Introduction
The United Kingdom’s exit from the European Union (‘Brexit’) raises an interesting question on the future of its takeover law: will London continue to champion an open market approach, or will it shift towards protectionism?
British media meticulously covered the issue. In 2019, the Financial Times wrote:
The UK system, with its blend of openness to foreign bids and investment . . . remains a model. . . . Unfortunately, it has become harder to predict how the government would react if another U.K. crown jewel was up for auction. And as Brexit looms, the risk of protectionist political meddling is likely to increase.[1]
Just a year turned out to be sufficient for transforming doubts into conclusions and for changing the newspapers’ tone decisively. At the end of 2020, an article reads:
Britain has long presented an image to the world of being open to business, with a regulatory regime on takeovers that encouraged international investment. This week’s publication of the National Security and Investment Bill represents not only the biggest overhaul of British takeover law for 20 years, but also signals the end of this open-door policy.[2]
This contribution aims at separating two different aspects of the future development of British takeover law: one deals with the general spirit of the regulation – a well-structured system with its historical roots – and one with the new rise of economic nationalism.
The overall approach to takeovers
Both the United States and the United Kingdom are characterized by dispersed ownership structures.[3] However, their regulatory approaches to takeover law diverge significantly.[4] While Delaware law allows target-boards to deploy defense measures (e.g. poison pills),[5] the City’s Takeover Panel, since its establishment in 1968, has limited target-boards’ interferences.[6] The British regulation has two main features: Firstly, it provides a mandatory bid rule, that extend to all shareholders an offer aimed at acquiring a certain threshold of control, to avoid bidders’ opportunism and ensure that all shareholders are treated equally. Secondly, it mandates a shareholders’ approval of defense measures, necessary to waive a ‘non-frustration’ rule that otherwise applies by default.[7]
No equivalent of the first and second generation of state-level anti-takeover laws introduced in the United States[8] occurred in the United Kingdom, that today still preserves its laissez faire approach; some have argued that the self-regulatory infrastructure of the Takeover Panel, which in 2006 gained statutory status,[9] serves well the interests of its clients: shareholders, rather than directors.[10]
Moreover, the U.K.’s regulation has been adopted as a model in several national and supra-national attempts to open up a market for corporate control in Europe. Although the Continent is still entrenched behind various legal and material barriers to takeovers,[11] some steps have been taken towards liberalization.
For example, since the late 1980s, the French approach to takeovers has been liberalized and aligned with the British one, thanks to the implementation of a passivity rule for target boards.[12] Various forms of passivity rules, shareholders’ approvals of defense measures and/or mandatory bid rules were also implemented in Italy, Spain, Portugal, Ireland, Austria, Belgium, Sweden, Finland and Germany.[13]
Adding up to this slow autonomous convergence towards the key features of the U.K.’s regulation, in 2004 the Takeover Directive finally introduced a common playing field throughout the European Union.[14] Although profoundly watered-down by a complex system of opt-outs, opt-ins and reciprocity clauses imposed by halting continental member States, the Directive was nonetheless templated on the U.K. model since its inception in the Commission’s proposals.[15] At the same time, the U.K. did not play an active role in the enhancement of its liberal model at the E.U. level:[16] it was the Commission to push, and the Continent to resist.[17] The results have been rather disappointing for those who dreamed a pan-European mandatory passivity rule and a generalized deconstruction of structural defenses.[18]
This is a key point to understand in order to decode the impact of Brexit on takeover law: The uniformity achieved at the E.U. level (from which the U.K. could now detach itself) is subtle compared to the national level of shareholders’ protection achieved by the City Code.[19] Certainly, for the U.K. Brexit will wrap this very low net that was pulled below all member States by a tireless European Commission. But a degradation below this minimum playing field seems implausible for the Country that founded its regulatory approach on the liberal paradigm that inspired the Commission in the first place.
