Corporate Control: Markets and Rules
| Published date | 01 March 1990 |
| Author | Caroline Bradley |
| Date | 01 March 1990 |
| DOI | http://doi.org/10.1111/j.1468-2230.1990.tb01802.x |
Corporate Control: Markets
and
Rules
Caroline
Bradley*
1.
Introduction
It is likely that the impact of statutes on transactions in corporate control in the United
Kingdom will increase in the near future, whether as a result of recent
scandals
or because
of the introduction of legislation to harmonise rules within the
EEC.’
For these reasons
it is appropriate to consider again the interests of those who are affected by the operation
of the market for corporate control.
Traditionally, comment on, and regulation of, take-overs has
focused
on three issues:
(1)
the maintenance of proper balances between managerial and ownership interests within
companies which are the targets of take-over attempts,
(2)
the maintenance of a balance
between the interests of predators and shareholders in the target company, and
(3)
the
protection
of
the public interest. The first issue can be traced to the identification by Berle
and
Means
of a potential conflict between the interests of owners and the interests of
controllers of large corporations. Since Berle and
Means,
much of the literature about
corporations has concentrated on whether constraints on corporate managerial power are
necessary in order to protect the interests of shareholders.* One of the most significant
constraints on corporate managerial power seems to many commentators to be the market
for corporate control, and the threat of displacement which it poses to corporate manage-
ment~.~ The idea of the market for corporate control seems to have originated with Berle
and
Means,4
but has since been The second issue arises out of the concern of
regulators that predators should not profit at the expense of target company share-
holders,6 and some of the refinements of the corporate control theory are relevant to
this
issue.
In
practice, the third issue, the protection of the public interest, usually involves
questions of competition policy.’
These three issues
all
have different origins, but economic theory is relevant
in
all cases,
as it suggests that markets operate in the public interest, except where there is market
*Law Department, London School of Economics and Political Science.
1
Statutes already affect transactions in corporate control. See, for example: The Fair Trading Act
1973;
sections
146-153
of
the Companies Act
1989.
On suggestions that the system of regulation of take-overs
will change, see, for example: Gower ‘Big Bang and City Regulation’
[1988] 51
MLR
1,
pp.19-20;
The
Annual
Report of the Takeover Panel for the year ended
31st
March
1988;
EC Proposal
for
a Xrreenrh
Company Law Directive Concerning Takeovers.
A
Consultative Document
DTI,
August
1989,
pp.7-12.
2
See,
for example: Berle and Means
The Modem Corporation and Private Propeny
(New York: The
MacMillan Company
1933);
Fama and Jensen ‘Separation of Ownership and Control’
26
J. L. and Econ
301 (1983);
Williamson ‘Organisation
Form,
Residual Claimants, and Corporate Control’
26
J.L. and
Econ,
351 (1983);
Victor Brudney ‘Corporate Governance, Agency Costs and the Rhetoric of Contract’
85
Col. L. Rev.
1403 (1985);
Helm, ‘Mergers, Take-overs, and the Enforcement of Profit Maximization’
in Fairburn and Kay (eds),
Mergers
&
Merger Policy
(Oxford: Oxford University Press
1989).
3
‘The Government believe that the threat of take-over is a powerful spur towards efficiency
in
the management
of
UK
Companies.’
Mergers Policy.
A
Depamnent
of
Trade
and
Indusny
Paper
on
the policy
and
procedures
of
merger control.
(1988)
at para.
2.27.
4
See
Berle and Means, note
2
above,
p.287.
5
See,
for example: Manne ‘Mergers and the Market for Corporate Control’ (1965)
Journal
of
Political
Economy
110;
Manne ‘Some Theoretical Aspects of Share Voting’
64
Col.
L.
Rev.
1427 (1964);
Mams
The Economic Theory
of
‘Managerial’ Capitalism
(London: MacMillan
&
Co Ltd
1964);
Easterbrook
and Fischel ‘Corporate Control Transactions’
91
Yale
L.
J.
698 (1982);
Comment and Jarrell ‘Two-Tier
and Negotiated Tender Offers. The Imprisonment
of
the Free-riding Shareholder’
19
Journal
of
Financial
Economics
283 (1987).
6
See,
for example: The Takeover Panel
Guinness PLC. The Distillers Company PLC
14
July
1989.
7
See
text at note
103
below.
