Liberating the Market for Corporate Control

Abstract

Many years ago, Henry Manne proposed a theory of the market for corporate control that provided a compelling argument for the existence of a vibrant hostile takeover market. He argued that “the control of corporations may constitute a valuable asset” if the acquirer takes control with the expectation of correcting managerial inefficiencies. In this way, it is the hostile takeover market and its lead actor, the hostile bidder, that acts as a corrective mechanism in corporate governance.

Unfortunately, while a vibrant hostile takeover market did exist in the United States during the 1960s, 70s, and 80s, this has not been the case for many years. By contrast, the United Kingdom, despite having a broadly similar capital market environment and corporate governance system to the U.S., has gone down the path of allowing its hostile takeover market to flourish. Thus, the U.K. has been able to successfully retain the hostile takeover as a corrective mechanism in corporate governance.

We find the current domestic state of affairs unacceptable. Without a vibrant hostile takeover market, a significant corrective mechanism has been lost. Therefore, with a view to correcting this inefficiency, we use as our primary authority the core principles identified in the U.K.’s regulatory legal framework, and especially its longstanding board passivity (or “non-frustration”) rule. More than any other element of the British framework, the board passivity rule has allowed for the creation of an enduring and successful hostile takeover market in the U.K. Accordingly, this Article recommends that domestic state corporate law statutes be amended to include a safe harbor for a hostile bidder when making an all-cash, all-shares tender offer that includes a guarantee of the same or higher price if a back-end or squeeze-out merger occurs.

The use of the above safe harbor would effectively disallow a board’s use of the poison pill as a takeover defense unless a specific takeover defense, such as a poison pill, is provided for in the corporate charter. In this way, private ordering can always be used to trump the statutory safe harbor.

Keywords: Corporate Governance, Market for Corporate Control, Corporate Law, Unocal Test, Board of Directors, U.K. Takeover Code, Board Passivity Rule, Tender Offers, Hostile Takeover, Hostile Tender Offer, Corrective Mechanism, Substantive Coercion

JEL Classification: G30, K2, K20, K22