality maintains the centrality of management power. The primacy of directors becomes even more pronounced when one compares the U.S. regime with the U.K.’s which places significant constraints on the board’s ability to negotiate deal protection devices. The question remains open, however, as to which system is better for the corporation, its shareholders, and its stakeholders.

Keywords: Takeovers, M&A, Deal Protection, comparative corporate governance

JEL Classification: K22