Hostile Takeovers and the Non-Frustration Rule: Time for a Re-Evaluation

50 Pages Posted: 15 Dec 2016

See all articles by David Kershaw

David Kershaw

London School of Economics - Law School; European Corporate Governance Institute (ECGI)

Date Written: November 25, 2016


This Chapter critically evaluates the Takeover Code’s "keystone" rule, the non-frustration rule. It first explores the scope of the rule to determine what steps target boards can and cannot take when faced with a hostile offer, and then considers the general meeting’s power to approve of frustrating action and why in practice such approvals are never seen. The Chapter then proceeds to consider where the rule is optimal for UK companies and the UK economy. It considers in particular the roots of the broad support in the UK for the rule, arguing that the commitment to the rule is a function not of the policy balance between the advantages and disadvantages of the rule but rather it is a function of the regulatory biases and preferences generated by the structure of power relations in a UK company. The Chapter then proceeds to consider this policy balance in a UK context and concludes that the policy case for prohibiting takeover defences is weak. It then moves to consider the reform options in light of the post- Cadbury and Kraft debate on this issue. The Chapter considers and supports both reform of the non-frustration rule (by abolishing the rule) and a higher acceptance threshold (which effectively enables shareholders who are interested in long term fundamental value to make the decision). But the Chapter rejects disenfranchisement of short-term shareholders and an enhanced public interest test. It concludes that it is now time for the Panel to engage with the broader consequences of the rule and possible reform options.

Suggested Citation

Kershaw, David, Hostile Takeovers and the Non-Frustration Rule: Time for a Re-Evaluation (November 25, 2016). LSE Legal Studies Working Paper No. 19/2016, Available at SSRN: or

David Kershaw (Contact Author)

London School of Economics - Law School

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European Corporate Governance Institute (ECGI) ( email )

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