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European Takeover Law – Towards a European Modified Business Judgment Rule for Takeover Law

Published online by Cambridge University Press:  17 February 2009

Christian Kirchner  and
Richard W. Painter
Christian Kirchner
Affiliation:
Prof. Dr. iur. Dr.rer.pol. LL.M. (Harvard), Humbolt University Berlin
Richard W. Painter
Affiliation:
Professor of Law, University of Illinois.
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Extract

Although mergers and acquisitions activity in Europe has reached unprecedented levels, almost doubling in the past year alone, hostile takeovers are still the exception, not the rule, especially in Germany. The British telecommunication concern Vodafone's 141 billion Euro takeover bid for its German counterpart, Mannesmann, in December 1999 was the first successful hostile bid for a major German company in post-war history.

Type
Articles
Information
European Business Organization Law Review (EBOR) , Volume 1 , Issue 2 , June 2000 , pp. 353 - 400
Copyright
Copyright © T.M.C. Asser Press and the Authors 2000

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References

1 Thompson Financial Services Data, “European M&A activity has increased by a massive 105%.” Corporate News: German Deals Hit Heights; Announced acquisitions of German companies reach $261 billion; Mannesmann / Vodafone Airtouch deal breaks all records; European M&A doubles in 1999, <www.tfsd.com> (visited 12 February 2000); “The annual merger and acquisition activity compiled by Thompson Financial Securities Data shows the total value of announced deals involving German targets in 1999 reached $261 billion (247 billion euros). This accounted for 22% of the overall announced European M&A in 1999, valued at $1,213 billion (1,146 billion euros)”, ibid.

2 See section 3 infra, discussing statistical data showing only 68 hostile bids in Continental Europe in the 1990s, compared with 333 in the United States.

3 Earlier unsuccessful bids included Krupp's 1997 bid for Thyssen AG, which was at first resisted by Thyssen and then resolved with a friendly deal in which Krupp acquired control of Thyssen's steel operations.

4 See generally, Bergström, Högfeldt, Macey, and Samuelsson, , “The Regulation of Corporate Acquisitions: A Law and Economics Analysis of European Proposals for Reform”, Colum. Bus. L. Rev. (1995) 495Google Scholar, analyzing takeover laws in Italy, France, Germany and other European Union countries.

5 Tender offers in the U.K. are regulated by the Panel on Takeovers and Mergers, a self-regulatory organization that functions pursuant to the City Code on Takeovers and Mergers. See “City Code on Takeovers and Mergers”, in Rabinowitz, (ed.), Weinberg & Blank on Takeovers and Mergers, Vol. 2, 5th ed. (Sweet & Maxwell 1989) p. 7001.Google Scholar

6 See Ubernahmekodex Börsensacherständigenkommission [Takeover Code of the Exchange Export Commission at the Federal Ministry of Finance], 14 July 1995, translated in Cleary, Gottlieb, , Steen and Hamilton, The New German Takeover Code (1996) Annex 1.Google Scholar

7 Börsensachverständigenkommission, Standpunkte der Börsensachverständigen-kommission zur künftigen Regelung von Unternehmesübernahmen (1999) pp. 36–47.Google Scholar

8 See Experten beraten Übernahme-Regeln [Experts Advise Takeover Regulation], ZDF.MS NB C, <http://www.zdf.msnbc.de/news> (visited 10 March 2000): “Bundeskanzler Gerhard Schröder (SPD) und Spitzenvertreter aus Wirtschaft, Wissenschaft und von Gewerkschaften sind übereingekommen, daβ die Bundesrepublik einen verlässlichen gesetzlichen Rahmen für die Übernahme von Unternehmen braucht [German Chancellor Gerhard Schröder (SPD) and high level representatives from business, academia and labor unions are convinced that Germany needs a functional legal framework for corporate takeovers]”, reporting that the government would like to see a takeover law passed by the legislature by the beginning of 2001 and that a point of contention is whether bidders should be required to pay for a target company's shares in part with cash or be permitted to pay solely with stock.

9 The text of the draft EU Takeover Directive as adopted by the Council of the European Union on 19 June is being published in: Council of the European Union, Inter-institutional File: 1995/0341 (COD), Brussels, 21 June 2000, 8129/1/00 Rev. 1, DG C II.

10 Thirteenth Directive, Art. 9 (1)(a). Many observers, including Klaus-Heiner Lehne, the European Parliament's reporter for the takeover directive, have expressed doubt about the strict neutrality rule. See Lehne, , “Briefe an die Herausgeber [Letter to the Editor]”, Frankfurter Allgemeine Zeitung, 14 March 2000Google Scholar, 11, expressing concern that approval of defensive measures at a shareholders meeting is unrealistic because a tender offer may be completed before the meeting is called.

11 Österreichisches Übernahmegesetz [Austrian Takeover Code], Bundesgesetz [Federal Law] of 14 August 1998Google Scholar, BGBl. 1,127.

12 City Code, supra n. 5, Principle 7.

13 But see text accompanying nn. 110-113 infra, suggesting that shareholder voting via the Internet in some cases be substituted for approval of takeover defenses at a shareholder meeting.

