Control Shifts via Share Acquisition Contracts with Shareholders

This chapter contrasts the ‘contractual’ and the ‘corporate’ models of takeover or tender offer regulation. Under the former, the aim of the regulation is to preserve the takeover transaction as a straightforward contract between acquirer and target shareholders. Under the latter, whilst keeping the essential contractual mechanism in place, the regulation aims to inject into the transaction elements which would be present if the control shift were being brought about in a way which involved a corporate decision on the part of the target company. This design decision has to be taken in respect of both of the two main questions at the heart of takeover regulation. These are how to regulate relations between (a) the target management, on the one hand, and the acquirer and target shareholders on the other, and (b) between the acquirer, on the one hand, and target shareholders and target management on the other. A contractual approach suggests side-lining management under (a) and giving the acquirer a free hand as to the formulation of its offer under (b). A contractual approach under (b) is unattractive because it leaves the acquirer free to exploit coordination costs among the shareholders in a way which would not be possible in a corporate decision. Under (a), there is much more room for debate over the proposition that defensive measures by target management should be prohibited. This is because of the wide range of motives which may drive takeover offers, some of which promote the welfare of society as a whole and others do not or are doubtfully of benefit. Choosing a single overall rule, therefore, depends on the particular circumstances of the corporate governance facts and arrangements in a particular state or, even, a particular company. Finally, the chapter describes and seeks to explain the actual choices made in four jurisdictions: UK, US, Germany and Japan.