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November 11, 2017

How U.S. and UK Deal Structures Protect Minority Shareholders

By Afra Afsharipour

[Cross-posted from The CLS Blue Sky Blog]

Takeover transactions are often the most significant activity affecting corporations and their shareholders. Accordingly, there are intense debates about the value and impact of takeovers and the extent to which law should regulate such transactions. One area of focus for takeover regulation has been the potential impact of takeovers on minority shareholders. The focus on minority shareholders is not surprising as research suggests that laws which protect minority shareholders are associated with stronger financial markets.

 

In a recent book chapter, I focus on how deal structures affect the protection of minority shareholders in two common law jurisdictions, the U.S. and the UK. I discuss the three most-commonly used methods of effecting a takeover in these jurisdictions—tender offers, schemes of arrangement, and triangular mergers—and assesses both the theoretical and empirical literature on their impact on minority shareholders. In each jurisdiction, lawmakers, regulators and courts have attempted to design rules to address harm to minority shareholders under various deal structures. These rules often result in different rights for shareholders of bidders and targets, and vary among transaction structures, even when economically similar transactions are undertaken. While the UK takeover regime focuses on ex ante regulation, the U.S. system uses some ex ante regulation but places significant emphasis on ex post policing through the courts.

 

First focusing on the U.S., I address the two most commonly-used deal structures for takeovers of U.S. public companies—a one-step triangular merger and a two-step transaction involving a tender offer followed by a merger. Target shareholders are provided with a say under both structures, either through a vote or through the decision to sell their shares. In addition, several aspects of the securities laws and tender offer rules, for example the best price rule or extensive disclosure rules for tender offers, were specifically designed to lessen the likelihood of abuse of minority target shareholders.

 

In the U.S., the courts also play an important policing role in regulating the parties’ behavior in takeovers. Target minority shareholders regularly seek redress for any harm through the courts, either through ex post fiduciary duty litigation or appraisal litigation. U.S. law, however, does little to address harm to bidder shareholders. Management can structure takeovers to exclude bidder shareholders from any decision-making role in acquisitions. Moreover, bidder shareholders cannot meaningfully seek any redress through the courts.

 

An acquisition of a UK public company takes place through the acquisition of shares in the target by the bidder either through an offer (similar to a U.S. tender offer) or through the nearest UK analogue to a U.S.-style merger, a “scheme of arrangement.” While the economic substance of these transactions is similar in the U.S. and UK, the steps that must be followed and the methods of minority shareholder protection are quite different. Unlike the U.S., where hostile takeover activity is difficult, the UK is much more non-protectionist and holds shareholder primacy as a core value. Several of the rules implementing the principles of the UK takeover regime, including the mandatory bid rule and the sell-out rule, are designed to protect minority shareholders.

 

Over the past decade, schemes of arrangement have become a commonly used acquisition structure in friendly transactions in the UK. UK law treats schemes quite differently from takeover bids. In a scheme, a significant majority of the shareholders of each class can bind the minority, including any dissident shareholders, so long as the scheme is subsequently sanctioned by the court. Some have argued that minority protection in the scheme context should be greater than that in the traditional bid/takeover context since in a scheme even dissenting shareholders are forced to sell once the scheme has been approved. Nevertheless, there is a strong argument that protection for minority shareholders is built into the structure of the scheme itself – namely the 75 percent majority requirement for shareholder approval, the court’s sanction, and the opportunity for full exit rights.

 

Two other major differences exist among deal structures prevalent in the U.S. and the UK. The UK listing rules expressly contemplate a vote for bidder shareholders in substantial acquisitions. Furthermore, unlike the U.S., where courts play an important role in protecting minority shareholders, courts in the UK do not play a decisive role in most transactions, even in schemes which they formally must approve. The appraisal remedy is not available in the UK, and there is little chance of corporate directors being sued in connection with a takeover.

 

The chapter then surveys the empirical literature on takeovers to assess whether differences in legal rules governing different deal structures translate into a quantifiable impact on minority shareholders. The answers to this question are somewhat unclear and need further empirical enquiry to determine which of the tools used in the U.S. and UK regimes better protect minority shareholders. Nevertheless, a few insights are suggested by the empirical research. First, despite the differences in each jurisdiction’s regime, target shareholders gain in takeover transactions in both jurisdictions, and in the U.S. these gains are higher in tender offers than in mergers. Second, research suggests that the UK’s takeover rules better protect bidder shareholders in large transactions than does U.S. regulation, which largely deprives bidder shareholders of a role in acquisition transactions. Finally, the research on U.S. transactions suggests that different legal treatment of economically similar acquisition structures may make a difference to minority shareholders.

