The Decision to Adopt Defensive Tactics in Italy: A Legal and Economic Analysis

This paper analyzes the Italian rules concerning the decision to adopt defensive tactics in the face of a hostile bid. The regulation presents an enabling aspect in that it does not set ex ante the level of resistance that firms can implement. Rather, it merely sets a pro-resistance default rule. Firms can thus opt out of this regime and model a resistance policy that suits their needs. At the same time, Italian law recognizes that agency costs may plague the decision concerning whether or not to adopt defensive tactics. The law, therefore, introduces a procedural mandatory requirement of shareholders' approval for all decisions that may obstruct a hostile takeover. This mandatory requirement applies, however, only after the launch of a hostile bid. This temporal limitation appears consistent with the need to protect managerial discretion and flexibility in the corporation's ordinary course of business. I posit that this regime strikes an overall efficient equilibrium in the trade-off between the costs and benefits generated by resistance. The paper also analyzes the possible shortcomings of a rule that requires shareholders' vote, that is, the possibility that under certain circumstances incumbent managers and blockholders abuse defensive tactics for entrenchment purposes. Finally, a tentative "public choice" history of the evolution of defensive tactics regulation in Italy is attempted. The picture that emerges appears to confirm the prediction that unitary systems tend to produce more efficient takeover regulation than federal systems.