The new economic protectionism
If the previous paragraph has sketched a comprehensive view of how freely takeovers are conducted in the U.K., it is now time to turn to another issue that has emerged in recent times. In November 2020, to protect national companies in seventeen sensitive industries from foreign (mainly Chinese) takeovers, the British government introduced new measures that increased governmental scrutiny on these transactions;[20] new regulations added on 2002 rules that already allowed intervention on competition grounds or, in case of national security, media plurality or financial stability implications.[21]
This form of economic protectionism has been exacerbated by the urge to protect national companies from takeovers during the weakness caused by the Covid-19 crises and is on the rise in France, Spain, Italy, Germany, Canada, the United States, and Australia.[22]
However, it is worth noticing that this closure to foreign investments is not played by altering the general framework of the takeover regulation (composed of infra-corporate relations between directors and shareholders) but is made working at its ‘contours.’ In other words, the British lawmaker is pulling levers that do not concern the break-through of pre-bid barriers to avoid directors’ entrenchments or the shareholders’ right to approve defense measures: bypassing such reforms, is directly strengthening governmental control on foreign investments in the name of national defense.
Conclusion
British national politics can determine a shift towards protectionism by creating obstacles to foreign takeovers. However, this is currently happening through legislation external to the takeover discipline’s core contained in the City Code. Rather than modifying the open market approach of the U.K.’s regulation, the Government is expanding the areas of its own scrutiny to more industries, exercising an intrusiveness that compresses a general transactional freedom. Numerous takeovers will now be examined by the Government, and draconian penalties will be imposed in case of a failure to file the notification of a relevant transaction.[23]
This is not of secondary importance, of course: The openness of a national takeover regulation should be measured exactly on the basis of its resistance to economic nationalism. Otherwise, the market for corporate control remains merely internal. The paradigm of U.K. openness was precisely praised for its magnetic attractiveness to foreign capital, but its laissez faire approach, as a double edge sword, could also be seen as a vulnerability to hostile acquisitions and tilted in favor of hostile acquirers.[24] Similarly, the scope of the Takeover Directive, heavily inspired by the U.K.’s regulation, was intuitively aimed at integrating the European Common Market by means of foreign infra-European takeovers.[25]
To conclude, it must be mentioned that within the European Union, other common rules (e.g., the ones set by the European Court of Justice concerning ‘golden shares’ for privatized companies)[26] partially limit a further spike in economic nationalism. The U.K. is now free to set those rules as it wishes.
[1] The UK’s unpredictable attitude to foreign bids, Fin. Times (Sep. 9, 2019), https://www.ft.com/content/00ad892c-cfe6-11e9-99a4-b5ded7a7fe3f.
[2] The UK must guard against protectionism, Fin. Times (Nov. 12, 2020), https://www.ft.com/content/6987daf0-bd52-451f-996b-00499962b0fb.
[3] John C. Coffee Jr., Dispersed Ownership: The Theories, the Evidence, and the Enduring Tension Between ‘Lumpers’ and ‘Splitters’, 3 (ECGI Working Paper No. 144, 2010).
[4] See John See Armour & David A. Skeel, The Divergence of U.S. and UK Takeover Regulation, 30(3) Regulation 2007.
[5] Id. at 51.
[6] Id. at 51-54.
[7] The City Code on Takeovers and Mergers, rules nos. 7, 9 and 21.
[8] Jonathan M. Karpoff & Michael D. Wittry, Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws, 73(2) J. Finance 657, 659-661 (2018).
[9] See Takeovers Directive (Interim Implementation) Regulations 2006; see also U.K. Company Act, (2006) § 28;; Blanaid Clarke, The Takeover Directive: Is a Little Regulation Better Than No Regulation?, 15(2) Eur. Law J. 174, 177 (2009).
[10] See Lucian A. Bebchuk & Allen Ferrell, Federalism and Corporate Law: The Race to Protect Managers from Takeovers, 99(5) Colum. L. Rev. 1168, 1172 (1999); see also John Armour & David A. Skeel, Who Writes the Rules for Hostile Takeovers, and Why? The Peculiar Divergence of US and UK Takeover Regulation (ECGI Working Paper No. 73, 2006), https://ssrn.com/abstract=928928.
[11] For an overview of these various barriers, see Guido Ferrarini, Share Ownership, Takeover Law and the Contestability of Corporate Control, 6-18 (Company Law Reform in OECD Countries A Comparative Outlook of Current Trends, 2000), https://ssrn.com/abstract=265429.
