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The Illusion of Importance: Reconsidering the UK'S Takeover Defence Prohibition

Published online by Cambridge University Press:  17 January 2008

David Kershaw
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Abstract

This article considers the significance of the UK Takeover Code's non-frustration prohibition. It asks to what extent the prohibition actually prevents post-bid, director-controlled defences that would not have been, in any event, either formally prohibited by UK company law without share-holder approval or practically ineffective as a result of the basic UK company law rule set. It finds that there would be minimal scope for director-deployed defences in the absence of the non-frustration prohibition, and that, in the context of UK company law, such defences have limited scope to be deployed for entrenchment purposes. Furthermore, this minimal scope for board defensive action would, in order to be compliant with a director's duties, require a pre-bid, shareholder-approved alteration to the UK's default constitutional balance of power between the board and the shareholder body to allow corporate powers to be used for defensive effect. In light of this conclusion the article looks for a rationale to justify denying shareholders the right to make this limited and potentially beneficial defensive election. It concludes that no persuasive rationale is available and that the prohibition is unnecessary and without justification.

Type
Research Article
Information
International & Comparative Law Quarterly , Volume 56 , Issue 2 , April 2007 , pp. 267 - 307
Copyright
Copyright © British Institute of International and Comparative Law 2007

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References

1 General Principle 3 provides that ‘the board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid’ Takeover Code (2006), B1.Google Scholar

2 Rule 21.1 (a) now sets forth the general non-frustration prohibition previously contained in the General Principle 7 of the previous edition of the Takeover Code. Rule 21.1(b) sets forth specific prohibitions, for example, on the issue of authorized but unissued shares without shareholder approval (Takeover Code (2006) I 14).

3 The eighth edition of the Takeover Code was published on 20 05 2006 <http://www.thetakeoverpanel.org.uk/new/codesars/DATA/code.pdf>..>Google Scholar

4 The non-frustration prohibition applies where an offer has been made but also ‘where the company has reason to believe that a bona fide offer might be imminent’. For simplicity's sake this article uses the term ‘bid’ to cover both actual and such imminent offers. This prohibition does not extend to defences put in place prior to any bid having been made.

5 Davies, P, ‘The Regulation of Defensive Tactics in the United Kingdom and the United States’ in Hopt, KJ and Wynmeersch, E (eds), European Takeovers:Law and Practice (Butterworths, London, 1992) 200.Google Scholar

6 See High Level Group of Company Law Experts Report on Issues Relating to Takeover Bids (2000) (the Winter Report) (the report was requested by the European Commission), rejecting any scope for the board to take defensive measures. See also Baums, T and Scott, KE, ‘Taking Shareholder Protection Seriously? Corporate Governance in the United States and Germany’ (2005) 53 American Journal of Comparative Law 31, 74.Google Scholar

7 See, eg, Ogowewo, TI, ‘Rationalising General Principle 7 of the City Code’ (1997) 1 Company Financial and Insolvency Law Review 74, 80Google Scholar, arguing that ‘it is fundamental to the efficient working of the market for corporate control that shareholders should be able to sell their shares without management frustrating action’; Ben Pettet notes that ‘takeover defences in the UK are heavily circumscribed by what seems to be a prevailing attitude among city institutions and business that hostile bids are beneficial and even if not actually encouraged, they should not be stifled’ (Pettet, B, Company Law (2nd edn, Longman, Harlow, 2005) 398)Google Scholar; Company Law Committee of the Law Society, Response to the Department of Trade and Industry Consultation Document (Apr 1996) on a proposal for a Thirteenth directive on Company Law concerning takeover bids (memorandum series no 329, 06 1996) paras 1.5 and 9.3Google Scholar; Plender, J, ‘Europe Feels the Toxic Effect of Corporate Nationalism’ Financial Times (London, 6 04 2006) referring to US takeover regulation as highly toxic compared to the UK approach which enables a control market which is fair to shareholders.Google Scholar

