Hostile Takeovers and Defensive Mechanisms in the United Kingdom and the United States: A Case Against the United States Regime

Abstract

The United States and the United Kingdom are two countries sharing the same belief in the free market economy. Both countries are characterized by the separation of ownership and control and hostile takeovers are an important mechanism for constraining managerial excesses. However, the regulation of takeovers and defensive mechanisms is strikingly different. While Delaware jurisprudence has entrusted the board with the power to block hostile bids subject to an enhanced judicial standard, the United Kingdom has been a pioneer in adopting and promoting across Europe an absolute ban on takeover defenses. The public outrage provoked by the recent Kraft-Cadbury debacle has increased calls for stricter regulation of hostile takeovers. In light of the growing skepticism against the City Code’s lenient approach to hostile takeovers, a question naturally arises. Should the United Kingdom abandon its restrictive approach towards takeover defenses and adopt the laxer and more lenient U.S. model? The answer should be negative, as the implementation of a U.S.-style regime, under which directors’ defensive actions are scrutinized by the courts, would result in the U.K. market losing its major advantages. The speed, flexibility and certainty offered by the current regime would dissipate, should the authority in regulating defensive tactics be given to the courts. The genius of the U.K. regime lies in its ability to achieve the best results at a minimum cost. It manages to promote certainty, a vibrant takeover market and the accountability of directors, while eliminating the costs generated by litigation. In addition, the costs imposed by Rule 21 of the Takeover Code are either insignificant or associated with a wider debate outside the takeover field.

Keywords: Hostile Takeovers, Takeover Defenses, UK, US