[12] Ben Clift, The Second Time as Farce? The EU Takeover Directive, the Clash of Capitalisms and the Hamstrung Harmonization of European (and French) Corporate Governance, 47(1) J. Common Mark. Stud. 55, 67 (2009).
[13] See Ferrarini, supra note 11 at 15-16; see also Erik Berglöf & Mike Burkart, European Takeover Regulation, 18(36) Econ. Policy 171,187 (2003);); Gerdard Hertig & Joseph A. McCahery, Company and Takeover Law Reforms in Europe: Misguided Harmonization Efforts or Regulatory Competition?, 4(2) Eur. Bus. Org. L. Rev. 179, 198-99 (2003).
[14] 2004 O.J. (L 142) 12 (CE) Takeover Directive (Directive 2004/25).
[15] See Clift, supra note 12, at 62-63.
[16] Dam Dombey, Watered-down EU takeover directive is a missed opportunity for open markets, Fin. Times (Dec. 20, 2003).
[17] See Clift, supra note 12, at 59.
[18] See generally Paul L. Davies et al., The Takeover Directive as a Protectionist Tool? (ECGI, Working Paper No. 141, 2010), https://ssrn.com/abstract=1554616.
[19] For an analysis of the influence of the U.K.’s regulation on continental member States and on the Takeover Directive and of the flexibility of the latter, see Klaus J. Hopt, Takeover Defenses in Europe: A Comparative, Theoretical and Policy Analysis, 20 Colum. J. Eur. L. 249 (2014).
[20] The proposal was being delayed for years. Jim Pickard et al., UK Draws Up Plans to Restrict Chinese Inward Investment, Fin. Times (May 24, 2020), https://www.ft.com/content/e2730a94-5307-4e2b-b5f5-3dcf775bb930; UK M&A: Intervening Before Elevenses, Fin. Times (Nov. 11, 2020), https://www.ft.com/content/269867fc-59c5-4be6-a0ef-c390d76d887a. The measures introduced in November were immediately executive, to avoid a rush to takeovers; the course of the bill can be followed at: https://bills.parliament.uk/bills/2801, last accessed Mar. 25, 2021.
[21] Jim Pickard et al., UK Toughens Takeover Rules Over Security Concerns, Fin. Times (Nov. 11, 2020), https://www.ft.com/content/68594eed-a082-464a-a125-2288587db693.
[22] See Clift, supra note 12, at 68; Didier Martin, Protectionism Is Back on the French Economic Menu, Fin. Times (Feb. 17, 2021), https://www.ft.com/content/7a3e0b84-9387-4425-8d05-ffb4f09f70a4; Simon Clark & Ben Dummett, Coronavirus Accelerates European Efforts to Block Foreign Takeovers, Wall St. J. (Apr. 10, 2020), https://www.wsj.com/articles/coronavirus-accelerates-european-efforts-to-block-foreign-takeovers-11586516403. Reuters Staff, Canada Tightens Takeover Rules for Critical Minerals, Reuters (Mar. 25, 2021), https://www.reuters.com/article/us-mining-canada/canada-tightens-takeover-rules-for-critical-minerals-idUSKBN2BH2WX. Jamie Smyth, Chinese Investors Turn Away from Australia After Canberra Crackdown, Fin. Times (Feb. 28, 2021), https://www.ft.com/content/f8e9a93f-72a5-49c3-832c-9a36fb6d4113.
[23] See National Security and Investment Bill 2019-21, HC Bill [191] cl. 32 (U.K.).
[24] Alexandros L. Seretakis, Hostile Takeovers and Defensive Mechanisms in the United Kingdom and the United States: A Case Against the United States Regime, 8 Entrepren. Bus. L.J. 245, 249 (2013).
[25] See Clift, supra note 12, at 55.
[26] See Jurgen Brohmer, The Free Movement of Capital in the European Union and the Problem of ‘Golden Shares’ and Similar Instruments, 25 L. in Context: A Socio-Legal J. 144 (2007).