14 See Kirchner, , “Neutralitäes- and Stillhaltepflicht des Vorstands der Zielgesellschaft im Übernahmerecht [The Strict Neutrality Obligation of the Target Company Board in Takeover Law]”, 44 AG, Die Aktiengesellschaft (1999) 481–492.Google Scholar

15 When in 1983 Professor Louis Lowenstein proposed for the United States a rule similar to the draft Thirteenth Directive, he also proposed that tender offers be required to remain open for six months to provide time for shareholder approval of defensive measures. Lowenstein proposed “a two-part amendment to the Williams Act applicable to all target companies with a class of equity securities registered under the Securities Exchange Act of 1934: (1) a hostile tender offer, as defined, must remain open for a minimum of six months, and (2) any responses to a hostile tender offer by the target company management must, if they entail so-called structural changes in the target, be submitted to the shareholders of the company for approval in accordance with the laws of the state of incorporation and pursuant to a proxy statement complying with the proxy rules.”, Lowenstein, , “Pruning Deadwood in Hostile Takeovers: A Proposal for Legislation”, 83 Colum. L. Rev. (1983) 249 at 255CrossRefGoogle Scholar. Requiring bids to remain open for six months, the time that is probably required for a shareholder vote using conventional notice and proxy solicitation procedures in the United States, however, would discourage some bidders and thus arguably might be worse for shareholders than relying on the discretion of target company directors.

16 See Kirchner, supra n. 14, at 484, discussing how the strict neutrality rule discriminates between hostile takeovers in which the target company's board is subject to the neutrality obligation and friendly takeovers in which it is not. Legal systems that do not impose the strict neutrality rule still differentiate between hostile and friendly transactions because of the heightened conflicts of interest for directors in hostile transactions. The distinction, however, under the modified business judgment rule only means a shift in the burden of proof. Directors are required to justify their actions instead of being presumed to be acting for a proper business purpose. See text accompanying nn. 35-39 infra, discussing Chef vxs. Mathes, 199 A.2d 548 (Del. 1964) and subsequent case law in Delaware.

17 Most American corporate law literature discussing hostile takeovers views managers' relationship to shareholders as an agency problem. See, e.g., Manne, , “Mergers and the Market for Corporate Control”, 73 J. Pol. Econ. (1965) 110 at 113CrossRefGoogle Scholar; Bebchuck, , “The Case for Facilitating Competing Tender Offers”, 95 Harv. L. Rev. (1982) 1028 at 1030-1031CrossRefGoogle Scholar; Easterbrook, and Fischel, , “The Proper Role of a Target's Management in Responding to a Tender Offer”, 94 Harv. L. Rev. (1981) 1161 at 1169-1174CrossRefGoogle Scholar; Gilson, , “A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers”, 33 Stan. L. Rev. (1981) 819 at 841.CrossRefGoogle Scholar

18 The collective action problems that shareholders confront in resisting inadequate tender offers are discussed more extensively in the text accompanying nn. 40-41 infra. Proponents of the strict neutrality rule dismiss these concerns because diversified shareholders, who own both bidder and target company stock, should be indifferent to price bias favoring bidders over targets. See Easterbrook, and Fischel, , “Auctions and Sunk Costs in Tender Offers”, 35 Stanford L. Rev. (1982) 1 at 8CrossRefGoogle Scholar, pointing out that diversified shareholders do not benefit from bid price maximization. Many shareholders, however, are not diversified, particularly across international boundaries. See text accompanying nn. 116-121 infra.

19 See Bergström, et. al., supra n. 4, at 510: “A conclusion that defensive measures should be prohibited is too simplistic. The matter is complicated because defensive measures also increase a target company's ability to negotiate a higher premium.” The higher premiums paid for U.S. companies than for their European counterparts support this observation and suggest that the modified business judgment rule in American corporate law may be more effective at raising premiums than the strict neutrality rule in London's City Code. See text accompanying nn. 102-105 infra, discussing possible explanations for higher premiums paid in the U.S.

20 The City Code requires any person who acquires 30% of the voting stock of a company to make a cash offer for the entire company, conditioned upon the bidder receiving at least 50% of the voting securities of the company. See City Code, supra n. 5, Rule 5.1, cited and discussed in Karmel, , “Transnational Takeover Talk: Regulations Relating to Tender Offers and Insider Trading in the United States, the United Kingdom, Germany, and Australia”, 66 U. Cin. L Rev. (1998) 1133 at 1138Google Scholar. Only after the bidder receives 50% of the company's voting securities, can the bidder make the offer unconditional. See City Code, supra n. 5, Rule 10. If the offer lapses without becoming unconditional, the bidder is precluded for twelve months from making a further bid for the company without permission from the Panel on Takeovers and Mergers, ibid., Rules 9.1 -9.3 and 10. After the bidder acquires 90% of the company's voting shares, it can force the remaining 10% to tender their shares on the same terms, ibid., Rule 9.3. Partial offers are permitted in a narrow range of circumstances. An offer that would result in an acquirer having 30% or more of a target company's voting rights must be approved by shareholders holding over 50% of the voting rights not held by the acquirer or persons acting in concert with the acquirer, a requirement that may occasionally be waived if over 50% of the voting rights in the company are held by a single shareholder, ibid.

21 See Herkenroth, , Konzernierungsprozesse im Schnittfeld von Konzemrecht und Übernahmerecht, Rechtsvergleichende Untersuchungen der Allokationseffizienz unterschied-licher Spielregeln von Unternehmensübernahmen [Mergers and Acquisitions in Corporate Law and Takeover Law: Comparative Law Examination of Allocative Efficiency of Different Rules for Takeovers], (Berlin 1994)Google Scholar; Kirchner, , “Szenarien einer “feindlichen” Unternehmens-übernahme: Alternative rechtliche Regelungen im Anwendungstest [Scenarios of “Hostile” Corporate Takeovers: Application of Alternative Legal Rules]”, 55 BB, Betriebs-Berater (2000) 105–133.Google Scholar

22 The “modified business judgment rule” that is applied by courts in evaluating directors' defenses to hostile bids, is a variation on the more deferential “traditional business judgment rule” that is applied in other contexts where conflict between director and shareholder interests is not so obvious. See text accompanying nn. 28-32 infra.

23 European Union directives, if worded with general language, encourage jurisdictional competition as Member States fill in details in their own legislation. Alternatively, highly specific directives fashion more uniform standards at the expense of jurisdictional competition. See text accompanying nn. 144-145 infra.