8 Gatti, M, ‘Optionality Arrangements and Reciprocity in the European Takeover Directive’(2005) 6 European Business Organization Law Review 553, 561CrossRefGoogle Scholar notes that ‘if we analyze the main reason why the [Directive on Takeover Bids] created so much dissatisfaction among the experts, we observe that its political failure is ascribed to the fact that the board neutrality rule is not binding’. See also Dombey, D, ‘EU reaches takeover code compromise’ Financial Times (London, 28 11 2003) 1Google Scholar; Editorial, ‘Concerns about the Lamfalussy approach: but EU member states are to blame for weak financial laws’ Financial Times (London, 1 12 2003) 18.Google Scholar

9 Winter Report (n 6) 21.Google Scholar

10 See, eg, Unitrin v American General Corp 651 A.2d 1361 (Delaware, 1995).Google Scholar

11 See, eg, Easterbrook, FH and Fischel, DR, The Economic Structure of Corporate Law (Harvard University Press, Cambridge, 1991) noting at 162 that ‘resistance is the phenomenon of interest’.Google Scholar

12 See, eg, Lipton, M, ‘Corporate Governance in the Age of Finance Corporatism’ (1987) 136 University of Pennsylvania Law Review 1Google Scholar (Martin Lipton is a Senior Partner at Wachtell, Lipton, Rosen, and Katz and creator of the poison pill which is discussed at n 23 below).

13 See, eg, Bebchuk, L, ‘The Case Against Board Veto in Corporate Takeovers’ (2002) 69 The University of Chicago Law Review 973, 1027CrossRefGoogle Scholar, arguing against board veto but accepting that a poison pill should remain in place for ‘a period reasonably sufficient for… exploring and preparing alternatives for shareholder consideration’.

14 ibid 981. See also n 133.

15 Kalian, M and Rock, EB, ‘Corporate Constitutionalism: Antitakeover Charter Provisions as Precommitment’ (2003) 152 University of Pennsylvania Law Review 473, 477 arguing that this effect of takeover defences has not been ‘properly emphasized in the takeover literature’.Google Scholar

16 Unitrin v American General Corp (n 10).

17 This contrasts with much of the existing scholarship on Rule 21 that has looked at the availability of pre-bid defences that do not require any post-bid board action such as multiple voting rights structures and placing shares with a friendly third party prior to any bid. See, eg, P Davies (n 5).

18 ‘Board controlled’ is used here to refer to both defences which give the board a discretion to apply them or to lift them once the bid has been made (whether put in place pre-or post bid) as well as to defences that involve post-bid corporate action that has a defensive effect.

19 eg poison pills or business combination statutes. See text to nn 23–36.

20 Unocol Corp v Mesa Petroleum Co 493 A2. d 946 (Delaware, 1985).Google Scholar

21 The proportionality constraint was significantly relaxed post-Unocal following the Delaware Supreme Court's decisions in Paramount Communications, Inc v Time Incorporated 571 A.2d 1140 (Delaware, 1990)Google Scholar and Unitrin v American General Corp (n 10).

22 This section does not set forth an exclusive list of possible defences, only those that involve post-bid board action without shareholder approval; that is, those defences caught by Rule 21.

23 For a more detailed explanation of flip-in and flip over pills as well as a review of the initial approval of these devices by the Delaware Courts see Lowry, JP, ‘“Poison Pills” in US Corporations—A Re-Examination’ [05 1992] Journal of Business Law 337.Google Scholar

24 The term poison pill is sometimes used in UK debates as a general term for takeover defences, see, Clarke, B, ‘Regulating Poison Pill Devices’ (2004) 4 Journal of Corporate Law Studies 51. This article adopts the US approach to this terminology where poison pill is used exclusively to refer to shareholder rights plans.CrossRefGoogle Scholar

25 Unitrin v American General Corp (n 10).

26 No-hand and dead-hand pills are not permitted in Delaware (see Carmody v Toll Brothers, Inc 723 A.2d 1180 (Delaware, 1998Google Scholar) and Quickturn Design Sys, Inc v Shapiro 721 A.2d 1281 (Delaware, 1998))Google Scholar, however, dead-hand pills have been approved in Georgia (Invacare Corp v Healthdyne Tech 968 F Supp 1678 (ND Georgia, 1997Google Scholar)) and no-hand pills have been approved in Pennsylvania (AMP v Allied Signal No 98–4405 LEXIS 15617 (Pennsylvania, 1998)).Google Scholar

