510 18 Takeover Defences
Lending subsidiary shares to friendly investors. The target company can park even
subsidiary shares. Lending shares to friendly investors under very long securities
lending contracts can keep them away from the reach of the hostile bidder.
This strategy was used in Japan in 2005 when Livedoor made a hostile bid for Nippon
Broadcasting System and announced that it had acquired 35% of its shares. Livedoor was
interested in Nippon Broadcasting Systems because Nippon owned 22.5% of shares in Fuji
Television Network. Nippon Broadcasting System kept the economic ownership but lent
voting rights in Fuji Television Network to Softbank Investment and Daiwa Securities un-
der two securities lending contracts. The parties could not rescind the contracts without mu-
tual consent.^26
18.7 The White Knight Defence
The board of the target may use the white knight defence subject to the legal rules
that govern its actions generally. There are no particular constraints under Com-
munity law.^27 However, the general constraints apply (section 18.1).
In the US, white knights proposing a leveraged buyout of the target in response
to a hostile takeover bid frequently require an engagement fee, requiring the target
to pay a relatively small fee as consideration for the white knight’s preparation
and submission of its bid.^28
Whether such payments are possible even in the EU dependes on the interpreta-
tion of EU company law. (a) In principle, the payment of such a fee could also be
constrained by the purpose of the target company and its articles of association.
However, where it is in the interests of the firm to find a white knight, it can be in
the interests of the firm to bear some of the white knight’s costs to the extent that
it is permitted by other company law rules. (b) Restrictions on financial assistance
can apply.^29 It is open to what extent the stated purpose of the payments is relevant
(section 20.4). If the stated purpose of the payments is relevant, it still remains
open whether reimbursement for costs other than the price of shares, or payments
made for services rendered to the target company in the context of the acquisition,
fall within the scope of the prohibition. (c) Cancellation fees, i.e. provisions for
monetary compensation of the favoured bidder in the event the transaction fails to
go forward, are common in negotiated acquisitions. The use of cancellation fees or
liquidated damages is usually permitted subject to some restrictions (section
(^26) For the reasons for this clause, see Hu HTC, Black BS, The New Vote Buying: Empty
Voting and Hidden (Morphable) Ownership, Southern Cal L R 79 (2006) pp 811–908 at
pp 841–842.
(^27) Article 9(2) of Directive 2004/25/EC (Directive on takeover bids).
(^28) Bainbridge SM, Mergers and Acquisitions. Foundation Press, New York (2003) pp 180–
181.
(^29) The target company “may not advance funds ... with a view to the acquisition of its
shares by a third party”. Article 23(1) of Directive 77/91/EEC (Second Company Law
Directive).