The Case for an Unbiased Takeover Law (with an Application to the European Union)

50 Pages Posted: 2 May 2013 Last revised: 22 Feb 2015

Luca Enriques

University of Oxford Faculty of Law; European Corporate Governance Institute (ECGI)

Ronald J. Gilson

Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)

Alessio M. Pacces

Erasmus School of Law, Erasmus University Rotterdam - Rotterdam Institute of Law and Economics; European Corporate Governance Institute

Date Written: June 2014

Abstract

Takeover regulation should neither hamper nor promote takeovers, but instead allow individual companies to decide the contestability of their control. Based on this premise, we advocate a takeover law exclusively made of default and menu rules supporting an effective choice of the takeover regime at the company level. For reasons of political economy bearing on the reform process, we argue that different default rules should apply to newly public companies and companies that are already public when the new regime is introduced. The first group should be governed by default rules crafted against the interest of management and of controlling shareholders, because these are more efficient on average and/or easier to opt out of when they are or become inefficient for the particular company. The second set of companies should instead be governed by default rules matching the status quo even if this favors the incumbents. This regulatory dualism strategy is intended to overcome the resistance of vested interests towards efficient regulatory change. Appropriate menu rules should be available to both groups of companies in order to ease opt-out of unfit defaults. Finally, we argue that European takeover law should be reshaped along these lines. Particularly, the board neutrality rule and the mandatory bid rule should become defaults that only individual companies, rather than member states, can opt out of. The overhauled Takeover Directive should also include menu rules, for instance a poison pill defense and a time-based breakthrough rule. Existing companies would continue to be governed by the status quo until incumbents decide to opt into the new regime.

Keywords: corporate governance, takeovers, takeover defenses, regulation of takeovers, poison pills, control contests, European takevoer regulation

JEL Classification: D21, G32, G34, G38, K22

Suggested Citation

Enriques, Luca and Gilson, Ronald J. and Pacces, Alessio M., The Case for an Unbiased Takeover Law (with an Application to the European Union) (June 2014). ECGI - Law Working Paper No. 212; Harvard Business Law Review, Vol. 4, Issue 1 (2014), pp. 85-127; ECGI - Law Working Paper No. 212; Columbia Law and Economics Working Paper No. 450; Stanford Law and Economics Olin Working Paper No. 444. Available at SSRN: https://ssrn.com/abstract=2258926 or http://dx.doi.org/10.2139/ssrn.2258926

Luca Enriques

University of Oxford Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Ronald J. Gilson (Contact Author)

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-0614 (Phone)
650-725-0253 (Fax)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-1655 (Phone)
212-854-7946 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Alessio Maria Pacces

Erasmus School of Law, Erasmus University Rotterdam - Rotterdam Institute of Law and Economics ( email )

Burgemeester Oudlaan 50
P.O. Box 1738
Rotterdam, Zuid Holland 3000 DR
Netherlands
+31-(0)10-4081613 (Phone)
+31-(0)10-4089191 (Fax)

HOME PAGE: http://www.esl.eur.nl/profile_az/?tx_eurliaatmetismis_pi1%5Bmetis_id%5D=1050049

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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