by R. Christopher Small for The Harvard Law School Form, May 27th, 2011.
In our paper, Is the Board Neutrality Rule Trivial? Amnesia About Corporate Law in European Takeover Regulation, which was recently made publicly available on SSRN, we suggest that there are two axes upon which we can assess the significance or triviality of the adoption of a board neutrality rule in European Union Member States. The first axis is the extent to which a Member States’ adoption of an unqualified board neutrality rule makes a consequential difference to the ability of boards to fashion and deploy defenses without requesting shareholder approval to do so: without a board neutrality rule does corporate law provide the tools to boards to construct defenses, and does it allow them to be used without restraint? If one emerges with a positive response from the analysis of these questions, the second axis comes into play, namely, the potency of such available defenses. There are two elements that structure defense potency: the first depends upon the nature of the defense itself – an asset sale, for example, is significantly less potent than a poison pill; the second element is the background corporate governance rules such as rules on director removal and the calling of shareholder meetings that enable or restrain the defenses’ deployment for non-corporate/non-shareholder value purposes.
In all three of our selected jurisdictions we have seen that there are multiple and overlapping fields of regulation. And in each of these jurisdictions there is variation in the importance and effectiveness of these different fields of regulation: variation in what does the work of restricting board defensive power. The rules restricting formal availability are, for example, more important in Germany and Italy – where there are serious doubts about the formal availability of a poison pill or similar mechanism even with ex-ante shareholder approval – than in the UK. General rules requiring explicit shareholder authorization to use board power for defensive purposes are more important in the UK (the improper purpose doctrine) and Germany (the Holzmüllerdoctrine) than in Italy. In the UK and Italy, the background corporate governance rule set is a stronger constraint on the potency of available defenses than it is in Germany where supervisory board and management board removal is more difficult. However, whilst there is variation in the role played by these different fields of regulation in each of the three jurisdictions, the conclusions we have reached for the UK, Germany, and Italy are very similar. Although we acknowledge variation in the strength of the argument, the case for the triviality of the board neutrality rule can be made in each country.
In the UK the non-frustration rule is trivial. Only asset sale defenses are available without shareholder involvement, and even their use requires specific ex-ante or ex-post defensive authorization from the shareholders. Where explicit, authorization is granted ex-ante to construct and deploy defenses the background rule set, and the role of UK institutional investors would prevent their use for any purpose that was not compellingly justified in terms of corporate and shareholder betterment. In Germany, poison pills are unavailable, although their functional substitutes may be with explicit shareholder approval and considerable practical difficulty; share issues of greater than 10 per cent of the outstanding shares require, in effect, explicit shareholder authorization to be used defensively. This leaves less than 10 per cent share issues and share buy-backs with a general ex-ante shareholder authorization (that may always be subject to shareholder imposed conditionality) and only asset sales requiring no authorization (subject to Holzmüller). But asset sales are not potent defenses – they are difficult to put in place in the tight time constraints of a bid and may be unavailable if the sold assets are closely interconnected with the remaining assets. (continue reading… )