21: Mergers, Acquisitions and Corporate Controlinfluence of the European Commission, as well as other international securities and trade regulators, in
affecting the outcome of proposed M&A transactions.
21-6c OTHER LEGAL ISSUES CONCERNING CORPORATE CONTROL
Securities laws also regulate the actions of managers in corporate control events. The high-profile
insider-trading scandals of the 1980s generated a keen interest in these laws, while the 2001 Enron
and WorldCom scandals prompted the US Congress to pass the Sarbanes–Oxley Act of 2002. This
legislation primarily targeted accounting practices, but it also mandated significant changes in how (and
how much) information must be reported by companies to investors. Individual states have also become
more interested in promoting corporate control legislation after witnessing business practices that were
perceived as detrimental to the welfare of the electorate.
Laws Affecting Corporate Insiders
Federal securities laws govern the actions of corporate managers and corporate insiders (and generally
anyone in possession of material non-public information) during corporate control events. These laws
generally attempt to prevent informed trading on non-public information (that is, inside information),
such as an upcoming takeover attempt known only to the insiders of the acquiring company. Trading on
inside information about a pending merger is considered a material misrepresentation, because material
information (news of the merger) is being withheld. Managers are also restricted from issuing misleading
information regarding merger negotiations. In Australia, the Australian Securities and Investments
Commission (ASIC) is responsible for monitoring the market and detecting and investigating breaches
of the rules prohibiting insider trading and market manipulation. Penalties for such breaches include
sanctions, fines and imprisonment.
14 Which industries do you anticipate will experience industry shocks that will spur merger activity in
the near future?15 Do you believe that increasing global competition will further heighten merger activity?16 What is the Herfindahl Index, and what does it measure?17 What is the purpose of classifying mergers by degree of business concentration? Why do you think
these classifications have changed over time?CONCEPT REVIEW QUESTIONS 21-6
21-7 CORPORATE GOVERNANCE
Corporate governance refers to how companies are governed; that is, the processes and rules that affect
who ultimately makes the decisions in a company. In Chapter 1, we discussed how shareholders are the
ultimate owners of any corporation, and therefore in principle have the right to make company decisions.
However, any one shareholder typically owns only a small portion of any particular public company, and
the ownership of any particular company is diffuse (that is, spread across many different shareholders).
corporate governance
The processes and rules that
determine how a company is
governed