New Agency Problems, New Legal Rules: Rethinking Takeover Regulation in the US and Europe
Ibero-American Institute for Law and Finance, Working Paper Series 3/2016
25 Pages Posted: 19 Apr 2016 Last revised: 10 Nov 2019
Date Written: October 30, 2019
The primary agency problem traditionally existing in the US corporation has been the risk of opportunism of managers vis-à-vis shareholders. By contrast, the primary concern in European corporations has been the risk of opportunism of controlling shareholders vis-à-vis minority shareholders. These divergences in agency problems and the design of corporate law in the US and Europe have been mainly explained or at least justified by the different corporate ownership structures existing in both regions. On the one hand, the US has been traditionally classified as a jurisdiction whose companies usually have dispersed ownership structures with small and diversified shareholders facing collective action problems, asymmetries of information and rational apathy. On the other hand, Europe has been classified as a region where most companies have controlling shareholders. Therefore, it makes more sense to give more power to the shareholders while paying higher attention to the protection of minority investors. However, the rise of shareholder activism, the reconcentration of share ownership in the hands of institutional investors, and the use of dual-class shares have changed those agency problems traditionally existing in US corporations. Likewise, the development of capital markets, the improvement of corporate governance practices and the rise of shareholder activism are also modifying, to a lesser extent though, the agency problems traditionally existing in European corporations. Therefore, these new agency problems should lead us to rethink European and US corporate law, especially in the context of hostile takeovers where weighted agency problems may arise among corporate actors. On the basis of this exercise, this paper suggests several reforms that should be implemented in both regions to effectively address the agency problems existing in the European and US corporation of the 21st century.
Keywords: Agency Problems, Shareholder Activism, Institutional Investors, Takeover Law, Mandatory Bid Rule, Anti-Takeover Measure, Board Neutrality Rule, Reverse Neutrality Rule
JEL Classification: K22
Suggested Citation: Suggested Citation