24 C-212/97 Centros, [1999] ECR I-1459. Centres Ltd. was incorporated in the U.K., which does not have any minimal capital requirements, in order to avoid Denmark's high minimal capital requirements (about $27,000), even though Centros did no business in the U.K. Centros' application to do business in Denmark was denied on the ground that Centros had not established a trade or business in its purported home, the U.K. Centros sued to compel registration, claiming that the Danish law, in compliance with Arts. 52,56 and 58 of the EC Treaty, provided that a foreign company established in another Member State could do business in Denmark through a branch. The Danish government argued that the EC Treaty did not apply to an internal matter involving a company having no business existence or purpose outside of Denmark, but the Court rejected this argument: “It is contrary to Articles 52 and 58 of the EC Treaty for Member States to refuse to register a branch of a company formed in accordance with the law of another Member State in which it has a registered office but in which it conducts no business where the branch is intended to enable the company to carry on its entire business in which the branch is created (…) thus evading application of the rules governing the formation of companies which, in that state are more restrictive (…).” The Centros Case is quoted and discussed in Coffee, Jr., “European Takeovers: The 13th Directive is Coming”, New York L.J. (November 18, 1999)Google Scholar. The Court also held, however, that this “interpretation does not prevent the authorities of the Member State concerned from adopting any appropriate measure for preventing or penalising fraud, either in relation to the company itself, or in relation to its members where it has been established that they are in fact attempting by means of the formation of a company to evade their obligations towards private or public creditors (…) of the Member State concerned”. Arguably, this qualifying language would allow Member States to continue to enforce against foreign corporations “social or public policies that are embedded in corporate legislation”. It is not certain, however, that the Centros decision requires EU Member States to substitute an incorporation doctrine similar to that used in the United States and the United Kingdom for the seat doctrine applicable in Germany and most other Member States. See Ebke, , “Das Centros-Urteil des EuGH und seine Relevanzfur das deutsche Internationale Gesellschaftsrecht [The Centros Decision of the European Court of Justice and its Relevance for International Choice of Law for Corporations]”, 54 Juristenzeitung (1999) 656–661Google Scholar. The German Federal Civil Court has submitted the viability of the seat theory to the European Court of Justice for determination (Decision of the Bundesgerichtshof of 3 March, Press release no. 21/2000).

25 Jurisdictional competition has been a hallmark of American corporate law, but not of American securities law. Compare, Romano, The Genius of American Corporate Law (The American Enterprise Institute Press 1993)Google Scholar, describing the achievements of federalism in corporate law, and Easterbrook, and Fischel, , The Economic Structure of Corporate Law (Harvard University Press 1991)Google Scholar, providing an economic analysis of jurisdictional competition in corporate law, with Romano, , “Empowering Investors: A Market Approach to Securities Regulation”, 108 Yale L. J. (1998) 2359 at 2361CrossRefGoogle Scholar, suggesting that jurisdictional competition would be superior to existing mandatory federal legislation as a method of regulating securities markets, and with Painter, , “Responding to a False Alarm: Congressional Preemption of State Securities Fraud Causes of Action”, 84 Cornell L Rev. (1998) 1Google Scholar, criticizing Congress for preempting state law for securities class actions in the 1998 Uniform Standards Act.

26 See Coffee, supra n. 24, discussing the implications of the Centros decision for European corporate law.

27 See Bebchuk, and Ferrell, , “Federalism and Corporate Law: The Race to Protect Managers from Takeovers”, 99 Colum. L. Rev. (1999) 1168CrossRefGoogle Scholar, criticizing judicial deference to managers in Delaware cases applying the modified business judgment rule to takeover defenses.

28 Cede v. Technicolor, Inc., 634 A.2d 345 (1994) at 360-361.

29 692 F.2d 880 (1982).

30 Ibid., e.g., a diversified investor would prefer to invest in Firm A, which has a 50% chance of a 100% return and a 50% chance of a 50% loss, or an overall expected return of 25%, over Firm B, which has a 100% chance of a 10% return. By investing in many different companies that are the equivalent of Firm A, the diversified investor could earn an actual return close to the 25% expected return and protect himself against a loss in any single firm. Directors unprotected by the business judgment rule, however, might err on the side of excessive caution and cause Firm A to be operated in a way that produced the more certain returns of Firm B, see 692 F.2d at no. 6 (using a similar example from Klein, , Business Organizations and Finance (1980) 147–149).Google Scholar

31 See Cede v. Technicolor, Inc., supra n. 28, at 362-363.

32 In 1999, the Delaware Supreme Court held that, when one or more directors have breached their duty of loyalty by failing to recuse themselves from decisions on transactions in which they are interested, the board's decisions should be scrutinized for substantive fairness in some circumstances. These include circumstances in which the interested directors “either a) constituted a majority of the board; b) controlled and dominated that board as a whole, or c), i) failed to disclose their interests in the transaction to the board, and (ii) a reasonable board member would have regarded the existence of their material interests as a significant fact in the evaluation of the proposed transaction”, Goodwin v. Live Entertainment, Inc. (Del. Ch. 1999).