 

The comparisons and literature review raise several research questions. The empirical inquiry into UK takeover transactions is quite sparse. For example, no studies empirically explore whether minority shareholders in the UK gain more or less from schemes of arrangement than from takeover bids. Also, do bidder shareholders in the UK gain or lose more in schemes or takeover bids? The empirical inquiry exploring the differences in regulatory approaches in the U.S. and UK is also sparse. For example, it may be useful to further examine which of the tools used in the U.S. and UK regimes better protect minority shareholders. There is also a need for more literature on costs of the regulatory framework imposed by both jurisdictions and whether such regulations can be translated to other countries, as well as a need for further exploration into the institutions needed to implement these regulatory structures. Further inquiry into these issues can help lawmakers determine what features of takeover regulation could be best used by other jurisdictions contemplating takeover regulations.

 

This post is based on my most recent book chapter, “Deal Structure and Minority Shareholders,” available here.


January 20, 2017

Serving as Visiting Scholar at National Chiao-Tung University in Taiwan

I had the honor of serving as a visiting scholar at National Chiao-Tung University, Taiwan during the week of January 8th. My visit was coordinated by Professor Chien-Chung Lin, who has twice visited UC Davis School of Law to present papers at the American Society of Comparative Law (ASCL), Younger Comparativists Committee (YCC) Workshop on Comparative Business and Financial Law. Taiwanese corporate law scholars such as Professor Lin have been doing excellent work especially in the area of comparative corporate law, so I was very much looking forward to interacting with some of them.

I began my visit with a fabulous lunch organized by Professor Lin and our own UC Davis JD student, Oscar Yang (himself a 2016 graduate of our LLM program). Oscar and Professor Lin had graciously invited leading Taiwanese lawyers for the lunch, including Prosecutor Jawyang Huang, Taipei District Prosecutors Office. Mr. Huang has been a visiting scholar at Yale University School of Law and was Oscar's supervisor in the Office of Trade Negotiations, in charge of WTO dispute settlement cases. We were joined by two of Oscar's former colleagues who were both fabulous company, Ms. Jenny Van, Senior Legal Adviser in Office of Trade Negotiations and Mr. Jason Lai, Secretary to the Director-General of Bureau of Foreign Trade.  It was a terrific lunch at one of Taipei's most popular restaurants, Din Tai Fung. After the lunch Mr. Huang gave me a fascinating tour of the Taipei Judicial Building, where I was able to observe a few trials that were being conducted. The efficiency and order at the judicial building was quite impressive.

After the first day in Taipei, Professor Lin took me to Hsinchu, one of the educational centers of Taiwan. The city has several prestigious universities, including National Chiao Tung University and National Tsing Hua University. Hsinchu is also an economic and technology hub in Taiwan with an impressive science and technology industrial park. The science and technology park is home to hundreds of high technology companies including world-renowned firms in the semiconductor space such as TSMC and UMC. Professor Lin gave me a tour of the technology park and given my prior corporate practice experience in the semiconductor space I was quite excited to see the place!

In Hsnichu, I gave three lectures at the two law schools there.

  1. Redefining Corporate Purpose: An International Perspective, at the Institute of Law for Science & Technology, College of Technology Management, National Tsing Hua University in Hsinchu, Taiwan.
  2. Deal Structure and Minority Shareholders, at the School of Law at National Chiao-Tung University, Taiwan
  3. Legal Transplants in the Law of the Deal: M&A Agreements in India at the School of Law at National Chiao-Tung University, Taiwan


Lecturing at NTHU

My visit to National Tsing Hua University was coordinated by Professor Robert Tsai, who is trained as an attorney in both Taiwan and the U.S. The lectures were well-attended, and the audience of professors and law students asked excellent questions.

I also had the opportunity to visit the Taiwan Stock Exchange to learn more about the significant corporate governance initiatives undertaken in Taiwan. I had an informative meeting at the Taiwan Stock Exchange with Mr. Joe Tsun Cheng (Senior Vice President, Corporate Governance Department) and Ms. Tracy Chen (Associate, Corporate Governance), as well as meeting Mr. Lih Chung Chien, Senior Executive Vice President of the Taiwan Stock Exchange. At the meeting we exchanged views on corporate governance initiatives undertaken in Asia, and I detailed some of my scholarly work on the trajectory and possible outcomes of the corporate governance reforms undertaken in India over the last decade. I really enjoyed the intellectual engagement with the professors, lawyers and law students I had the privilege to meet.

