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In the UK and US, most publicly listed companies have dispersed ownership, and controlling shareholders are the exception. The consequence is that the board of directors is very powerful. As Hopt has observed, although the directors are agents of the company,

their interests are not ‘generally aligned with those of shareholders’.343 The rules laid down in takeover law in connection with director’ duties are attempting to seek a balance between freedom of action taken by the directors to manage the company and possible abuse of their power for their private interests.344

In the context of a takeover, especially a hostile takeover, the conflict of interests between target directors and shareholders is severe, and the issue of directors’ duties is particularly complex.345 As Davies and Hopt have found, when facing a hostile takeover, there is a tension between the shareholders’ freedom to sell shares they hold in the target company and ‘a recognition that sales of shares sufficient to produce a control shift have consequences for the policies of the company which would normally call for a decision of the board’.346 _{Therefore, the critical question here is whether and to what extent the} directors of the target company should be allowed to adopt defensive measures to resist the tender offer which shareholder may wish to accept. As Gilson has pointed out, in the regulation of board conduct, there is a sensitive balance between giving directors the freedom to employ takeover defences against an unwanted bid and restricting the defences to encourage a market for corporate control.347

When a takeover bid is announced, it is broadly understood that the target board and shareholders have very different attitudes towards the bid. On the one hand, shareholders generally have a welcome attitude towards it because in a tender offer they are usually

343 _{Klaus J. Hopt, ‘Comparative Company Law’ in Mathias Reimann and Reinhard Zimmermann (eds), The Oxford}

Handbook of Comparative Law (Oxford University Press 2006) 1183.

344 _{Ventoruzzo (n31) 25.}

345 _{Blanaid J. Clarke, ‘Directors’ Duties During an Offer Period—Lessons from the Cadbury PLC Takeover’ (2011)}

UCD Working Papers in Law, Criminology and Socio-Legal Studies Research Paper No. 44/2011 <http://ssrn.com/abstract=1759953> accessed 8 March 2012, 1.

346 _{Davies and Hopt (n5) 230.}

347 _{Ronald J. Gilson, ‘Unocal Fifteen Year Later (And What We Can Do About It)’ (2001) 26 Delaware Journal of}

given an immediate opportunity to sell their shares above market price.348 They might benefit from the takeover bid by selling their shares in the target for a premium, to maximise the current value of their shares. They might, however, tender their shares out of fear that, if they do not, then the bidder might still gain control, in which case the shareholder would be left with low-value minority shares in the acquired target.349 In addition, the possibility of a hostile bid helps to discipline the managers if a takeover does happen. Thus, shareholders normally have a good incentive to sell their shares when faced with a tender offer.

On the other hand, target directors’ incentives are likely to diverge from those of the shareholders. As Bainbridge has argued, if the hostile bid is successful and a change of control takes place, the bidders who would be the majority shareholder would replace the board of directors and remove the existing managers in order to control the target company.350 As a result, when hostile takeovers occur, the target board may not be perfectly faithful to the shareholders and may be expected to pursue their own interests at the shareholders’ expense.351 They may seek to avoid losing their positions in the target company by adopting defensive measures to deter potential acquirers from the right to run the target company, although the defending board usually attempts to justify their resistance as being in the best interest of the shareholders.352 However, the defensive tactics they frequently use may fight off even a value-maximising takeover bid.

348 _{B. Espen Eckbo, ‘Bidding Strategies and Takeover Premiums: A Review’ (2009) 15 Journal of Corporate}

Finance149, 149.

349 _{Lucian A. Bebchuk, ‘The Pressure to Tender: An Analysis and a Proposed Remedy’ (1987) 12 Delaware Journal of}

Corporate Law 911, 912.

350 _{Bainbridge (n274) 26-27.}

351 _{Note that the terms “directors”, “managers” and “management” can be used interchangeably when representing a}

group of interests in opposition to the shareholders.

