Deal Structure and Minority Shareholders

Abstract

Takeover transactions are often the most significant activity affecting corporations and their shareholders. Accordingly, there are intense debates about the value and impact of takeovers and the extent to which law should regulate such transactions. One area of focus for takeover regulation has been the potential impact of takeovers on minority shareholders. The focus on minority shareholders is not surprising as research suggests that laws which protect minority shareholders are associated with stronger financial markets. This chapter discusses three methods of effecting a takeover, focusing on tender offers, schemes of arrangement, and triangular mergers, and assesses both the theoretical and empirical literature on their impact on minority shareholders of bidders and targets. The chapter primarily focuses on how two common law jurisdictions, the United States (US), the United Kingdom (UK), govern such transactions. In each jurisdiction, lawmakers, regulators and courts have attempted to address the potential for harm to minority shareholders under various deal structures. At times, regulators have arrived at different sets of rules for different types of transaction structures. These rules often provide different rights for shareholders of bidders and targets, and vary among various transaction structures, even when economically similar transactions are undertaken.This chapter chronicles the use of regulatory and judicial tools to address the rights of minority shareholders under each particular structure in the US and UK. An important regulatory concern in designing laws to govern various deal structures is the balance between shareholder interests and the costs of imposing legal requirements. What is clear is that the US and UK have arrived at different tools to address minority shareholder rights in each of these transactions. While the UK takeover regime focuses primarily on ex ante regulation, the US system uses some ex ante regulation but focuses primarily on ex post policing through the courts. What is less clear and needs further empirical enquiry is which of the tools used in the US and UK regimes better protect minority shareholders. To date there have been few studies that empirically evaluate the differences between the US and UK rules. Nevertheless, a few insights are suggested by the empirical research chronicled in this chapter. First, despite the differences in each jurisdiction’s regime, target shareholders gain in takeover transactions in both jurisdictions, and in the US regime these gains are higher in tender offers than in mergers. Second, recent research suggests that the UK’s takeover rules better protect bidder shareholders in large transactions than US regulation which largely deprive bidder shareholders a role in acquisition transactions. Finally, the research on US transactions suggests that different legal treatment of economically similar acquisition structures may make a difference to minority shareholders.