New Agency Problems, New Legal Rules: Rethinking Takeover Regulation in the US and Europe
The main agency problem traditionally existing in the US corporation has been the risk of opportunism of managers vis-à-vis shareholders. In Continental Europe, however, the primary concern in corporate law has been the opportunism of controlling shareholders vis-à-vis minority shareholders. These divergences in agency problems and the design of corporate law in the US and Europe has been mainly explained or, at least, justified by the different corporate ownership structures existing in both regions. On the one hand, the US has been traditionally classified as a jurisdiction with dispersed shareholders where collective action problems, asymmetric information and rational apathy were considered crucial problems to address in corporate law. Therefore, as a result of these features, it has traditionally made sense to grant broad powers to the board of directors as a way to protect the shareholders as a whole.
On the other hand, European countries have been more concerned with the protection of minority shareholders from the expropriation of controlling shareholders. Moreover, since European shareholders do not face the same collective action problems as their US counterparties, it has made sense (or more sense) in European Corporate law to give more powers to the shareholders, while simultaneously protecting the interests of minority shareholders.
However, the rise of shareholder activism, the concentration of corporate ownership structures in the hands of institutional investors, and the use of dual-class shares have changed those agency problems traditionally existing in the US corporation. Likewise, the development of capital markets, the improvement of corporate governance practices and the rise of shareholder activism have also modified, though to a lesser extent, those agency problems existing in European corporations. Therefore, as I argue in my recent paper, entitled “New agency problems, New Legal Rules: Rethinking Takeover Regulation in the US and Europe” (available here), these changes in agency problems should require changes in European and US corporate law, especially in the context of hostile takeovers, where weighted agency problems may arise among corporate actors.
Namely, it is argued that the shareholders of US corporations are no longer the uninformed, uncoordinated and rationally apathetic investors described in the Berle and Means corporation. Therefore, it would seem reasonable to give more powers to the shareholders of the US corporation of the 21st century, for instance, by providing them with the power to block the managers from fighting a hostile takeover. Thus, the implementation of this reverse passivity duty would allow the managers to fight a hostile takeover unless the shareholder provide otherwise.
Likewise, European takeover law should be amended in several ways. First, it is argued that the board neutrality (or non-frustration) rule existing in European Corporate law should be available at a firm-level rather than a member state-level. Thus, the shareholders would have the ability to adjust the degree of power potentially given to the managers in order to fight a hostile takeover. Second, the shareholders should also be able to allow the managers to use any anti-takeover defence. By doing so, managers may have more powers to avoid value-decreasing acquisitions and they could increase their bargaining power to obtain a higher price for the shareholders.
Nevertheless, these empowerment of the board of directors in European corporations may generate perverse incentives to fight a hostile takeover either because the managers just want to keep their jobs or, more probably, because they may act in the exclusive interest of the controlling shareholder. Therefore, unless these measures have been implemented in the corporate charters prior to the IPO-stage, the removal of the board neutrality rule or the authorization to use any anti-takeover defence should be approved by a majority of disinterested shareholders –that is, by a ‘majority of the minority’. Thus, minority shareholders would be protected from these perverse incentives potentially faced by managers/controlling shareholders, while the shareholders as a whole would be protected from value-decreasing acquisitions.
Finally, my paper argues that the development of capital markets and the improvement of corporate governance practices in Europe have enhanced the protection of minority shareholders in European corporations. Therefore, the maintenance of a mandatory bid rule may do more harm than good for minority shareholders. On the one hand, it may hamper the implementation of a superior business by a new acquirer. On the other hand, the absence of a credible threat of a hostile takeover may create perverse incentives for the controlling shareholder to expropriate (or keep expropriating) corporate funds from minority shareholders. Therefore, firms should be able to opt out the mandatory bid rule traditionally existing in European takeover law.
Aurelio Gurrea Martínez is SPILS Fellow at Stanford Law School and Executive Director of the Ibero-American Institute for Law and Finance.
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