27 See Barboutis, G, ‘Takeover Defence Tactics II: Specific Defensive Devices’ (1999) 20 Company Lawyer 40, discussing the availability of pills in the UK prior to a bid.Google Scholar

28 cf Criterion Properties plc v Stratford UK Properties LLC [2002] EWCA Civ 1783.Google Scholar

29 Table A provides for interim dividends in Art 103.

30 Section 80 of the Companies Act 1985 requires that the board is authorized by the shareholder to body to allot ‘relevant securities’, which are defined in s 80(2) to include ‘any right to subscribe for, or to convert into any security into, shares of the company’ (ss 549–51 CA 2006).

31 This restriction is inapplicable if following the completion of the transaction in which the bidder crosses the 15 per cent threshold the bidder owns 85 per cent of the disinterested outstanding voting stock of the company s 203(a)(2) DGCL.

32 Section 203(a)(3) DGCL.

33 A short-form merger takes place where a parent that owns at least 90 per cent of the voting shares of a subsidiary merges with that subsidiary (s 253 DGCL). All other mergers are long-form mergers (s 251 DGCL).

34 Section 203(b)(3) DGCL.

35 Section 425 CA 1985 (ss 895–9 CA 2006).Google ScholarIn re Oceanic Steam Navigation Company Limited [1939] Ch 41Google Scholar, the court held that it could not sanction any arrangement or compromise (under ss 153 and 154 of the Companies Act 1929) which involved a transfer of assets where the memorandum did not include a power to ‘sell or dispose of the whole or any part of the undertaking’.

36 General Principle 3 and Rule 21.1(a) Takeover Code (2006).Google Scholar

37 Assuming any financial assistance problems can be resolved (Part V, Chapter VI CA 1985; Part 18 Chapter 2 CA 2006).Google Scholar

38 See ‘Doubts on Arcelor's bear-hug strategy now the Luxembourg company faces governance issues’ Financial Times (London, 31 05 2006).Google Scholar

39 Section 161 DGCL.

40 New York Stock Exchange Listing Manual, para 312.03(c).

41 Black, B and Coffee, JC, ‘Britannia: Institutional Investor Behavior Under Limited Regulation’ (1994) 92 Michigan Law Review 1997.CrossRefGoogle Scholar

42 Delaware Fraudulent Conveyance Act (Delaware Code, Title 6, subtitle n, Chapter 13, s 1305).

43 DGCL, s 170(a).

44 DGCL, s 154.

45 DGCL, s 170(a).

46 DGCL, s 160. Capital here refers to the stated capital of the company which in many cases will only be the aggregate par value of the issued shares. If net assets post-repurchase are less than stated capital, capital will be impaired (Manning, B and Hanks, JJ Jr, Legal Capital (3rd ednFoundation Press, Westbury, NY, 1990) 34).Google Scholar

47 Note 3 to Rule 21 of the Takeover Code (2006) provides that interim dividends issued during the offer period which are not in the ordinary course of business may violate the non-frustration principle.

48 Section 80 CA 1985 (ss 549–51 CA 2006). See Barboutis, G, ‘Takeover Defence Tactics II: Specific Defensive Devices’ (1999) 20 Company Lawyer 40Google Scholar discussing, amongst others, authority to allot and pre-emption rights in relation to share issues as a defence tactic.

49 Sections 89 and 95 CA 1985. (ss 561, 570, 571 CA 2006). (The Companies Act 2006 abolishes authorized share capital, however, it leaves authority to allot and pre-emption rights in place).

50 Section 80(3) CA 1985. (ss 549–51CA 2006).

51 See, eg, Vodafone Plc obtained at its AGM in July 2006 authority to allot 9,000,000,000 ordinary shares amounting to 14.9 per cent of the capital of the company.

52 Preemption Group Principles, Principles 8 and 10. See n 164 for further detail.

53 Section 94(3)(A) CA 1985 (s 560(2)(b) CA 2006).

54 Section 89(4) CA 1985 (s 565 CA 2006).

55 Section 80(3) CA 1985 (s 551(2) CA 2006) provides that any authority to allot ‘may be conditional or subject to conditions’.