33 See s. 144 of Delaware's General Corporation Law

34 See, e.g., Easterbrook and Fischel, supra n. 17 at 1161, arguing that the wealth of investors and society is increased if target company managers neither resist takeover bids nor seek competing offers for the target's securities; Easterbrook and Fischel, supra n. 18, responding to critiques of this analysis raised by Professors Lucian Bebchuk and Ronald Gilson. But see Bebchuk, , “The Case for Facilitating Competing Tender Offers: A Reply and Extension”, 35 Stan. L Rev. (1982) 23CrossRefGoogle Scholar; Bebchuk, , “The Case for Competing Tender Offers”, 95 Harv. L. Rev. (1982) 1028CrossRefGoogle Scholar, and Gilson, , “Seeking Competitive Bids Versus Pure Passivity in Tender Offer Defense”, 35 Stan. L. Rev. (1982) 51CrossRefGoogle Scholar. Professor Gilson, however, rejects an approach that would give broad discretion to the target company board outside of soliciting competing bids, see Gilson, , “A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers”, 33 Stan. L. Rev. (1981) 819 at 868-875CrossRefGoogle Scholar; Gilson, , The “Case Against Shark Repellant Amendments: Structural Limitations on the Enabling Concept”, 34 Stan. L. Rev. (1982) 775.CrossRefGoogle Scholar

35 199 A.2d 548 (1964).

36 Ibid, at 554.

37 See text accompanying n. 28 supra; Aronson v. Lewis, 473 A.2d 805 (1984) at 812.

38 199 A.2d 554 (1964) at 554-555.

39 Ibid, at 555.

40 493 A.2d 946 (Del. 1985).

41 The two-tier offer presents the target company's shareholders with collective action problems that are evaluated by many legal scholars using the prisoners' dilemma paradigm. See, e.g., Leebron, , “Games Corporations Play: A Theory of Tender Offers”, 61 NYU L. Rev. (1986) 153 at 186-188Google Scholar and n. 117: “Arguably, virtually any tender offer creates a prisoner's dilemma.”; Bebchuk, , “Toward Undistorted Choice and Equal Treatment in Corporate Takeovers”, 98 Harv. L. Rev. (1985) 1693 at 1696CrossRefGoogle Scholar; Macey, and McChesney, , “A Theoretical Analysis of Corporate Greenmail”, 95 Yale L.J. (1985) 13 at 22CrossRefGoogle Scholar, and Ayres, , “Playing Games with the Law”, 42 Stan. L. Rev. (1990) 1291 at 1315CrossRefGoogle Scholar. Arguably, a target company's board can help overcome this dilemma by defending the company against offers that, if the shareholders could decide collectively rather than individually, would be rejected.

42 493 A.2d 955 (Del. 1985).

43 Ibid.

44 Ibid.

45 Ibid., n. 10.

46 E.g., under the balancing test suggested in Unocal, an all-cash offer for 100% of the target's stock by a bidder who has immediately available financing and plans to continue to operate the business would probably be perceived to be less of a threat to corporate policy and effectiveness than a two-tier offer in which 49% of the target's shareholders will be paid in junk bonds by a bidder with dubious financing and clear plans to liquidate the company.

47 After the Unocal holding, the United States Securities and Exchange Commission amended its tender offer rules to prohibit self-tender offers that are not made to all shareholders, see SEC Rule 13e-4(f)(8). Although self-tender offers that exclude the hostile bidder thus are no longer available as a defensive measure, the reasoning of the Delaware court in Unocal still holds. The board of a target company has wide discretion in responding to a hostile bid, and a variety of measures (including poison pills and other plans that exclude the hostile bidder from a distribution) can be deployed, see Moran v. Household International, Inc., 500 A.2d 1346(Del. 1995), upholding a “flip-over” poison pill providing that if an acquirer sought to merge the target corporation into itself after a hostile tender offer, the remaining shareholders of the target would be entitled to purchase $200 worth of the acquirer's stock for $100.

48 506 A.2d 173 (Del. 1985).

49 Ibid, at 177

50 Ibid.

51 Ibid, at 178.

52 Ibid, at 182.

53 Ibid, at 184.

54 Ibid.

55 Ibid.

56 “The principal object, contrary to the board's duty of care, appears to have been protection of the noteholders over the shareholder's interests (…). The principal benefit went to the directors, who avoided personal liability to a class of creditors to whom the board owed no further duty under the circumstances.”, ibid.

57 Ibid.

58 571 A.2d 1140 (Del. 1989).

59 Under the share exchange agreement, Time would receive 17,292,747 shares (9.4%) of Warner's common stock and Warner would receive 7,080,016 shares (11.1%) of Time, ibid, at 1146.

60 Ibid.

61 Ibid, at 1148. Time would immediately pay $70 per share in cash for 51% of Warner's shares and at a later date pay $70 per share in cash and securities for the remaining 49% of Warner.

62 Ibid.

63 “Under Delaware law there are, generally speaking and without excluding other possibilities, two circumstances which may implicate Revlon duties. The first, and clearer one, is when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear breakup of the company (…). However, Revlon duties may also be triggered where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving a breakup of the company.”, Ibid.

64 “Implicit in the plaintiffs' argument is the view that a hostile tender offer can pose only two types of threats: the threat of coercion that results from a two-tier offer promising unequal treatment for non-tendering shareholders, and the threat of inadequate value from an all-shares, all-cash offer at a price below what a target board in good faith deems to be the present value of its shares (…). We reject such a narrow and rigid construction of Unocal (…)”, ibid.

65 Ibid.

66 637 A.2d 34 (Del. 1994).

67 571 A.2d 1140 (Del. 1989). “The terms of the merger provided that each share of Paramount common stock would be converted into 0.10 shares of Viacom Class A voting stock, 0.90 shares of Viacom Class B non-voting stock and $9.10 in cash”, 637 A.2d 39 (Del. 1994).

68 Ibid.

69 ibid.

70 500 A.2d 1346 (Del. 1995).

71 Ibid. Such a provision also deters non-coercive tender offers, and thus may reduce shareholder value by decreasing the number of acquirers who are interested in the company.