Professor Lin had also kindly arranged many opportunities for me to experience the beauty and culture of Taiwan, including visits traditional tea houses, temples and the CKS Memorial Hall and Liberty Square, an afternoon at beautiful hot springs outside of Taipei, a culinary adventure with law students at one of Taipei's fabulous night markets, a tour of the National Palace Museum, several informative walks around the different districts in Taipei, and more delicious meals than I can count.  I could easily have spent weeks enjoying all that Taiwan has to offer from its vibrant coffee culture to its elegant tea houses and lush country side, all topped off by the generous hospitality and friendliness of its people.

If it is not already clear, the trip to Taiwan was truly inspiring, and I look forward to future visits!

January 20, 2016

Launch of the Handbook on Corporate Governance in India

This week has been one filled with excitement, education and some jet lag.  I have been involved in a whirlwind of activity connected with the launch of the Handbook on Corporate Governance in India which I have authored. The handbook has been a labor of love for me over the past several years as India has significantly transformed the laws and regulations concerning corporate governance practices of Indian companies. I have intended for the handbook to serve as a useful tool for those involved in the corporate governance field in India, including Board members, in-house counsel, corporate secretaries and other advisors such as auditors, outside counsel, investment banks and proxy advisory firms. The handbook is unique in that it collates the issues and practices from various areas of corporate governance and presents it in a consolidated and comprehensive manner. One of my goals was for the handbook to capture both the academic research in this field as well as the latest legal developments in India in an era of rapid shifts. The handbook discusses the changes enacted in the Companies Act, 2013 and the Companies Amendment Act in early 2015, as well the flurry of rules made by the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).

For the launch, we had an event in Delhi in a room filled with various luminaries, former government officials and many members of boards of directors from well-known listed companies in India.  We have had two similar events in Mumbai, one in North Mumbai and one in the South (if you have ever been in Mumbai traffic, you know well why there needed to be launch events in both locations). Like the Delhi events, the Mumbai events were attended by members of boards of directors from prominent Indian companies who came together both to learn and to contribute to the discussion on how to move Indian corporate governance forward. I am happy to report that the handbook and the discussions we had were all quite well-received.

It's been an eye opening experience talking to those who deal with corporate governance challenges (and opportunities) day to day. I came away from these events even more inspired to dive into research related to governance issues in the Indian landscape.

For more information, here is the press release about the handbook.

July 27, 2010

Report from the XVIIIth International Congress of Comparative Law in Washington

Congress 2010

I am here in Washington, D.C., at the XVIIIth International Congress of Comparative Law.

The congress is taking place all of this week, presented by the International Academy of Comparative Law and the American Society of Comparative Law, and hosted by three local law schools, American University Washington College of Law, George Washington University Law School, and Georgetown University Law Center. It is a pleasure to be among such a diverse group of jurists, lawyers, and scholars from around the world. The Academy, which is composed of academics and jurists from around the world, organizes every 4 years in different parts of the world an international congress of comparative law. From my understanding, this is the first time that an international congress has been held in the United States.

The conference got off to a great start today with an opening plenary addressing the "Role of Comparative Law in Courts and International Tribunals." The panel was chaired by the Secretary-General of the International Academy of Comparative Law and Director of the Max Planck Institute for Comparative and International Private Law in Hamburg, Dr. Jürgen Basedow. Representing views from both domestic and international courts, as well as a viewpoint from practice, the distinguished panelists discussed the role of both international and comparative law in their own courts:

Judge Rosemary Barkett

Judge Rosemary Barkett (right), U.S. Court of Appeals for the Eleventh Circuit (for whom I had the privilege of clerking), began by remarking that to some extent comparing laws has some role in all jurisdictions. She presented a historical perspective from the United States to demonstrate that the practice of considering foreign sources is rooted in the legal history and tradition of the United States, citing to the Declaration of Independence, the U.S. Constitution, and the Federalist papers, as well as to numerous opinions from the U.S. Supreme Court. One of Judge Barkett’s most important points was that, as international and comparative scholars, we need to address the definitional problems in comparative law. For example, many jurisdictions espouse allegiance to the rule of law, but what exactly does rule of law entail?