352 _{Yoon K. Choi, ‘The Choice of Organizational Form: The Case of Post-Merger Managerial Incentive Structure’}

2.1UK’s Response

In accordance with the statutory duties introduced by the CA 2006, directors of UK registered companies have a duty to promote the success of the company and only take action for the purpose for which they were appointed. In the case of takeovers, the directors are subject to certain additional duties pursuant to the City Code. One of them is acting in the interest of the company as a whole, which stems from the Takeover Directive. More significantly, the legal regime for takeovers in the UK makes it clear that the decision on takeover defences belongs to shareholders, not directors, and generally holds that directors cannot use their powers to preclude the majority shareholders’ constitutional right to decide whether or not to accept a takeover bid. The target shareholders are therefore given maximum opportunity to decide whether to accept or reject the takeover bid and how to deal with their shares in face of a takeover.

According to the City Code, once the target board is aware of the takeover offer, it is prohibited from taking any action to frustrate the takeover bid without the approval of the shareholders in general meeting.353 According to Dean, this prohibition has been a central rule of the UK City Code since its inception, and gives target shareholders the ultimate power to determine the success or failure of a hostile bid when balancing the powers between target board and shareholders.354 _{This prohibition is based on the common law} view that directors’ powers should only be used ‘for their proper purpose’ and this does not include frustrating takeovers.355 But unlike the proper purpose doctrine, the City Code bans all actions which have the effect of frustrating a takeover offer without shareholder approval. As Seretakis has argued, the NFR makes the purpose of directors irrelevant

353 _{City Code, r 21.} 354 _{Janice Dean (n183) 371.}

when considering the validity of the takeover defences.356 According to an empirical study over a five-year period, undertaken by Deakin and others, litigation is very rarely used by shareholders in the UK and the popularity of poison pills and other takeover defences is far below the level in the USA.357

2.2US’s Response

By contrast, the US adopts a dramatically opposite regulatory approach towards a takeover defence to that taken by the UK in the City Code. In the US, the target shareholders do not have as much power to prevent the directors’ choice as in the UK. There is an entire body of tactical options for a target board which is seeking to defend itself against a takeover bid. As Miller has argued, the directors of US target companies play a central role in adopting defensive measures – most of which, such as the poison pills, can be implemented without shareholder approval.358 Through precedents along with the various anti-takeover statutes, a positive increase has been observed in the freedom of directors to adopt takeover defences in response to hostile takeovers.359 The board of directors in the target company is protected in a way that leaves shareholders little choice in this matter. The broadened power of the target board to resist a hostile takeover seems to be a move toward favouring freer use of takeover defences in the US. In practice, target boards have been granted far more freedom than in the UK to decide whether to accept or reject a takeover bid.

356 _{Alexandros Seretakis, ‘Hostile Takeovers and Defensive Mechanisms in the UK and the US: A Case Against the US}

Regime’ (2012) Social Science Research Network <http://ssrn.com/abstract=1985846> accessed 28 January 2013, 25.

357 _{Simon Deakin and others, ‘Implicit Contract, Takeovers, and Corporate Governance: in the Shadow of the City Code’}

in David Campbell and Hugh Collins (eds) Implicit Dimensions of Contract (Hart Publishing 2003), 296.

358 _{Geoffrey P. Miller, ‘Political Structure and Corporate Governance: Some Points of Contrast between the United}

States and England’ (1998) 1 Columbia Business Law Review 51, 51.

However, the board’s power to adopt defensive measures is not absolute. Although the target shareholders’ ability to gain premiums through takeovers is restricted by the fact that power to respond to takeovers lies with the target company’s board of directors, the action taken by the target board in employing defensive measures is subject to the common law fiduciary duties examined by enhanced business judgement rule on a case- by-case basis.360 In this respect, the target directors are required to demonstrate a certain level of responsibility and good faith towards their shareholders. US courts design a series of tests to make sure that the target board’s defensive action is in the best interests of the company and its shareholders, and is reasonable in the light of the threat posed by the takeover bid to corporate policy or effectiveness.361