72 Quickturn Design System, Inc. v. Mentor Graphics Corp., C.A. No. 16584 (Del. 1998).

73 Ibid., but see Invacare Corp. v. Healthdyne Technologies, Inc., 968 F. Supp. 1578 (N.D.Ga. 1997), holding that a “dead-hand” poison pill does not violate Georgia's corporation code; AMP, Inc. v. Allied Signal, Inc., 1998 U.S. Dist. LEXIS 15617 (E.D. Pa. 1998), upholding under Pennsylvania law a delayed amendment provision stating that the rights plan could not be amended or redeemed before the scheduled expiration of the plan 14 months later.

74 See generally, the Williams Act, 15 U.S.C., ss. 78m(d)-(e) and 78n(d)-(f) (1996) amending various sections of the 1934 Securities Exchange Act.

75 On 19 October 1999 the Securities Exchange Commission (SEC) adopted its “Regulation M-A Release.” The new rules are intended to, among other things, liberalize restrictions on communications with shareholders prior to commencement of a tender offer (revised Rules 14d-2(b) and (c)), and allow a “subsequent offer period” after a tender offer is closed, during which remaining shareholders are given one last chance to tender their shares without withdrawal rights (Rule 14d-11). The SEC also adopted new Regulation M-A and Schedule TO, which consolidate in one place the disclosure requirements for tender offers and other extraordinary transactions.

76 On 19 October 1999 the SEC adopted new rules on cross-border tender offers, business combinations and rights offerings in its “Cross-Border Release.” The new rules encourage bidders and offerers to include in their offers U.S. holders of securities in foreign companies, by exempting, in some instances, bidders and offerers from complying with SEC regulations. Broad exemptions from many U.S. securities law requirements apply for tender offers, exchange offers and rights offerings, if U.S. holders own 10% or less of the target foreign company. More limited exemptions apply, if U.S. holders own more than 10% and up to 40% of the company. Anti-fraud and anti-manipulation provisions of the U.S. securities laws, however, continue to apply to cross-border transactions.

77 See text accompanying n. 41 supra, discussing the “prisoners' dilemma” scenario in which shareholders collectively would decide to reject an inadequate offer, but individually tender their shares because they fear that other shareholders will do the same first and leave them with an even worse deal.

78 See Easterbrook and Fischel, supra n. 18, at 16-17: “If information were a free good, disclosure rules would benefit shareholders. But it is not, and disclosure of scarce goods without compensation simply leads to less production. That means less monitoring, fewer takeovers, and lower prices for shares. Waiting periods, advance notice rules, and the regulatory paraphernalia of auctioneering have the same effects, although to a smaller degree.”

79 In contrast to Easterbrook and Fischel, Bebchuk argues that Williams Act restrictions should be tightened further, e.g., by extending the minimum period during which offers must stay open and requiring bidders to give notice before commencing a tender offer. See Bebchuk, “The Case for Facilitating (…)”, supra n. 34, at 45-46.

80 Some commentators minimize the threat to shareholders from collective action problems, imperfect information and bounded rationality, and argue that investors as a whole are better off if regulation of tender offers is minimized and discretion of target company directors is curtailed. See articles by Easterbrook, Fischel and Gilson, cited in nn. 17-18 supra. Other commentators, however, argue that shareholders cannot always protect themselves, although the method of protecting shareholders usually suggested is more regulation of tender offers rather than expanded discretion for the target company's board of directors. See Bebchuk, “The Case for Facilitating (…)”, supra n. 34, at 45-46. The law in the United States clearly rejects the notion that shareholders can fend for themselves, and seeks to protect shareholders both by regulating bidding procedures and disclosures under the Williams Act and by allowing target company boards a certain amount of discretion to deploy defensive measures under the modified business judgment rule in state corporation law. The Williams Act does not, however, regulate the type of consideration paid in a tender offer. See supra n. 8, discussing current debate on this issue within the German government. Neither does the Williams Act require that a bidder who obtains control of a company buy 100% of its stock as required under the City Code, see supra n. 20.

81 Some states, but not Delaware, in the 1980's enacted “other constituency statutes” that allow directors to take the interests of non-shareholder constituencies into account in a tender offer or other change of control transaction. These statutes essentially codify the Unocal approach, but apply in a Revlon situation as well, thus allowing directors to consider non-shareholder interests when the company is up for sale. Connecticut is the only state that requires directors to consider non-shareholder constituencies in change of control transactions.

82 See Bebchuk and Ferrell, supra n. 27.

83 Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496 (1989), cert, denied, 493 U.S. 955 (1989).

84 See “Hostile Reception”, The Economist, 17 April 1999, reporting J.P. Morgan data.

85 See Thompson Financial Services Data, supra n. 1, reporting that in the last year alone “European M&A activity has increased by a massive 105%.”; Thompson Financial Securities Data, The World is Not Enough… To Merge; Worldwide Announced M&A Volume Soars to Record $3.4 Trillion in ‘99, <www.tfsd.com> (visited 22 March 2000), stating that European mergers soared to over $1.2 trillion in 1999, more than double the 1998 tally for European M&A.

86 Sunday Times (London), 2 January 2000Google Scholar, quoting Jeremy Podger, fund manager at Investec Guinness Flight, reporting Guiness Flight data showing that the number of European hostile bids in 1999 was four times the average for the 1990s. The vast majority of these hostile bids, however, have been in the U.K. See “Hostile Reception”, supra n. 84, reporting J.P Morgan data showing that between 1990 and April of 1999, there were 222 hostile takeover bids in Europe, but only 68 of these were on the Continent.

87 Corporate News: Forget About It! Hostile, Unsolicited M&A Bids Show Low Success Rate, <www.tfsd.com> (visited 12 February 2000).

88 Coates, , “Measuring the Domain of Mediating Hierarchy: How Contestable are U.S. Public Corporations”, 24 J. Corp. L. (1999) 837 at 855.Google Scholar

89 Ibid, at 857. See Thompson Financial Securities Data, supra n. 85, stating that the actual number of United States M&A transactions is expected to decline to about 10,800 in 1999 from 1998's record level of more than 12,300.

