Vol 12 (2015) - Issue 4

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Entrusting the United Kingdom’s Boards of Directors with Takeover Defences: Carrots, Sticks and Executive Remuneration Contracts – Part One

Introduction
The sale of a company has been described as 'the most significant and emotional point in its history'. The debate regarding which approach is most favourable in respect to management’s role during Takeovers of public companies has ensued for more than thirty years. This paper will attempt to primarily challenge the existing method of regulating management’s role in the United Kingdom and poses the following question: Is there a method of solving the agency problem that exists between management and shareholders, essentially a misalignment of interests, in the wake of a Takeover that is acceptable and beneficial to both?
In the first half of this paper, I intend to present a brief introduction on the subject of Takeovers in respect to public companies. This is followed by an analysis of the current takeover regulatory regimes focusing on management’s role during Takeovers in two prominent jurisdictions namely the United Kingdom and the United States. The first half will subsequently conclude with an extensive review of the most prominent arguments for and against the use of Takeover defences and how these relate to the UK’s position.
In the second half of this paper, I will explore the practical availability of takeover defences in the UK and present a solution to the amplified conflict of interests that colours the relationship of management and shareholders during takeovers. The solution is founded by proposing a new contractual mechanism to be implemented in executives’ remuneration contracts.
Initially, in Section 1 will set out the Takeover context in the two regimes, describe the wider reasons for the occurrence of Takeovers and subsequently examine their significant impact in the realm of Corporate Governance.
In Section 2, I will describe the historical development of the method of regulating management’s role in the Takeover process and their fundamental contrast. The United Kingdom has developed what has come to be known as the 'non-frustration' rule whereas the United States permits management a considerable amount of latitude in the deployment of defences.
In Section 3, I will present and critically comment the authoritative work of authors such as Bebhcuk and Easterbrook & Fischel who highlight the negative implications of empowering management with takeover defences. Subsequently, I will contrast these views with the prominent work of authors such as Lipton and Bainbridge and adopt their opinion that Takeover defences are beneficial to shareholders and compatible with contractarian notions. This analysis aims to nullify the majority of the justifications in favour of the non-frustration rule and re-conceptualises the academic debate as a predominantly heightened agency problem.

Section 1: Takeover framework and relationship with Corporate Governance
The current Takeover regime in the UK is in stark contrast with another prominent jurisdiction with sophisticated capital markets namely the US. The unfortunate existence of the infamous non-frustration rule precludes UK boards of directors from employing takeover defences denoting any action that would render management able to 'divert hostile offers into a negotiated acquisition process' or thwart unsolicited offers altogether.