The Transplant Problematics of Hostile Takeover Defense: A Comparative Look at the U.S.' and U.K.' Models

• Author: Yuhua Zhang
• Position: University of Leeds; Ningxia Academy of Governance
• Pages: 3-40

e Indonesian Journal of International & Comparative Law

ISSN: 2338-7602; E-ISSN: 2338-770X

http://www.ijil.org

© 2021 e Institute for Migrant Rights Press

thE transplant proBlEmatiCs of

hostilE takEovEr dEfEnsE

A CompArAtive Look At the U.S.’ And the U.k’

modeLS

Yuhua Zhang

University of Leeds; Ningxia Academy of Governance

E-mail: zlily123@live.com

e board or the shareholders are authorized to react when the company be-

comes a target of a hostile takeover bid. is reects two value inclinations in

corporate governance: the U.K. and the U.S. In the U.K., it is shareholders who

play a primary role. By contrast, in the U.S., the board decides independently.

Comparing the advantages and disadvantages of these two models, the board in

the U.S. model is more likely to exert eorts and mitigate its drawbacks under

regulations provided by the U.S. model while handling a hostile takeover. In

contrast, the shareholders in the U.K. model have limited eects because it de-

pends on their authority to handle a hostile takeover. is disadvantage makes

it worse compared to the U.S. model. e discrepancy between these models

reects their variously regulated branches and value inclinations. Other juris-

dictions can transplant the U.S. model to mitigate similar issues as an advanced

model. However, in doing so, these jurisdictions need to be careful because the

success of the U.S. model does not diverge from some elements on which it relies.

Such elements are dierent in dierent jurisdictions. When one compares the

branches and value orientation of the U.S. legal environment and the Chinese

legal environment, one sees how dicult it can be for a jurisdiction without

similar elements to those of the transplanted model to exert its eorts.

Keywords: Corporate Governance, Legal Transplant, Company Law, Merger and

Aquisition.

IX Indonesian Journal of International & Comparative Law 3-40 (January 2022)

4

Zhang

INTRODUCTION

In contrast to other jurisdictions where shareholders are few but with

signicant rights, the United Kingdom and the United States have con-

trolled most public companies globally1 and have developed inuential

corporate governance theories. In various areas, they are concerned

with the signicant issue of regulating takeovers, particularly hostile

takeovers: several articles and cases have debated the defense of the

target company.

Under the development of takeover supervision, these two countries

have generated distinctive models to mitigate the relevant problems. In

other words, when a company faces the challenge of a hostile takeover

bid, who decides whether to defend the company or not and how to

do so? In response to this question, the distinctive models propose

that either the shareholders or the board in a target company must

either approve the acquisition or defend the company against a hostile

takeover.2 In the U.K. model, shareholders have that authority. In the

U.S. model, it is the board.

In the issue of corporate takeover defense, “who decides?” becomes

a fundamental one.3 Without the indubit ability of this problem,

considering specic defensive tactics could prove dicult. While the

shareholders approve some defensive measures, the board permits

others. When it is not clear that their decision-makers are entitled to

do so, others will criticize the validity of those methods.4 In this case,

discussing who should defend helps understand the unsettled question

of anti-takeover defense legality.5

1. Ronald J. Gilson, Controlling Shareholders and Corporate Governance:

Complicating the Comparative Taxonomy, 119 H. L. R. 1641 (2005).

2. Michael P. DooleM, Two Models of Corporate Governance, 47 T B. L

461 (1992).

3. Stephen M Bainbridge, Director Primacy in Corporate Takeovers: Preliminary

Reections, 55(3) S L. R. 791 (2002).

4. Melissa M. Kurp, Corporate Takeover Defenses Aer QVC: Can Target Boards

Prevent Hostile Tender Oers Without Breaching eir Fiduciary Duties? 26

L. U. C. L J. 29 (1994).

5. Robert A. Ragazzo, e Legitimacy of Takeover Defense in the’90s, 41 DP

L. R. 689 (1991).

5

e Problematic of Hostile Takeover: A Comparative Look

Zhang

e discussion begins with an opposite attitude of prohibiting a

takeover defense.6 It stems from a theory called “e Ecient Markets

Hypothesis (EMH),” in which the stock market becomes the most

sensible guide to making any judgment about the issue of the stock

value.7 Next, an article presupposes that shareholders and the board

of directors do not have to judge a takeover oer as the market can

handle it.8 However, this argument has two main weaknesses; one is

that the EMH is ineectual, and the other is that it fails to consider the

disadvantages of a hostile takeover. In other words, a precondition is

that the EMH itself must be accurate.9 Without it, a conclusion should

not be given. e EMH is still criticized,10 so its premise does not hold

strong enough to support this opinion. Besides, its discussion concerns

the so-called eects of the takeover on shareholders and the target

company without considering the disadvantages of a hostile takeover.

us, the assumption of denying the function of takeover defense

should be ignored.

It must be clear whether shareholders or the board should be

authorized to react when a company is subject to a hostile takeover

bid. On the theoretical level, the ownership for the decision-making in

hostile takeover defense concerns not only a hostile bidder who ignores

the development of the target and almost entirely focuses on its own

interest but also reects the issue of authority distribution in corporate

governance. e inclination of shareholders or the board may indicate

value orientation to protect the interests of shareholders or other

stakeholders in the company, which is a possible reason for that.

Likewise, other jurisdictions have faced the challenge of a hostile

takeover. us, they must learn from proven models to cope with hostile

6. Frank H. Easterbrook & Daniel R. Fischel, e Proper Role of A Target’s

Management in Responding to A Tender Oer, 94(6) H. L. R. 1161(1981).

7. Eugene F. Fama, Ecient Capital Markets: A Review of eory and Empirical

Wor k, 25 J.  F. 383 (1970).

8. R, supra note 5. at 691.

9. See supra text accompanying note 5.

10. Z Z, W   “Xü S J”  Z—J

X R F  H J S  N W

("Division over the efficient market hypothesis (EMH): how economists

rethink and defend the stability of the financial market after the crisis") (2010).