56 Section 263 CA 1985 (s 830 CA 2006).

57 Section 264 CA 1985 (s 831 CA 2006).

58 Section 164 CA 1985 (off-market purchase: special resolution) (s 694 CA 2006); s 166 CA 1985 (market purchase: ordinary resolution) (s 701 CA 2006).

59 The Takeover Code does not provide bright line rules to determine materiality, rather it provides guidelines for the Panel to take into account in determining whether a transaction involves a material amount. These involve comparing the value and profitability of the assets against the target's market capitalization, its assets and profitability (note 2 to Rule 21, Takeover Code (2006)).

60 Rule 21.1(b)(iv).

61 Rule 21.1(b)(v).

62 UKLA, Listing Rules, LR 10 (Significant Transactions), Annex 1 (the Class Tests).

63 These provisions also regulate the issue of shares by a subsidiary that represents 25 per cent of the gross assets or profits of the target group, if the effect of such an issue of shares is ‘equivalent to the disposal of 25% of the group’ (Listing Rule 10.2.8).

64 Section 271 (a) DGCL.

65 Section 13(d) of the Securities Exchange Act 1934 and Regulation 13D promulgated thereunder require disclosure on Schedule 13D when a shareholder acquires 5 per cent of a company's equity securities. Section 14(d) of the Securities and Exchange Act 1934 and Regulation 14D promulgated there under requires disclosure on Schedule TO at the time the tender offer is commenced.

66 eg Chevron Corp v Pennzoil Co 974 F.2d 1165 (9th Cir, 1992).Google Scholar

67 See Consolidated Gold Fields PLC v Minorco, SA, 871 F.2d 252, 258 (2d Cir, 1989)Google Scholar where the Second Circuit Court of Appeals granted standing and Anago Inc v Techno Medical Products Inc 976 F.2d 248 (1992)Google Scholar where the Fifth Circuit Court of Appeals held that the target did not have standing and stating that the decision in Consolidated Gold was inconsistent with the Supreme Court's decision in Cargill, Inc v Monfort of Colorado, Inc, 479 US 104 (1986).Google Scholar

68 Jacobson, JM and Greer, T, ‘Twenty-One Years Of Antitrust Injury: Down The Alley With Brunswick v Pueblo Bowl-O-Mat’(1998) 66 Antitrust Law Journal 273, 305Google Scholar noting that ‘most other courts have sided with the Fifth Circuit’; see, eg, Moore Corporation Limited v Wallace Computer Services 907 F Supp 1545 (Delaware, 1995) 1556.Google Scholar

69 Moran v Household International, Inc 500 A2d 1346 (Delaware, 1985).Google Scholar

70 Unitrin v American General Corp (n 10).

71 Typically, if a company has a staggered board only one-third of the directors are subject to re-election each year. In Delaware, for example, if a company has a staggered board the directors can only be removed during the course of their tenure for cause (s 141(d) and 141(k) DGCL).

72 Fleischer, A and Sussman, AR, Takeover Defense (Aspen Law & Business, Gaithersburg, 2004) 11–18.Google Scholar

73 ibid 11–33 noting that ‘unless the bidder has seriously underestimated its legal exposure or overestimated its steadfastness a target cannot expect a vigorous litigation campaign to cause the bidder to abandon its offer’.

74 ibid 11–13 referring to corrective disclosure as the more typical remedy.

75 Consolidated Gold Fields, PLC v Minorco, SA, 871 F.2d 252, 258 (2d Cir, 1989).Google Scholar

76 Atlantic Coast Airlines Holdings, Inc v Mesa Air Group, Inc, 295 F.Supp.2d 75 (DDC, 2003) (obtaining preliminay injunctive relief in relation to a consent solicitation and exchange offer).Google Scholar

77 The relative unimportance of takeover litigation in the contemporary defensive setting is borne out by the paucity of US scholarship on takeover litigation since the late 1980s. For an excellent analysis of the earlier scholarship see Ogowewo, T, ‘Tactical Litigation in Takeover Bids’ [2007] Journal of Business Law (forthcoming).Google Scholar

78 For a review of the scope for defensive litigation pre- and post the Takeovers Directive (Interim Implementation Regulations) 2006 (which were superseded by Part 28 of the CA 2006 Act) see T Ogowewo, op cit.

