Defence tactics in Hostile takeovers - An Analysis of the Rules Imposed on the Pursued Target
| Author | Simen H. Stokka |
| Pages | 1-28 |
S.S.L.R. Defence Tactics in Hostile Tak eover s
1
Vol.3
Defence Tactics in Hostile Takeovers – An Analysis
of the Rules Im posed on the Pursued Target
Sim en H . Stok ka
The aim of this article is to exam in e the app licability of defence tactics which
would be favorable to th e board of a t arget company when tr ying to war d off a
hostile takeover attempt. The assessment will main ly focus on how takeover
defence tactics ar e regulated in th e U.K, wher e the scope for the target boar d
to employ su ch tactics is sub stan tially r estricted.
Furt her, this ar ticle will assess the distinct app roach adopted t o r egulate
takeover defensive measures in the State of Delaware U.S, and discuss
whether British takeover regu lation should be altered in order t o give the
target com pany boar d of directors m ore flexibility to a dopt defen ce tact ics.
Introduction
he term takeover is commonly used when a publicly tr aded company1
(offeror) offers to acquire sufficient sh ares to obtain con trol of another
(offeree), in retu rn for ca sh an d/ or secu rities2. The takeover is d escrib ed
as h ostile when the offeree board does n ot support the bid. Actions taken by
the offer ee board of directors to ward off the hostile takeover attempt are
referred t o as defen sive measures or d efence ta ctics3.
Takeover defensive m easur es developed amon g UK company boards aft er the
emergen ce of hostile takeovers in th e early fifties. In the wake of Wor ld War II
both th e inflation and real estat e values in the UK rose rapidly, an d higher
quality fin ancial repor ting of comp anies` ear nings was required by virtue of
the Com panies act 1948 4. These factors in combination with un dervalued
1 This article will focus on takeovers of publicly traded listed co rporations.
2 Wild, C. and Weinstein, S. Smith and Keenan`s Company Law, Pearson Education, 15th Ed. (2011), at
p. 540.
3 For the purposes of this article the terms “defensive measures” and “defence tactics” will be used
synonymous and in a broad sense, covering not only measures which would directly frustrate a bid, but
also measures which might have a more indirect deterrent effect on a hostile bid.
4 Armour, A. Jacobs, J.B. and Milhaupt, C.J. The Evolution of Hostile Takeover Regimes in Developed
and Emerging Markets: An Analytical Framework, (2011) Harv. Int. L.J. 52 (1), 221, 233.
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[2013] Southam pt on St uden t Law Review Vol.3
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corporate assets an d su perficially low share prices 5 m ade man y companies
attr active acq uisition tar gets.
However, to prevent takeovers of their rep resentative companies, the
company directors responded by adopting defensive measures, such as p aying
out higher dividends to shar eholders to th rive u p th e share prices, selling off
valu able compa ny ass ets, a nd issu ing blocks of new sha res in the company to a
friendly third party holder to counteract the takeover. An exam ple of a drastic
defence tact ic from 1953 was the schem e adopted in t he Sav oy H otel a ffair,
where th e Berkeley Hotel in fear of a hostile takeover essentially transferred
the hotel pr operty to a frien dly thir d party in retur n for shares in that
company6.
The shar eh olders of target comp anies did not respond well to the measures
adopted b y their dir ectors an d proclaim ed that it was “inappropriate for
directors to take steps that would m aterially affect con trol of a compa ny—such
as issu ing lar ge blocks of un issued sha res—withou t sha reholder ap proval”7.
After extensive litigat ion contests regardin g takeover defence tactics in th e
sixties, investor's calls for r egulation were m et by the issue of the City Code on
Takeov ers and M er gers 1968. The City Code was ad ministered by the City
Panel on takeovers and M ergers. The Pan el was granted authority as a self-
regulatory organization by the London Stock Exchange, the Board of Tr ade
and trad e association s fr om the Working party to initiat e san ction s for
breaches of the Code, and the system int roduced by the Code ha s “proved
remarkably end uring” in governing takeover disputes from its origin and up
un til tod ay8.
Since its or igin, the Code has represented a substantial restriction of the
opportunity for target company directors to apply defensive m easu res. In the
cur rent version of the Code9, the most pr ominent provision in this regard is
rule 21. Rule 21 pr oh ibits the offeree company from taking any action which
might fru strate the offer or den y the sha reholders the op portun ity to decid e on
th e merits of a bid without shar ehold er approval, if they have reason to believe
that a takeover offer m igh t be imminent. Rule 21 is reinforced by General
Principle 3 of th e Code, which proclaims the shar eholders right t o d ecide on
th e mer its of a bid .
When the Code was issu ed in 1968 th e Panel did not have statutory authority
to enforce it. Com pliance to the Code was en sur ed by a process referred to as
“cold should er ing”, where the banks and oth er in vestors refused to deal with
companies proclaimed by the Panel as violators of the Code, and thereby
forced directors to comply in order to obtain investment capital for the
5 Johnston, A. Takeover regulation: historical and theoretical perspectives on the City Code, (2007)
CLJUK, 422, 427-428.
6 Johnston (above note 5) at 429.
7 Armour, Jacobs and Milhaupt (above note 4) at 235.
8 Armour, Jacobs and Milhaupt (above note 4) at 237.
9 The Panel of Takeovers and Mergers, The Takeover Code, Tenth Edition, September 2011.
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