Private versus Public Regulation: A Comparative Analysis of British and American Takeover Controls

By Rosenzweig, Brian E. | Duke Journal of Comparative & International Law, Fall 2007 | Go to article overview

Private versus Public Regulation: A Comparative Analysis of British and American Takeover Controls


Rosenzweig, Brian E., Duke Journal of Comparative & International Law


"There is no financial system in the world which does not depend to a large extent on the moral standards and disciplines of self-regulation." (1)

INTRODUCTION

The hostile takeover is a powerful tool of corporate governance. (2) A hostile tender offer enables the shareholders of a target corporation to effect a change of control against the will of the incumbent board of directors. (3) The ability of the tender offer to alter the management of a corporation in such a drastic fashion led both the United Kingdom (4) and the United States to institute controls over hostile takeover transactions. Despite clear similarities between their business (5) and legal structures, (6) the United Kingdom and the United States have pursued strikingly different models of corporate takeover regulation. In England, takeovers are regulated by the City Code on Takeovers and Mergers (City Code or Code), which is interpreted and enforced by the Panel on Takeovers and Mergers (Takeover Panel or Panel), a self-regulatory body appointed by bodies representing different segments of the British financial community. (7) In the United States, an overlapping system of state and federal laws and regulations controls bids for corporate control. (8)

This Note illustrates the differences and similarities between England's self-regulatory, standards-based system and America's more formal, rules-based system. Particularly, this Note will focus on the structural and procedural attributes of these systems, the "mode" of regulation, (9) as opposed to the substantive rules that govern takeovers. Part I describes the procedures and structures employed by the Takeover Panel to amend, interpret and enforce the City Code. Part II illustrates the system of overlapping state and federal authority in the United States. Part III contrasts the two systems and examines the prospect of convergence.

I. TAKEOVER REGULATION IN ENGLAND

A. Origins of the City Code on Mergers and Takeovers

In the early postwar era, the City of London (City) (10) was faced with a simple choice about controlling the burgeoning takeover market: (11) either submit to legal regulation by the government or adopt a system of self-regulation. (12) At that time, underutilization of assets and mismanagement made many British firms ripe targets for takeovers. (13) In the absence of specialized legislation, common law courts were left to settle disputes over the defensive measures taken by incumbent boards. (14) Due to concerns over timeliness and uncertainty, however, investors were not satisfied with the dependence on litigation. (15) The City Code (16) was first drafted in 1968 by a working party of City institutions as a solution to the perceived threat from hostile corporate bidders. (17) The Code was comprised of ten General Principles and thirty-five rules. (18) The Takeover Panel, a non-governmental body composed of representatives from British financial, industry and investor trade associations, (19) is responsible for regulating takeovers through the administration of the Code. (20)

In its earliest form, the Code lacked statutory authority and the only means of sanction available to the Takeover Panel was the public censure of violators. (21) In order to compel compliance with the Code, the Panel implored the investment banks that advised parties in takeover transactions to honor its rulings by holding the banks responsible for their clients' violations. (22) The threat of losing the professional services and capital of the City investment banks compelled bidders and target boards to follow the Code. (23)

B. The Structure and Activities of the Takeover Panel

The Code sets out the organizational structure of the Takeover Panel and its subcommittees. (24) The makeup of the Panel demonstrates its business-oriented, self-regulatory nature. Members of the Panel are appointed by various bodies such as insurers, investment companies, private and institutional investment management firms, banks, industry, accounting firms, investment banking houses and pension funds. …

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