79 [1987] 2 WLR 699.Google Scholar

80 Part 28 CA 2006. The Code was first given direct legal effect through the Takeovers Directive (Interim Implementation Regulations) 2006 which were superseded by Part 28 of the 2006 Act.

81 Section 955(3) CA 2006.

82 Section 956 CA 2006.

83 Takeover Panel Statements 1989/7.

84 See Ogowewo (n 7) 86.

85 (1985) Unreported LEXIS.Google Scholar The plaintiff argued that provisions of the Code had contractual force between the parties as the Listing Rules contained an obligation to ‘endeavor to observe the Code’ and that the Listing Rules amounted to a ‘nexus of agreement between the parties’. The Court thought this argument ‘extremely thin’ but not ‘totally unarguable’ for the purposes of obtaining a preliminary injunction. Pursuant to the 2006 Regulations such a claim would be code related and unactionable (ss 955 and 956 CA 2006).

86 [1977] 1 Lloyd's Rep 505.Google Scholar

87 Marina Developments discontinued the proceedings when information came to light that made it clear that there could have been no breach of confidential information. See ‘Marina abandons injunction challenge’ The Independent (London, 15 Feb 1989).Google Scholar

88 Section 120 Enterprise Act 2002.

89 Section 120(3) Enterprise Act 2002.

90 eg Ford's purchase of Jaguar in 1989 involved concurrent US and UK offers (‘Ford's Jaguar Offer Unconditional’ Financial Times (London, 12 Dec 1989)).Google Scholar

91 The likelihood of suit will increase markedly upon the coming into force of the Companies Act 2006 which makes it easier for shareholders to bring a derivative suit (ss 260–4 CA 2006).

92 As Professor Sealy notes corporate action in bad faith or resulting from improper motives is sometimes included in the improper purpose doctrine, however, ‘in this type of situation, the expression ‘improper purpose’ is simply a restatement in negative terms of the “bona fide in the interests of the company” test’ (Sealy, L, Cases and Materials in Company Law (OUP, Oxford, 2001) 310).Google Scholar

93 See, eg, Howard Smith v Ampol Petroleum Ltd [1974] AC 821Google Scholar and Hogg v Cramphorn Ltd [1967] Ch 254.Google Scholar

94 Farrer, J and Hannigan, B, Farrer's Company Law (4th edn, Butterworths, London, 1998) 389Google Scholar: ‘the first step then is to construe the article conferring the power in order to ascertain the nature of the power and the limits within which it may be exercised.’

95 Howard Smith v Ampol Petroleum Ltd [1974] AC 821, 834.Google Scholar

96 Section 171(b) CA 2006.

97 See Nolan arguing that ‘the proper purpose doctrine is better seen as supplementing the expressed intention of those who conferred discretionary power on the board’ in Nolan, RC, ‘The Proper Purpose Doctrine and Company Directors’ in Rider, BAK (eds), The Realm of Company Law (Kluwer Law International, London, 1998) 19.Google Scholar

98 [1974] AC 821, 835.Google Scholar

99 ibid 835.

100 Davies, P in Gower and Davies's Principles of Modern Company Law (7th edn, Sweet & Maxwell, London, 2003) 386.Google Scholar

101 Sealy (n 92) 305.

102 [1974] AC 821, 837.Google Scholar

103 [1967] Ch 254, 268.Google Scholar

104 See text to nn 108–23.

105 Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 35.Google Scholar

106 Farrar notes, eg, ‘that is open to a company to adopt whatever form of management article it pleases’. See also Davies, (n 5) 209 noting that ‘this restriction on director's conduct could in theory be circumscribed by an appropriate change in the articles’. See also Nolan (n 97) arguing that the doctrine is a presumptive default rule.Google Scholar

107 Davies (n 5).

108 [1967] Ch 254.Google Scholar

109 At the time the defences were put in place the bid had not formally been made, although the bidder had indicated the intended price.

110 [1967] Ch 254, 270.Google Scholar

111 ibid 259.

112 ibid 268.

113 [1974] AC 821, 837.Google Scholar

114 Brady v Brady [1989] AC 755.Google Scholar

115 [1973] DLR (3d) 288.Google Scholar

116 ibid para 110.