90 Coates, supra n. 88, at 857-58.

91 Ibid, at 858.

92 Ibid.

93 Although the European “success” figure is reported to be around 33%, see supra n. 84, comparison is difficult because many European bids may never be attempted by bidders who know that government regulation, cross-shareholdings by corporate conglomerates or other factors will frustrate their efforts. Indeed, most “European” hostile bids take place in one Member State, the United Kingdom. See supra n. 84.

94 Ibid.

95 Coates, supra n. 88, at 856.

96 Ibid.

97 Supra n. 87.

98 Bebchuk and Ferrell, supra n. 27.

99 See Coates, supra n. 88, at 855-856.

100 Table reproduced from The Daily Deal, 6 January 2000,9.

101 Ibid.

102 See “Hostile Reception”, supra n. 84.

103 Bergström, et al., supra n. 4, at 510.

104 See text accompanying nn. 84-87 supra, discussing data showing 222 hostile bids in Europe and 333 hostile bids in the United States during the 1990s. See, however, supra n. 86, discussing Guinness Right data showing that the number of European hostile bids in 1999 was four times the average for the 1990's.

105 See supra n. 84, citing J.P. Morgan data on U.K. and Continental hostile bids reported in The Economist and n. 87, citing Thompson Financial Services data on hostile bids in the United States.

106 See text accompanying nn. 94-99 supra.

107 See text accompanying nn. 88-90 supra.

108 See Bebchuk and Ferrell, supra n. 27.

109 Professor Grundfest has suggested that shareholders use the annual election of directors as an opportunity to protest inefficient defensive measures, see Grundfest, , “Just Vote No: A Minimalist Strategy for Dealing with Barbarians Inside the Gates”, 45 Stan. L. Rev. (1993) 857CrossRefGoogle Scholar, advocating protest vote strategy.

110 See generally Ponds, Kobler, “Shareholder Voting Over the Internet: A Proposal for Increasing Shareholder Participation in Corporate Governance”, 49 Ala. L. Rev. (1998) 673Google Scholar; Wilcox, , “Electronic Communication and Proxy Voting: The Governance Implications of Shareholders in Cyberspace”, Insights (March 1997) 8 at 11Google Scholar, discussing communications between companies and investors through electronic media.

111 Corporations in the United States have already begun to implement on-line shareholder voting. See “Lucent Technologies, Con Edison and Others Offer Online Proxy Voting to Shareholders”, Business Wire, 1 February 2000, reporting that Lucent Technologies and Con Edison, among other companies, have implemented a shareholder direct electronic proxy voting service. Virginia has enacted legislation that specifically permits notification of shareholder meetings and proxy voting to be conducted by electronic means, see Va. Code Ann., s. 13.1-847 (Repl. Vol. 1999).Google Scholar

112 See Grundfest, supra n. 109.

113 On-line voting can be problematic if shareholders constantly change their votes or transfer their shares, leading to unstable majorities. For this reason, decisions that are final (e.g., election or removal of directors) may be better suited to a more strictly regulated on-line vote (e.g., one imposing record dates and voting deadlines that cannot be reopened). On the other hand, volatility and lack of stable majorities would be less detrimental when shareholders only cast a preliminary veto of certain takeover defenses. The rule could be simple: if at any time, the majority of shares vote “no”, the directors would be required to desist from the defense unless it is approved by the affirmative vote of a majority of shares voted at a meeting, as required under the draft Thirteenth Directive.

114 Easterbrook and Fischel, supra n. 18, at 8.

115 Ibid.

116 See ibid, at 2, n. 3, citing Manne, , “Mergers and the Market for Corporate Control”, 73 J. Pol. Econ. (1965) 110.CrossRefGoogle Scholar

117 As the Court pointed out in Revlon, “[a] lock up is not per se illegal under Delaware law (…). Such options can entice other bidders to enter a contest for control of the corporation, creating an auction for the company and maximizing shareholder profit”, 506 A.2d 173 at 183 (Del. 1985).

118 See text accompanying nn. 134-135 infra, discussing likely regulatory responses to a strict neutrality rule.

119 See text accompanying nn. 135-138 infra, discussing the prospect for unwinding cross-shareholdings under a strict neutrality rule.

120 American directors can abuse the modified business judgment rule to repel a tender offer that clearly is in the interest of shareholders. The price of Time-Warner's stock, for example, has not appreciated to a point anywhere close to what Paramount's $200 offer would have been worth if invested by Time shareholders in an index fund, such as the S&P 500, at the time the offer was made.

121 Easterbrook and Fischel, supra n. 18, at 2.

122 There is substantial debate in the academic literature over whether hostile takeovers actually harm non-shareholder stakeholders.

123 Ironically, the same Art. 9 of the proposed Thirteenth Directive that imposes the strict neutrality rule requires the board to inform the public as to how the bid, that the board is powerless to defend against, will affect employment: “(b) the board of the offeree company shall draw up and make public a document setting out its opinion on the bid, together with the reasons on which it is based, including its views on the effects of implementation on all the interests of the company, including employment.”

124 See Easterbrook and Fischel, supra n. 18, at 8, raising shareholder diversification as an argument against protecting shareholders from low bids. As pointed out above, the shareholder diversification argument is less powerful if shareholders are not diversified across jurisdictions that deploy different methods of regulating hostile tender offers. See text accompanying nn. 116-117 supra.

