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Abstract
Many years ago, Henry Manne proposed a theory of the market for corporatecontrol that provided a compelling argument for the existence of a vibrant hostiletakeover market. He argued that “the control of corporations may constitute avaluable asset” if the acquirer takes control with the expectation of correctingmanagerial inefficiencies. In this way, it is the hostile takeover market and itslead actor, the hostile bidder, that acts as a corrective mechanism in corporategovernance.
Unfortunately, while a vibrant hostile takeover market did exist in the UnitedStates during the 1960s, 70s, and 80s, this has not been the case for many years.By contrast, the United Kingdom, despite having a broadly similar capital marketenvironment and corporate governance system to the U.S., has gone down thepath of allowing its hostile takeover market to flourish. Thus, the U.K. has beenable to successfully retain the hostile takeover as a corrective mechanism incorporate governance.
We find the current domestic state of affairs unacceptable. Without a vibranthostile takeover market, a significant and efficient corrective mechanism hasbeen lost. Therefore, with a view to redressing this inefficiency, we use as ourprimary authority the core principles identified in the U.K.’s regulatory legalframework, and especially its longstanding board passivity (or “non-frustration”)rule. More than any other element of the British framework, the board passivityrule has allowed for the creation of an enduring and successful hostile takeovermarket in the U.K. Accordingly, this Article recommends that domestic statecorporate law statutes be amended to include a safe harbor for a hostile bidder when making an all-cash, all-shares tender offer that includes a guarantee of thesame or higher price if a back-end or squeeze-out merger occurs.
The use of the above safe harbor would effectively disallow a board’s use oftakeover defenses, such as a poison pill, unless specifically provided for in thecorporate charter. In this way, private ordering can always be used to trump thestatutory safe harbor.