(A) Kouloridas Prelims 24/4/08 15:50 Page i THE LAW AND ECONOMICS OF TAKEOVERS This book studies takeovers from the acquirer’s perspective. More pre- cisely, the book focuses on the legal and regulatory treatment of the risks faced by the acquiring company shareholders in takeovers. The identified risks are categorised into two main groups: first, risks generated by managerial choices and secondly, regulatory or external risks. The analy- sis considers the legal context but also draws on the economic literature, seeking to map the area under consideration and to suggest measures to improve the present position from the perspectives of both law and economics. More specifically, the book examines various methods of protecting the acquiring shareholders against value-decreasing or self-interested acqui- sitions, such as the class transaction rules, fiduciary duties, the acquiring directors’ responsibilities under the Takeover Code, the court scheme pro- cedure, the role of institutional shareholders and reward strategies, and methods of making the acquiring directors more exposed to the discipline of the market. The effects of the choice of the medium of payment are also covered. In addition, it covers the Takeover Code’s position with regard to auc- tion situations and seeks to identify ways of addressing the acquiring shareholders’ interests in auctions, including auctions where buyout teams or White Knights are involved. Moreover, it identifies situations where deviations from horizontal equality rules, which increase takeover premia, are or should be recognised. To that end the Code’s rules on mandatory bids, the determination of the price and the form of payment offered, partial offers and squeeze outs are considered. The analysis covers both hostile and friendly situations. In relation to hostile takeovers, the legal and regulatory framework of toehold strategies is analysed (the Takeover Code’s requirements, the Disclosure Rules and Companies Act disclosure requirements, etc). Market Abuse issues in relation to stake-building are also highlighted. In relation to friendly takeovers the operation of lock-up agreements and break fees (the Takeover Code’s requirements, fiduciary law, financial assistance and other contract law concerns), are also explored. Finally, the Takeover Panel’s position on adverse changes, pre-conditions and conditions which the offer can be subject to, and the bidder’s exposure to Material Adverse Change risk are assessed. The book discusses developments in the area under consideration including the Takeover Code regime after the implementation of the Takeovers Directive and the Companies Act 2006. (A) Kouloridas Prelims 24/4/08 15:50 Page ii CONTEMPORARY STUDIES IN CORPORATE LAW Corporate law scholarship has a relatively recent history despite the fact that corporations have existed and been subject to legal regulation for three centuries. The modern flourishing of corporate law scholarship has been matched by some broad- ening of the field of study to embrace insolvency, corporate finance, corporate governance and regulation of the financial markets. At the same time the intersection between other branches of law such as, for example, labour, contract, criminal law, competition and intellectual property law, and the intro- duction of new inter-disciplinary methodologies, affords new possibilities for studying the corporation. This series seeks to foster intellectually diverse approaches to thinking about the law and its role, scope and effectiveness in the context of cor- porate activity. In so doing, the series aims to publish works of high intellectual content and theoretical rigour. Titles in this series Working Within Two Kinds of Capitalism: Corporate Governance and Employee Stakeholding: US and EC Perspectives Irene Lynch Fannon Contracting with Companies Andrew Griffiths The Jurisprudence of the Takeover Panel Tunde Ogowewo (A) Kouloridas Prelims 24/4/08 15:50 Page iii The Law and Economics of Takeovers An Acquirer’s Perspective Athanasios Kouloridas OXFORD AND PORTLAND, OREGON 2008 (A) Kouloridas Prelims 24/4/08 15:50 Page iv Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA Tel: +1 503 287 3093 or toll-free: (1) 800 944 6190 Fax: +1 503 280 8832 E-mail: [email protected] Website: http://www.isbs.com © Athanasios Kouloridas 2008 Athanasios Kouloridas has asserted his right under the Copyright, Designs and Patents Act 1988, to be identified as the author of this work. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission of Hart Publishing, or as expressly permitted by law or under the terms agreed with the appropriate reprographic rights organisation. Enquiries concerning reproduction which may not be covered by the above should be addressed to Hart Publishing at the address below. Hart Publishing, 16C Worcester Place, OX1 2JW Telephone: +44 (0)1865 517530 Fax: +44 (0)1865 510710 E-mail: [email protected] Website: http://www.hartpub.co.uk British Library Cataloguing in Publication Data Data Available ISBN: 978-1–84113–664–6 Typeset by Hope Services, Abingdon Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall (A) Kouloridas Prelims 24/4/08 15:50 Page v Foreword One of the central curiosities of takeover rules across jurisdictions is that they say virtually nothing about the position of the shareholders of the bidding company or