125 German accounting practices do not exclude the use of “hidden asset reserves” which companies are not required to disclose as part of their cash reserves, and that companies can use to subsidize net income and level out earnings bumps. See “Allianz Embraces IAS to Boost Growth Plans”, The Accountant (Lafferty Publications Limited, July 1998) 8Google Scholar, reporting that “Europe's largest insurance group, the German corporation Allianz, has revealed hidden assets of $54 billion while overhauling its accounting procedures in preparation for a probable New York listing” and that Allianz “announced its intention to switch to international accounting standards (IAS)” and that in 1998, “German regulators required all German insurers to report their hidden assets in real estate using current rather than historic values”. It is often overlooked, however, that under any set of accounting principles that is based on historical cost accounting, including U.S. GAAP (US Generally Accepted Accounting Principles), hidden reserves are an inevitable consequence. A “fair value accounting” standard under U.S. GAAP and IAS applies to certain financial instruments, but not to fixed and most other assets.

126 Lowenstein, , “Pruning Deadwood in Hostile Takeovers: A Proposal for Legislation” 83 Colum. L. Rev. (1983) 249 at 325.CrossRefGoogle Scholar

127 See Easterbrook and Fischel, supra n. 18, at 16.

128 Judge Easterbrook and Dean Fischel argue that regulation of tender offers, including the less obtrusive regulation under the Williams Act, should be abolished, even though they argue that the target corporation's board should remain neutral with respect to the tender offer, ibid. Their arguments assume, however, that shareholders are diversified between bidder and target corporation stock and therefore are indifferent to price, ibid, at 8. This assumption, however, may not hold with respect to European shareholders, who are likely to predominantly own stock in European companies, see text accompanying nn. 116-117 supra.

129 Some commentators have suggested that regulation under the Williams Act should be expanded to give shareholders more protection, see Bebchuk, “The Case for Facilitating (…)”, supra n. 34, at 45-46.

130 Compare, e.g., Edgar v. Mite, 457 U.S. 624 (1982), striking down as unconstitutional an Illinois statute that required, among other things, that a tender offer be approved by the Illinois Secretary of State, with CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987), upholding an Indiana statute that limited the voting rights of shares acquired as part of a change in control.

131 Proposed EU Takeover Directive, supra n. 9, Art. 5 (1) and 5 (5).

132 See Grundfest, supra n. 109.

133 See nn. 78 and 79 supra, discussing the debate over the desirability of tender offer regulation under the Williams Act.

134 See, e.g., Cowell, “EU to Block Airtours in Merger Bid”, International Herald Tribune, 11 September 1999, 11, reporting “a significant toughening of European Union competition rules (…) as the 15-nation body shows itself to be increasingly ready to enforce antitrust regulations across a broad range of industries”; Skold, , “Norwegian Banking: Law Change Urged to Block Foreign Bidders”, Financial Times (London), 25 March 1999, 29Google Scholar, reporting that “[t]he Norwegian Bankers' Association yesterday called for speedy changes to the country's financial regulations to defend its banking industry from foreign takeovers as consolidation sweeps European banks”.

135 In 1993, 38.8% of shares in Germany were owned by non-financial enterprises and 14.2% by banks, compared with 3.1% and 0.6% respectively in the U.K. and 14.1% and 0% respectively in the U.S.. Insurance companies own 5.2% of shares in Germany, 17.2% in the U.K. and 4.6% in the U.S.. Pension funds owned 1.9% of shares in Germany, 34.2% in the U.K. and 20.1% in the U.S.. Finally, individual households owned 16.6% of shares in Germany, 17.7% in the U.K. and 50.2% in the U.S., CPB Netherlands [Netherlands Bureau for Economic Policy Analysis], Challenging Neighbors: Rethinking German and Dutch Institutions (1997) 357, tbl. 10.3, cited and discussed in Bratton, and McCahery, , “Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross-Reference”, 38 Colum. J. Transnational L. (1999) 213 at 218.Google Scholar

136 See Monopolkommission, Gesellschaftsrecht und Konzentration, Hauptgutachten 1986/1987, (1987) 281Google Scholar. Germany's system of cross-ownership of equity interests has also been the subject of extensive commentary in the United States. See, e.g., Buxbaum, , “Tensions Between Institutional Owners and Corporate Managers: An International Perspective: Institutional Owners and Corporate Managers: A Comparative Perspective”, 57 Brooklyn L. Rev. (1991) 1Google Scholar, discussing implications of Germany's share cross-holdings system; Kumubler, , “Institutional Owners and Corporate Managers: A German Dilemma”, 57 Brook. L. Rev. (1991) 97Google Scholar; Baums, , “Corporate Governance in Germany: The Role of the Banks”, 40 Am. J. Comp. L. (1992) 503CrossRefGoogle Scholar; Roe, , “Some Differences in Corporate Structure in Germany, Japan, and the United States”, 102 Yale L. J. (1993) 1927.CrossRefGoogle Scholar

137 “Germany's stock market capitalization in relation to its gross domestic product, which is a common way of measuring the significance of the equity markets in a given country, has been lower than any OECD country except Austria and Turkey”, Andre, Jr., “Cultural Hegemony: The Exportation of Anglo-Saxon Corporate Governance Ideologies to Germany”, 73 Tul. L. Rev. (1998) 69 at 100Google Scholar, citing Organisation for Economic Co-Operation and Development, Financial Markets and Corporate Governance (1995), available in LEXIS, News Library, Arcnws File.

