The Non-Frustration Rule of the UK City Code on Takeover and Mergers and Related Agency Problems: What are the Implications for the EC Takeover Directive?
Columbia Journal of European Law Online, Vol. 17, p. 5, 2010
6 Pages Posted: 28 Jul 2010 Last revised: 18 Aug 2014
Date Written: July 27, 2010
The Takeover Directive, first envisioned in the White Paper on completing the Internal Market, was finally adopted in 2004, after almost 20 years of work. The Takeover Directive is based upon the assumption that the takeover offers numerous benefits to companies, investors, and, ultimately, the European economy as a whole. The functions of a takeover include disciplining management, stimulating competition, and disseminating good management practice, thus improving the quality of management as well as corporate performance. While one of the major purposes of the Takeover Directive is to mitigate the agency problem in the takeover context, some mechanisms, such as “broad neutrality” (Article 9) and the “breakthrough rule” (Article 11) are nevertheless made optional both at the Member State and at the individual company levels. As a result of the compromise among Member States, whether this Directive can achieve its goal, and to what extent, deserves further consideration. Article 20 of the Takeover Directive instructs the Commission to carry out a survey on the enforcement and experience of the Takeover Directive in 2011 for the purpose of considering future amendments. To this end, on December 16, 2008, the Commission drafted a checklist for Member States to provide relevant information as to takeover bids taking place in their respective markets. Whether the Directive really works in the way the Commission had originally intended, however, remains far from clear. Given the fact that many aspects of the Takeover Directive followed the UK City Code on Takeovers and Mergers, the UK experience with regard to the agency problem in the takeover context can provide useful guidance to the revision of the Takeover Directive. Among others, the major weapon for tackling the agency problem under the Takeover Directive, namely, the non-frustration rule, was modeled after the Takeover Code. This paper seeks to explore the functions of the non-frustration rule in the UK and its implications for the Takeover Directive.
Keywords: Takeover Directive, UK City Code on Takeovers and Mergers, agency cost
JEL Classification: K22
Suggested Citation: Suggested Citation