companies. Their focus is on the shareholders of the target company, in relation to both the bidder(s) and the management of the target company. It is well recognised that target company sharehold- ers may incur agency costs in relation to their own company’s manage- ment and face coordination problems when dealing with the bidder which wishes to acquire their shares – though the answers to the questions of what should be done about these issues are controversial. The lack of attention paid to the agency and other problems of the bidding company’s shareholders is surprising, for, as is well known, the empirical data sug- gests that target company shareholders do well out of takeover bids, whereas the successful bidder (and its shareholders) are much less likely to be financially better off in consequence. The traditional answer to the point just made is that the agency and other problems of the bidding company’s shareholders can be dealt with through the general mechanisms of corporate governance applicable to all major decisions taken by company managements, whether involving a takeover bid or not. One of the several merits of this book is that it subjects that proposition to a wide-ranging appraisal: what are these general mech- anisms and how precisely and how well do they function in the case of a decision by a company’s management to launch a takeover bid? A second great merit of the book is that it takes the point that it is wholly unrealistic to treat the regulation of the target shareholders’ agency and coordination problems as without impact on the issues facing the bidding company’s shareholders. Protecting the interests of the target company shareholders may have an adverse impact on the interests of the bidding company’s shareholders (for example, by reducing the bidder’s freedom of manoeu- vre) or, conceivably but less likely, may promote those interests (for exam- ple, by discouraging potential bidders from launching an offer). A second main area for study in this book is thus the impact of takeover rules, osten- sibly aimed at target shareholder protection, on the interests of the bid- der’s shareholders, an approach which sheds new light on the operation of those rules. Third, but certainly not the least among the book’s merits, is its concep- tual and methodological approach to the above topics. Firmly grounded in the ‘law and economics’ school of legal analysis, the book uses the insights from that approach to generate novel perspectives on the legal rules in this (A) Kouloridas Prelims 24/4/08 15:50 Page vi area – but without losing the lawyer’s respect for the legal rules as impor- tant things in themselves. The bringing together of the legal literature on control shifts with the writing from the social sciences more broadly is something which the book achieves with sophistication and thorough- ness. I am sure that this work of Athanasios Kouloridas will prove a mile- stone in the takeover literature and I commend it to readers with great enthusiasm. Paul L Davies Cassel Professor of Commercial Law at the London School of Economics and Political Science. (A) Kouloridas Prelims 24/4/08 15:50 Page vii Acknowledgements I am very grateful to my supervisor, Professor P L Davies, for his invalu- able direction and near-inexhaustible patience throughout my research and writing at London School of Economics. I also owe a particular debt to the Hellenic Observatory of the European Institute of London School of Economics and Political Science without which it would not have been possible to have access to up-to-date information in order to transform my dissertation to this book. I am also most grateful to my viva examiners Professors Eva Lomnicka and Eilis Ferran for their invaluable comments and their appreciation of my work in their report that permitted this thesis to be published as a book. None of the above is, of course, responsible for the defects in this work. I am thankful to my publisher for his hard work in publishing this book. I also owe an enormous debt to my fiancée Despina for her tolerance, support, encouragement and active assistance in completing this work and to my parents, Stefanos and Despina Kouloridas. I can only express my gratitude to them by the token of dedicating this first book to them. Athanasios Kouloridas London, 2007 (A) Kouloridas Prelims 24/4/08 15:50 Page viii (A) Kouloridas Prelims 24/4/08 15:50 Page ix Table of Contents Foreword vii Table of Figures and Tables xv Table of Cases xvii Table of Statutes and Statutory Instruments xxxiii Table of Rules of the Takeover Code xxix Table of FSA Rules xxxiii Chapter 1: Introduction 1 I The paradox of corporate acquisitions and the need to shift attention to acquirers 1 II Scope and structure of the thesis 5 Chapter 2: The acquiring shareholders’ internal risks 9 I Introduction 9 II Agency risk 10 A Incentives for return maximisation 11 (i) Empire building 11 (ii) Free cash flows 12 B Incentives for risk reduction 13 (i) Diversification 13 (ii) Takeover deterrence 16 III Financial Risk 16 A Debt-financed acquisitions and financial leverage 17 B Equity financed acquisitions—dilution risk and market volatility 18 IV Business risk 21 A Synergy risk 21 B Overpayment risk 22 V Conclusion 24 Chapter 3: Market control 27 I Introduction 27 II The functions of the Capital Market 27 A Exit rights 27