138 See Förster, , et al., “Die Nacht der Entscheidung [The Night of Decision]”, Financial Times Deutschland, 17 July 2000.Google Scholar

139 Bürgerliches Gesetzbuch (BGB) s. 242: “Der Schuldner ist verpflichtet, die Leistung so zu bewirken, wie Treu und Glauben mit Rücksicht auf die Verkehrssitte es erfordern. [The debtor is bound to effect performance according to the requirements of good faith, giving consideration to common usage.]”. Contracts have frequently been invalidated or reformed under this provision. See Dawson, , “Unconscionable Coercion: The German Version”, 89 Harv. L. Rev. (1976) 1041CrossRefGoogle Scholar; Dawson, , “Effects of Inflation on Private Contracts: Germany, 1914-1924”, 33 Mich. L Rev. (1934) 171 at 177CrossRefGoogle Scholar, describing use of such general clauses to rewrite contracts during the inflation of the early Weimar Republic. Indeed, this good faith provision has been judicially transformed from a general contract interpretation clause into “a ‘super control norm’ for the whole BGB, and indeed for large parts of German law outside it (…). A ‘principle of legal ethics’, which dominates the entire legal system.”, Horn, , Kotz, and Leser, , German Private and Commercial Law: An Introduction, 135 (T. Weir trans. 1982)Google Scholar (footnote omitted), quoting I Protokolle zum BGB 303, pp. 135-145: “[s. 242 BGB's] function is to justify the value-judgments of the judge”.

140 See Coffee, supra n. 24 and the text accompanying n. 24 supra, discussing this possibility.

141 The Centros decision only dealt with an EU company's secondary right of establishment to set up a branch in another Member State, but not with the primary right of establishment which would allow a corporation duly formed in one Member State to transfer its seat from that Member State to another Member State without losing its corporate identity. Two other cases (a German case and a Dutch case) now before the ECJ directly address conflict-of-laws issues that could lead to clarification on the primary right of establishment. See n. 24 supra.

142 Paramount v. Time, supra n. 58, is often cited by American commentators as an example.

143 See Bebchuk and Ferrell, supra n. 27.

144 See proposed EU Takeover Directive, Art. 3, setting forth “General Principles” including equivalent treatment for all holders of securities in a target company, and sufficient time and information for security holders to decide on the bid.

145 Proposed EU Takeover Directive, Art. 3.

146 Ibid., Art. 4. With respect to choice of law, Art. 4 provides that “(a) [t]he authority competent for supervising the bid shall be that of the Member State in which the offeree company has its registered office if the securities of that company are admitted to trading on a regulated market in that Member State (…); (b) [i]f the securities of the offeree company are not admitted to trading on a regulated market in the Member State in which the company has its registered office, the authority competent for supervising the bid shall be that of the Member State on whose regulated market the securities of the company are admitted to trading. If the securities of the company are admitted to trading on regulated markets in more than one Member State, the authority competent for supervising the bid shall be that of the Member State on whose regulated market the securities were first admitted; (c) [i]f the securities of the offeree company are first admitted to trading on regulated markets within more than one Member State simultaneously, the offeree company has to determine the competent authority for supervising the bid by notifying these regulated markets and their supervisory authorities on the first trading day.” Art. 4 also provides that in cases (b) and (c) above, matters relating to the procedure for the bid, including disclosure, shall be governed under the rules of the Member State of the competent authority, but that matters relating to company law, including “the conditions under which the board of the offeree company may undertake any action which might result in the frustration of the offer” shall be governed under the rules of the Member State in which the offeree company has its registered office.

147 Ibid., Art. 5. See discussion accompanying n. 131 supra.

148 Ibid., Art. 6.

149 This information includes: the terms of the bid; the identity of the offeror and persons acting in concert with the offeror; the securities in the offeree company for which the bid is made; the consideration offered for those securities including information about any other securities that are used as consideration; the maximum and minimum percentages or quantities of securities which the offeror undertakes to acquire; any existing holdings of the offeror and persons acting in concert with the offeror in the offeree company; all conditions to which the offer is subject; the offeror's intentions with regard to the future business of the offeree company, including changes in conditions of employment; the period for acceptance of the bid, and information on the financing of the bid, ibid.

150 Ibid., Art. 9.

151 Ibid., Art. 10.

152 Liberalization of the strict neutrality rule in Art. 9, however, might justify liberalization of the mandatory bid provisions in Art. 5. See section 4.2 supra, discussing the possibility of more limited regulation of tender offers if the target company board has the discretion allowed under a modified business judgment rule. To the extent (i) defensive measures result in sufficiently high premiums being paid for control blocks of stock (see text accompanying n. 100 supra describing generally higher takeover premiums in the United States compared to Europe), and (ii) bidders are required to take shares from all tendering shareholders on a pro rata basis (as required in the United States under the Williams Act), target company shareholders should receive the full value of their investment even though the value of their residual minority shares might decrease after a partial bid for a control block is consummated. The premium for the control shares would have to be sufficient to compensate the shareholders for loss in value of minority interest shares remaining after the partial bid. Incentive structures under the modified business judgment rule would of course have to be such that the target company's board would properly distinguish between bids in which this premium is sufficient and those in which it is not.

153 This specific German business judgment rule, called “Unternehmensinteresse” is discussed at length in Brinman, , Unternehmensinteresse und Unternehmensstruktur (Frankfurt/Main 1983)Google Scholar; Juergenmeyer, , Das Unternehmensinteresse (Heidelberg 1984)Google Scholar; see also Kübler, , Gesellschaftsrecht, 5th ed. (Heidelberg 1999) p. 413Google Scholar; Raiser, , Recht der Kapitalgesellschaften, 2nd ed. (Munchen 1992) p. 151 at pp. 153-154Google Scholar; Mertens in: Zöllner, (ed.), Kolner Kommentar zum Aktiengesetz, vol. 2 no. 1, 2nd ed. (1977) p. 28Google Scholar, nn. 23 and 24.

154 See Kirchner, supra n. 21, at p. 109.

155 See Raiser, supra n. 153, at pp. 56-57 and pp. 59-63.

156 Ibid, at pp. 60-63.

157 Decision of the German Federal Civil Court of 2 February 1993, BGHZ 83, 122; see Raiser, supra n. 153 at pp. 61.