117 ibid para 109.

118 [1974] AC 821, 837–8.Google Scholar

119 (1982) Unreported LEXIS.Google Scholar

120 [1974] AC 821, 837–8.Google Scholar

121 [2003] 1 WLR 2108.Google Scholar

122 Davies (n 5).

123 Part 11 CA 2006.Google Scholar

124 Ralph Campbell v Loew's Incorporated 134 A.2d 852 (Delaware, 1957)Google Scholar referring to with cause removal as involving ‘the worst sort of violation of his duty’ (at 857) and charges of ‘grave impropriety’ (at 859).

125 Section 141(k) DGCL.

126 Section 141(d) and 141(k) DGCL.

127 Section 211(d) DGCL.

128 The by-laws cannot be inconsistent with the certificate of incorporation (s 109 DGCL). By laws can be amended unilaterally by the board or the shareholders.

129 Section 242(b) DGCL.

130 A poison pill can be put in place by the target after the bid has commenced (Unitrin v American General Corp 651 A.2d 1361 (Delaware, 1995)).Google Scholar

131 Subramanian, G, ‘Bargaining in the Shadow of Takeover Defenses’ (2003) 113 Yale Law Journal 621, 654.CrossRefGoogle Scholar

132 Bebchuk, Coates and Subbramanian recommend that courts should not allow management protected by a staggered board to block a takeover bid if they lose one election. This would give the board up to approximately a year, depending on when the bidder makes his intentions clear (Bebchuk, L, Coates, J IV, and Subramanian, G, ‘The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence and Policy’ (2002) 54 Stanford Law Review 887, 944.CrossRefGoogle Scholar

133 Proponents of the undistorted shareholder vote idea argue that by forcing a proxy contest the shareholders have an opportunity to vote on the control transaction separately from tendering their shares. This is considered important for two reasons: first, because even though you do not wish to tender if you expect other shareholders to tender then you will tender because you will not want to remain as a minority shareholder in a company with a substantial majority shareholder who may act to the detriment of minority shareholders in ways that are unactionable; second, if most shareholders tender the likely consequence is that the shareholder will be squeezed out in any event for equivalent consideration, in which case the refusal to tender has simply cost the shareholder the time value of money for the period from completion to squeeze out which in the US could take up to three months. A separate vote on the deal through a proxy contest is not, however, subject to these tender pressures (see Bebchuk (n 13)).

134 Richards, CF and Stearn, R, ‘Shareholder By-Laws Requiring Boards of Directors to Dismantle Rights Plans are Unlikely to Survive Scrutiny Under Delaware Law’ (1999) 54 Business Lawyer 607.Google Scholar In Oklahoma such resolutions have been held to be binding see International Brotherhood of Teamsters General Fund v Fleming Cos No CIV–96–1650–A (WD Oklahoma, 1997).Google Scholar

135 Section 303 CA (s 168 CA 2006).

136 Section 368(2) CA (s 303(2) CA 2006).

137 Section 368(4) and (6) CA (s 305 CA 2006).

138 Section 379 CA 1985 (s 312 CA 2006—note that s 312 reduces the shareholder notice period to 14 days).

139 21 days from Tl (date of requisition) waiting for the directors to call the requisitioned meeting plus 21 days notice to the general meeting under the special notice requirements. The 28-day special notice period to the company is satisfied if given at T1. Please note that the removal period will be reduced to 35 days when the 2006 Act comes in to force as the shareholder notice period for director removal is reduced from 21 to 14 days.

140 Section 368(8) of the 1985 Act and section 304(1)(b) of the 2006 Act require that the meeting be called for a date not later than 28 days after the date of the notice of the meeting.

141 Rule 30.1 Takeover Code (2006) requires that the offer document should normally be posted within 28 days of the announcement of a firm intention to make an offer. Rule 31.1 requires that an offer must be open ‘for at least 21 days following the date on which the offer document is posted’.

142 The 2006 Act reduces the notice period for meetings at which special resolutions are moved to 14 days, which would reduce the minimum time period to force a redemption to 35 days. See ss 283 and 307 CA 2006.

