18 Takeover Defences
18.1 General Remarks
The target’s board of directors functions as a “gatekeeper” in all acquisitions
which require the consent of the target. Mergers, asset deals, and reverse takeovers
are always friendly. A potential acquirer can circumvent such constraints by mak-
ing an offer directly to the target’s shareholders contrary to the intentions of the
target’s board. Particular takeover defences are designed to reduce the risk of such
offers.^1
Three main methods. Generally, takeover defences work in three main ways.
First, they can make the acquisition of a sufficient amount of shares more expen-
sive or impossible. Second, they can reduce the rights attached to shares or restrict
their exercise. Third, they can frustrate the commercial purpose of the acquisition.
Categories. Takeover defences are usually divided into various categories. The
two main categories of takeover defences are pre-bid defences (structural de-
fences, control enhancing mechanisms) and post-bid defences. Some takeover de-
fences belong to both categories at the same time.
It is sometimes distinguished between takeover defences that apply to the “ex-
ternal” and “internal” market for corporate control.^2 On the other hand, those mar-
kets for corporate control are, to a large extent, interrelated.
A person can be said to have full control over a corporate firm (subject to prob-
lems relating to agency relationships in general) when that person can decide how
the board must act and the board tries to further the interests of that person. Typi-
cally, the voting power of a very large blockholder will also ensure a high degree
of control over the board. There are nevertheless “internal” takeover defences that
seek to shield the board from new blockholders.
Pre-bid defences. According to the Report of the High Level Group of Com-
pany Law Experts,^3 pre-bid defences include:
- the use of direct barriers to the acquisition of shares in the target;
- the use of barriers to exertion of control at the general meeting;
- the use of barriers to exertion of control in the board of directors;
(^1) Bainbridge SM, Mergers and Acquisitions. Foundation Press, New York (2003) p 312.
(^2) For those two markets for corporate control generally, see Manne HG, Mergers and the
market for corporate control, J Pol Econ 73 (1965) pp 110–120.
(^3) Commission of the European Communities, Report of the High Level Group of Com-
pany Law Experts on Issues related to Takeover Bids, 10 January 2002.
P. Mäntysaari, The Law of Corporate Finance: General Principles and EU Law,
DOI 10.1007/ 978-3-642-03058-1_18, © Springer-Verlag Berlin Heidelberg 2010