Justice Sabino Cassesse

Justice Sabino Cassese (left), of the Constitutional Court of Italy, next provided three distinct examples of courts looking beyond their own nation’s borders for insights. He emphasized that recourse to comparison by high courts is widespread, and that increasingly supreme courts are acting as comparatists. Justice Cassese emphasized two tasks for comparative lawyers and scholars: one, to examine and evaluate how judges and courts use foreign law; and two, to develop methods and procedures for comparison.

Carolyn Lamm

The presentations of Judge Barkett and Justice Cassese were followed by the practitioner’s perspective, Carolyn Lamm (right), a partner at White & Case in Washington and President of the American Bar Association. She emphasized the importance of looking to other systems for persuasive, not precedential, value. Lamm reminded us of the speech from former U.S. Chief Justice William H. Rehnquist, in a 1989 talk titled "Constitutional Courts—Comparative Remarks," in which he remarked:

For nearly a century and a half, courts in the United States exercising the power of judicial review had no precedents to look to save their own, because our courts alone exercised this sort of authority. . . . But now that constitutional law is solidly grounded in so many countries, it is time that the United States courts begin looking to the decisions of other constitutional courts to aid in their own deliberative process.
Reprinted in Germany and Its Basic Law: Past, Present and Future, A German-American Symposium 411, 412 (Paul Kirchhof & Donald P. Kommers eds., 1993).

Lamm also cited to the “Obama-Clinton Doctrine” speech that State Department Legal Adviser Harold Hongju Koh delivered to the American Society of International Law annual meeting. (additional coverage) The speech is definitely worth a read.

Judge Diego García Sayán

Judge Diego García Sayán (right), President of the Inter-American Court of Human Rights, spoke of the role of his regional court with respect to national courts in the Americas. He explained that most Latin American national courts openly and explicitly use judgments of the Inter-American court in their decisions, and that the Inter-American court also has used local and national criteria used by national courts. Judge García Sayán also remarked on the use of international law by the Inter-American court, particularly noting the influence of the jurisprudence of the European Court of Human Rights. While this influence used to be primarily a one-way street, recently the European Court of Human Rights has also looked to the jurisprudence of the Inter-American court for persuasive value.

Judge Bruno Simma

Judge Bruno Simma (left) followed by describing his experience on the International Court of Justice and his use of comparative law in an early opinion on the Oil Platforms dispute between Iran and the United States. Judge Simma warned both of the dangers that could befall a comparatist and of comparative law accidents.

The presentations were followed by a dynamic discussion among the panelists on a variety of issues, including the weight to be given to comparative law in judicial opinions and the relationship between international and comparative law.

The opening plenary was followed the rest of the day with various breakout sessions, including the delivery and discussion of general and national reports prepared for the conference. For those of you interested in comparative surveys of various legal issues, the reports should not be missed.

The conference got off to a great start yesterday. Today’s program, which will be held at the George Washington University Law School, promises to be as dynamic as this first day.

Cross-posted at IntLawGrrls.

July 15, 2010

Corporate Governance Reforms in India


Bombay Stock Exchange, by Appaiah

So I've been away for a while with a research trip to India and then madly trying to finish a couple of papers related to the trip. Before I left, I blogged about some of Vice Chancellor Strine's comments during his lecture at Stanford's Rock Center for Corporate Governance. I think that some of Chancellor Strine's comments on the efficacy of independent directors should be a warning for those pushing for corporate governance reforms in other countries. I have written previously about the potential pitfalls of importing US-style corporate governance rules with respect to India. I've now posted another paper entitled "The Promise and Challenges of India's Corporate Governance Reforms" which addresses some of the recent reform efforts following the Satyam scandal and the continuing barriers for effective corporate governance. The paper is forthcoming in the inaugural issue of the Indian Journal of Law and Economics.

Recently, there has been some very interesting work on independent directors in India, particularly arising out of unprecedented independent director resignations following the Satyam scandal. The Indian corporate law blog has a very useful post about recent academic literature on corporate governance norms, including the value of independent directors, in India. For those interested in India, all of the papers are worth a careful read.

I think that while the independent director model has much to recommend, there are serious constraints to the model for the Indian context. There is a danger that simply pushing for independent directors will not fully address some important corporate governance concerns in India, particularly the pervasive influence of promoters and controlling stockholders. Others, in particular Umakanth Varottil, have also written on this issue. I highly recommend Umakanth's recent paper entitled "Evolution and Effectiveness of Independent Directors in Indian Corporate Governance" for anyone who is interested in corporate governance reforms around the globe.

I'll soon be posting more on other projects related to this trip to India, including a paper on outbound M&A by Indian firms. Stay tuned…

Cross-posted at M&A Law Prof Blog.