143 As under the UK Takeover Code, any successful bidder is required to offer an extended offer period of 14 days for those shareholders or refuse to tender initially (Rule 31.4 Takeover Code (2006)), there is no distortion in the tendering process (see n 133) which a proxy contest vote or pill redemption resolution would remedy. Any shareholder who does not tender in the initial offer has no concern about being left behind as a minority shareholder if the bid is successful nor any significant concern about lost value as a result of later payment; he simply accepts the offer after the initial successful offer closes.

144 Although formally it is possible that the shareholders could provide a pre-bid rolling large pre-emption waiver, in practice, we see that the pre-emption guidelines mean that such waivers are for low single digit percentages of outstanding shares. See text to nn 52–5.

145 As of 1998 60 per cent of US publicly traded companies had staggered boards (Investor Responsibility Research Center, Corporate Takeover Defenses (1998)).Google Scholar

146 See, eg, the proxy contest to remove the entire board of Tace PLC in 1992 organized by Norwich Union. See generally, Black, and Coffee, (n 41) 2042–6.Google Scholar

147 Paul Davies notes that the power to remove the board under UK law is the basis for the view of Bob Monks (vice-chairman of Hermes Lens asset management) that the UK is ‘“easily the world leader” in the accountability of managers to investors’ (P Davies, ‘Shareholder Value: A New Standard for Company Conduct? A (British) Common Law View’ (working paper on file with the author)).

148 For examples of where the threat of proxy contest resulted in board capitulation see the removal of the CEO of Coffee Republic following a meeting called by shareholders to remove the CEO (see ‘Shareholders Oust Coffee Republic Founder’ Financial Times (London, 21 Oct 2006) 18). See also, the removal of the CEO of Brown and Jackson Plc and the replacement of the CEO and a majority of the board in Spring Ram Plc (see Black and Coffee (n 41)).Google Scholar

149 See, eg, the proposed appointment and withdrawal within a week of Sir Ian Prosser as Chairman of Sainsbury Plc (see: ‘Investor Fury at Sainsbury Rejig’ Financial Times(London, 11 Feb 2004)).Google Scholar

150 See investor ‘anger’ in relation to the approval of Sainsbury's 2003 remuneration report (‘Sainsbury's board set for lifeline: family to back controversial remuneration report’ Financial Times(London, 12 July 2004))Google Scholar and investor's responses to Vodafone bonuses in 2006 (‘Vodafone investors prepare for battle over bonus plans’ Financial Times (London, 19 Apr 2006)).Google Scholar

151 See ‘Investors unite to confront Vodafone’ Financial Times (London, 10 June 2006)Google Scholar; ‘Vodafone under pressure on strategy amid huge write-down’ Financial Times (London, 29 May 2006).Google Scholar

152 Although, as demonstrated above poison pills are in themselves practically ineffective they indicate an intention to alter the balance of power between the shareholders and the board.

153 Klausner summarizes research by the Investor Responsibility Research Center (Investor Responsibility Research Center, Voting by Institutional Investors on Corporate Governance Issues 5 (2001))Google Scholar regarding US institutional investor voting practices as follows: ‘59% [of the survey respondents] consistently vote against management proposals to adopt classified [staggered] boards, and 65% vote in favor of shareholder proposals to repeal classified boards. Institutions oppose management control over poison pills as well, with 72% of survey respondents voting in favor of shareholder proposals that ask management to submit pills to shareholder vote before adoption’ Klausner, M, ‘Institutional Investors, Private Equity and Anti-takeover Protection at the IPO Stage’ (2003) 152 University of Pennsylvania Law Review 755, 760.CrossRefGoogle Scholar He also notes that the institutional investor opposition to the mid-stream adoption of staggered boards has meant that management realizes that ‘there is no point in even asking shareholders to support a [staggered] board’ (758).

154 eg through their investments in private equity limited partnerships.

155 Klausner, (n 153) 763–4.Google Scholar

156 Note, however, that the prohibition on calling an interim meeting is defensively less important when directors can only be removed with cause, which is normally the case when the company has a staggered board.

