Takeover transactions are often the most significant activity affecting corporations and their shareholders. Accordingly, there are intense debates about the value and impact of takeovers and the extent to which law should regulate such transactions. One area of focus for takeover regulation has been the potential impact of takeovers on minority shareholders. The focus on minority shareholders is not surprising as research suggests that laws which protect minority shareholders are associated with stronger financial markets.
In a recent book chapter, I focus on how deal structures affect the protection of minority shareholders in two common law jurisdictions, the U.S. and the UK. I discuss the three most-commonly used methods of effecting a takeover in these jurisdictions—tender offers, schemes of arrangement, and triangular mergers—and assesses both the theoretical and empirical literature on their impact on minority shareholders. In each jurisdiction, lawmakers, regulators and courts have attempted to design rules to address harm to minority shareholders under various deal structures. These rules often result in different rights for shareholders of bidders and targets, and vary among transaction structures, even when economically similar transactions are undertaken. While the UK takeover regime focuses on ex ante regulation, the U.S. system uses some ex ante regulation but places significant emphasis on ex post policing through the courts.
First focusing on the U.S., I address the two most commonly-used deal structures for takeovers of U.S. public companies—a one-step triangular merger and a two-step transaction involving a tender offer followed by a merger. Target shareholders are provided with a say under both structures, either through a vote or through the decision to sell their shares. In addition, several aspects of the securities laws and tender offer rules, for example the best price rule or extensive disclosure rules for tender offers, were specifically designed to lessen the likelihood of abuse of minority target shareholders.
In the U.S., the courts also play an important policing role in regulating the parties’ behavior in takeovers. Target minority shareholders regularly seek redress for any harm through the courts, either through ex post fiduciary duty litigation or appraisal litigation. U.S. law, however, does little to address harm to bidder shareholders. Management can structure takeovers to exclude bidder shareholders from any decision-making role in acquisitions. Moreover, bidder shareholders cannot meaningfully seek any redress through the courts.
An acquisition of a UK public company takes place through the acquisition of shares in the target by the bidder either through an offer (similar to a U.S. tender offer) or through the nearest UK analogue to a U.S.-style merger, a “scheme of arrangement.” While the economic substance of these transactions is similar in the U.S. and UK, the steps that must be followed and the methods of minority shareholder protection are quite different. Unlike the U.S., where hostile takeover activity is difficult, the UK is much more non-protectionist and holds shareholder primacy as a core value. Several of the rules implementing the principles of the UK takeover regime, including the mandatory bid rule and the sell-out rule, are designed to protect minority shareholders.
Over the past decade, schemes of arrangement have become a commonly used acquisition structure in friendly transactions in the UK. UK law treats schemes quite differently from takeover bids. In a scheme, a significant majority of the shareholders of each class can bind the minority, including any dissident shareholders, so long as the scheme is subsequently sanctioned by the court. Some have argued that minority protection in the scheme context should be greater than that in the traditional bid/takeover context since in a scheme even dissenting shareholders are forced to sell once the scheme has been approved. Nevertheless, there is a strong argument that protection for minority shareholders is built into the structure of the scheme itself – namely the 75 percent majority requirement for shareholder approval, the court’s sanction, and the opportunity for full exit rights.
Two other major differences exist among deal structures prevalent in the U.S. and the UK. The UK listing rules expressly contemplate a vote for bidder shareholders in substantial acquisitions. Furthermore, unlike the U.S., where courts play an important role in protecting minority shareholders, courts in the UK do not play a decisive role in most transactions, even in schemes which they formally must approve. The appraisal remedy is not available in the UK, and there is little chance of corporate directors being sued in connection with a takeover.
The chapter then surveys the empirical literature on takeovers to assess whether differences in legal rules governing different deal structures translate into a quantifiable impact on minority shareholders. The answers to this question are somewhat unclear and need further empirical enquiry to determine which of the tools used in the U.S. and UK regimes better protect minority shareholders. Nevertheless, a few insights are suggested by the empirical research. First, despite the differences in each jurisdiction’s regime, target shareholders gain in takeover transactions in both jurisdictions, and in the U.S. these gains are higher in tender offers than in mergers. Second, research suggests that the UK’s takeover rules better protect bidder shareholders in large transactions than does U.S. regulation, which largely deprives bidder shareholders of a role in acquisition transactions. Finally, the research on U.S. transactions suggests that different legal treatment of economically similar acquisition structures may make a difference to minority shareholders.
The comparisons and literature review raise several research questions. The empirical inquiry into UK takeover transactions is quite sparse. For example, no studies empirically explore whether minority shareholders in the UK gain more or less from schemes of arrangement than from takeover bids. Also, do bidder shareholders in the UK gain or lose more in schemes or takeover bids? The empirical inquiry exploring the differences in regulatory approaches in the U.S. and UK is also sparse. For example, it may be useful to further examine which of the tools used in the U.S. and UK regimes better protect minority shareholders. There is also a need for more literature on costs of the regulatory framework imposed by both jurisdictions and whether such regulations can be translated to other countries, as well as a need for further exploration into the institutions needed to implement these regulatory structures. Further inquiry into these issues can help lawmakers determine what features of takeover regulation could be best used by other jurisdictions contemplating takeover regulations.
This post comes to us from Afra Afsharipour, Professor of Law and Martin Luther King, Jr. Hall Research Scholar at the University of California Davis School of Law. It is based on her recent book chapter, “Deal Structure and Minority Shareholders,” available here.