Corporate Board Authority in Takeover Bids: A Comparative Analysis of the EU and US Approaches

Abstract: Global Merger and Acquisition activity reached record levels in 2006, with the US and EU playing a large role in this activity. This paper examines the duties of a board which is subject to a takeover bid and any defensive moves the board may take to protect its company from acquisition. The US law in this field requires the boards to actively participate in any bid offers and grants these boards the option to veto a bid or send it to shareholder for approval. These active boards may take a number of actions in order to promote or prevent the bid, so long as these actions were informed business decisions meant to help the company and maximize shareholder value. There are a number of clauses that may be inserted into a bid to give the offeror a better chance of the targets acceptance and these are legal in the US to the extent that they do not lock the target company into a deal that cannot be avoided if there is a change of circumstances. Additionally, US target boards may enact devices to make their companies less attractive to a bidder in order to prevent takeover. These defensive techniques are legal as long as they are made for a business reason and not a personal decision by the directors to entrench themselves on the board. European boards are more passive in the face of a takeover offer than their American counterparts and rely more on shareholder approval. The Thirteenth Company Directive was approved in 2004 and places the obligations of neutrality on EU boards in a takeover bid. This directive also includes a number of other clauses to promote takeovers, including a breakthrough rule designed to neutralize defensive measures. In light of the Directive, German and UK and updated their laws and take differing approaches to takeovers. The passivity of EU boards and their inability to veto bids prevents many bid protection devices. EU boards cannot take actions to frustrate a takeover bid without shareholder approval to do so, thereby limiting their use in the EU. Both approaches have their supporters and critics, and it is unclear which approach is better for the shareholders as a whole but each approach offers unique rules for the target boards to follow.