157 See Klausner, (n 153) 766–84.Google Scholar

158 Debevoise &Plimpton's Private Equity Report (2003) 3Google Scholar, notes that “underwriters have frequently advised that including a normal set of shark repellants— including a poison pill—will not harm the marketability of the IPO shares’.

159 See Klausner, (n 153) 766—84.Google Scholar

160 This rationale demand also applies to the mandatory background rule of UK company law analysed in this article, however, the focus of this article remains on Rule 21.

161 See references set forth in nn 6 and 7.

162 See (n 9).

163 See text to nn 146–51.

164 Generally on the Pre-emption Group see <http://www.pre-emptiongroup.org.uk/>. The Pre-emption Group's Principles provide for routine institutional investor support for the disapplication of pre-emption rights provided that the annual disapplication does not amount to more than 5 per cent of the ordinary share capital of the company or 7.5 per cent in a three-year rolling period.

165 See n 153.

166 See n 158.

167 Considering such an a possibility see: Daines, R and Klausner, M, ‘Do IPO Charters Maximze Firm Value? Antitakeover Defences in IPOs’ (2002) 17 Journal of Law, Economics and Organization 83, 113Google Scholar; Klausner, (n 153) 780–2, in particular, n 88.Google Scholar

168 See Easterbrook and Fischel (n 11).

169 See Conyon, MJ and Sadler, GV, ‘How Does US and UK CEO Pay Measure Up?’ (2005), working paper on file with the author.Google Scholar

170 Bhullar v Bhullar [2003] EWCA CIV 424.Google Scholar Section 175(5) of the Companies Act 2006 allows public companies to elect, through their constitutions, to empower the board to approve director exploitation of such opportunities.

171 Art 85 and 94 of Table A Arts (Companies (Tables A to F) Regulations 1985, 1985/805, Schedule, Table A (ss 177, 180 CA 2006)).

172 Section 320 CA 1985 (s 190 CA 2006).

173 Conyon, MJ and Florou, A, ‘Top Executive Dismissal, Ownership and Corporate Performance’ (2002) London Business School Working Paper (available at SSRN <http://ssrn.com/abstract=304940>).Google Scholar

174 Combined Code (Financial Reporting Council, 2006)Google Scholar

175 Clarke, B, ‘Articles 9 and 11 of The Takeover Directive (2004/25) and the Market for Corporate Control’ [June 2006] Journal of Business Law 355, 359.Google Scholar

176 ibid 360 (Coffee, J, ‘Regulating the Market for Corporate Control: a Critical Assessment of the Tender Offer's Role in Corporate Governance’ (1984) 84 Columbia Law Review 1145, 1202–3).CrossRefGoogle Scholar

177 Franks, J and Mayer, C, ‘Hostile Takeovers in the UK and the Correction of Managerial Failure’ (1996) 40 Journal of Financial Economics 163, 180.CrossRefGoogle Scholar

178 Clarke, (n 175) 362.Google Scholar

179 Coates, JC IV, ‘The Contestability of Corporate Control: A Critique of the Scientific Evidence’ (1999) Harvard, John M Olin Center for Law, Economics and Business Discussion Paper No 265 (available at SSRN <http://ssrn.com/abstract=173628>).).>Google Scholar

180 ibid 11–29.

181 ibid 38.

182 ibid 69.

183 Heron, RA and Lie, E, ‘On the Use of Poison Pills and Defensive Payouts by Takeover Targets’ (2006) 79 Journal of Business 1783.CrossRefGoogle Scholar

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185 ibid 114.

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188 An effective staggered board is one that cannot be removed by unilateral shareholder action. For example, a staggered board would be ineffective if provided for by the by-laws, which can usually be amended by the board or by the shareholders acting alone (s 109 DGCL), rather than in the charter which requires board and shareholder approval (242(b) DGCL).

189 Bebchuk et al (n 132).

190 ibid 930.

191 ibid 936.

192 eg see Gordon, M, ‘Takeover Defenses Work. Is That Such a Bad Thing?’ (2002) 55 Stanford Law Review 819, 823, 837.CrossRefGoogle Scholar

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194 Gordon, (n 192) 824.Google Scholar

195 See Subramanian, (n 131) 641–66.Google Scholar

196 See Dann, and DeAngelo, (n 184) 116–26.Google Scholar