170
The Modern
Law
Review
53:2
March
1990 0026-7961
March
19901
Corporate
Control: Markets
and
Rules
failure, such
as
insufficient competition, or external social costs.8 Recent suggestions that
the traditional approach to take-overs does not take adequate account of the interests of
predator company shareholders, employees and suppliers of the target company, the local
community and the public interest9 are suggestions that take-overs involve external social
costs, which should be eliminated or internalised.
This article describes the market for corporate control theory, and
the
implications of
this theory for the interests of investors in the target company, and investors in the predator
(if it is a company), and of other affected groups. Current rules which affect the interests
of these various groups are described, and
I
suggest ways in which the current rules could
be amended in order better to protect the interests
of
those who may be threatened by
the operation of the market for corporate control. These issues are often ignored in the
context of a regulatory system which has developed in response to perceived abuses in
the market place.l0
2.
The Market for Corporate Control
The theory of the market for corporate control
is
that ‘inefficient managers, if not responsible
to, and subject to displacement by, owners directly, can be removed by stockholders’
acceptance of take-over bids induced by poor performance and a consequent reduction
in stock value’.lI The market for corporate control is supposed to reduce the risk,
identified by Berle and Means, that managers may satisfice or engage in non-profit
maximising behaviour12 and to ensure that resources are allocated efficiently.
I3
The foundation of the market for corporate control theory is the relationship between
the activities of a company’s management and the price
of
its shares.14 Inefficient
managers do not take feasible action to maximise the price of the company’s shares,Is
and where the management of a company is inefficient in this sense the price of shares
in that company fails to reflect the company’s true potential. This creates a ‘control
opportunity’, an opportunity for a predator to acquire control of the company and appoint
a new management which will act to maximise the share price, and, in
so
doing, produce
8
9
10
11
12
13
14
15
See, for example: Stone
Regulation and its Alternatives
(Washington DC: Congressional Quarterly Press
1982).
See,
for example: Greene and Junewicz ‘A Reappraisal of Current Regulation of Mergers and Acquisitions’
132 U. Pa.
L.
Rev. 647-739 (1984) pp.732-5; Coffee ‘Shareholders Versus Managers: the Strain in
the Corporate Web’ 85 Mich.
L.
Rev. 1 (1986) p. 12;
Takeovers
and
Mergers.
A
GMB Plan
for
Action.
General, Municipal Boilermakers and Allied Trades Union, May 1987;
A Market with Rules: Regulating
Takeovers, Mergers and Monopolies
Labour Finance and Industry Group, 1988.
See, for example: Statement of the Panel
on
Take-overs and Mergers ‘Guinness PLC’ 30 January 1987;
Joint Statement of The Stock Exchange and of the Panel
on
Take-overs and Mergers
30
January 1987.
Herman
Corporate
Control,
Corporate Power
(Cambridge: Cambridge University Press 1981) p. 10.
See,
for example: Manne ‘Some Theoretical Aspects of Share Voting’ Note
5
above, p.1432.
See, for example: Manne ‘Mergers and the Market for Corporate Control’ Note
5
above at p. 119. Manne
suggests that other benefits of the market for corporate control are the lessening of costly bankruptcy
proceedings, more efficient management of corporations and protection to non-controlling corporate
investors, and consequent impact
on
the liquidity of the market in shares.
The Department of Trade and Industry has endorsed
the
role of the market in ensuring efficient allocation
of resources. See:
Mergers Policy.
A
Depament
of
Trade
and
Indusny
Paper
on
the Policy
and
Procedures
of
Merger Control,
note 3 above, and
DTI
-
the Department
for
Enterprise
Cm 278 (1988) para 2.9.
See, for example: Manne ‘Mergers and the Market for Corporate Control’ note
5
above; Ryngaert ‘The
Effect of Poison Pill Securities
on
Shareholder Wealth’ 20
Journal
of
Financial Economics
377 (1988);
Dann
and De Angel0 ‘Corporate Financial Policy and Corporate Control. A Study of Defensive Adjustments
in Asset and Ownership Structure’ 20
Journal
of
Financial Economics
87 (1988).
Manne ‘Some Theoretical Aspects of Share Voting’ Note 5 above, p. 143 1, note 1 1. If efficiency is defined
as the failure to take action to maximise the price of shares in a company it is not surprising if there
is
a correlation between management efficiency and share price.
171
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