Takeovers
A
Takeovers are important because they lead to the reduction of the informational monopoly of the incumbent manager with reference to the state of the firm in addition to providing a chance to replace managers that are not efficient. New firms after the takeover also may benefit from the economies of scale and share knowledge. A friendly takeover entails a bidder or an acquirer acquiring or taking over a target company with the approval or consent of the board of directors or management of the target company. The acquiring company informs the board of directors of a target company of its intentions to purchase a controlling interest. The target company’s board of directors then votes on the proposed buyout believing that it would benefit the shareholders. The acquiring company then takes control of the operations of the target company and may or may not decide to keep the board of directors of the target company in place. Hence the management or board of directors of both companies support the acquisition of the target company by the bidder hence it begins when both companies agree to do so. Therefore both organizations begin the process of bargaining for purposes of negotiating as well as split the payoff of the merged organization.
There is no specific best practices in takeover law as there are multiple models. The following are the takeover models;
The United Kingdom’s model
Adopted in the autumn of 1959 which entailed the adoption of the Notes on Amalgamation of British Businesses by Bank’s Committee. This was made up of various guidelines to safeguard the shareholder’s interests. New rules were drafted known as the City Code on Takeovers and Mergers. Subsequent changes took place like the “mandatory bid rule,” of 1972 that made it mandatory for seeks to gain control (defined as thirty percent of the voting shares) of a publicly-traded company to make an offer for the remaining shares at the most favorable price paid for shares during the preceding six months (Amrour et al., 2011).
The United States (Delaware) model
It combines the method that an acquirer obtains control of a publicly held corporation without the board of the target company’s consent or cooperation which includes the hostile tender offer and the proxy contest hence leading to a unified takeover strategy. Before the 1960s it involved a raider making an offer to buy all or a fraction of the outstanding shares at a tender price that is stated. Consequently, the takeover becomes successful in the event that the raider is able to get more than 50% of the voting shares and hence obtain effective control of the target company. When the raider has more than 50% of the voting shares he will have the capability of gaining the majority representation on the board and consequently will be able to appoint the Chief Executive Officer (CEO). In this sense, the raider acquires the target company without the consent of the management and or the board of the target company after voting down the proposed sale by the raider. In the mid-1960s hostile tender offer gradually replaced the proxy contest. According to Grossman & Hart (1980), there were various ways that could be used in improving the efficiency of the hostile takeover mechanism. These ways entail a dilution of the rights of the minority shareholders. One of the propositions they make is that the raiders in a takeover should be permitted to squeeze/freeze out the minority shareholders that have not tendered their shares or to permit the raiders to build up a larger toehold before their stake is disclosed as required. In 1968, the Williams Act was enacted to respond to the various abuses in the tender offers. This did not require a mandatory bid for all shares so as to give the minority shareholders a chance to exit their investment like the UK regulations. It also did not regulate the conduct of boards of target companies in responding to as well as resisting hostile takeover bids although it was subsequently regulated and provided that the board should decide whether or not to entertain a hostile takeover bid through a vote although not as a tender offer (Amrour et al., 2011).
The Japan Model
The institutional infrastructure for hostile takeovers in Japan is best characterized as minimalist. In 2005, the Livedoor court presented new regulations for takeovers in Japan. The Livedoor court presented four examples of abusive motive: (1) greenmail, (2) “scorched earth” practices that involve stripping the intellectual property of a target company or key customer relationships after the acquisition, (3) liquidation of the assets of the target company to pay down the debt of the acquirer, and (4) selling off assets not related to the core business of the target company in for purposes of paying a high one-time dividend. In May 2005, nonbinding Takeover Guidelines were released for improvement of corporate value through adoption, activation, and removal of defensive measures; defensive measures being disclosed and based on the reasonable will of shareholders, and defensive measures should be suitable and necessary. Consequently, Japan does not have a significant legislative intervention leaving it to have a multilayered and complex set of guideposts for hostile takeover defenses compiled by subordinate lawmakers like the judiciary, TSE among others (Amrour et al., 2011).
B
There are four issues in which the analyses of the regulation of optimal takeover have focused on which entail whether the deviations from the rule of one share one vote leads to outcomes in a takeover that are not efficient; whether or not the raiders in a takeover should be mandated to buy out minority shareholders; whether takeovers may lead to the partial expropriation of other claims on the corporation that are not adequately protected and if that is the case whether some amendments that are against takeovers may have justifications as basic protections against expropriation and lastly whether the contests of proxy should be favored over tender offers. In this sense, the takeover law that I would recommend for Ambigia is the Japanese model based on its description on corporate governance system which entails high growth market, highly educated population, free-market reforms, majority of its publicly traded firms have a controlling shareholder (typically a family or holding group), but an increasing number of firms do not have one, most domestic shareholders with small shareholdings, retail investors and both UK and US institutional investors, vertically integrated groups of firms, little shareholder litigation, one-tier boards of majority firms, controversies in hostile takeovers among others. There are various advantages and disadvantages of the Japanese model of takeover law. The advantages include the following;
The Japanese model of takeover law presents a more advanced legal regulation of the takeover activities because it is as a result of the extensive research that took place by the Corporate Value Study Group (“CVSG”) made up of experts and business representatives with reference to the Anglo-American takeover activities and regulations as well as legal precedents (Armour et al., 2011). Hence it is a hybrid of the United States’ model and the United Kingdom’s model as various aspects from both are adopted in the Japanese model. Additionally, the model advocates for the protection of corporate value which entails the interest of shareholders or stakeholders like employees. Additionally, shareholder equality is provided by the model and it approves defensive measures to ensure fairness. The model engages very important actors in the corporate sector which entails the judiciary, the securities exchange, various agencies among others in the market that present important contributions to the regulations.
The disadvantages include that the model law is nonbinding guidelines hence not effectively implemented for lack of legal consequences as it is soft law. Moreover, the model takeover law lacks an institutional framework for hostile takeovers as it is still incomplete. The Bull-Dog Sauce being part of the model is viewed as insular and unwelcoming to the foreign investors in Japan and hence to the nation that adopts this model which would hinder foreign investment. Moreover, there is a lack of legislative intervention in this model making its enforcement have various challenges.
2
A
There are at least two forms of limited liability business associations provided by most countries around the world. These include limited liability partnerships and limited liability companies which may be private or public as well as either limited by shares or by guarantees. Limited liability partnerships (LLPs) are similar to general partnerships where two or more people come together for purposes of carrying out a business with the aim of making a profit hence multiple partners are each responsible for the day to day activities and operations of the business. However, the partners in limited liability partnerships are not personally responsible for the actions of the other partners or the debts of the business hence partners in LLPs enjoy limited liability for the business’ liabilities (Anderson et al., 1991). In this sense, the business that is the limited liability partnership is a separate and distinct legal personality with the capability of owning property, assets among others, transacting its own name, contracting, suing, and being sued among other things that a legal person is capable of doing. For this reason any liability such as debts, contractual obligations falls on the limited liability partnership as a business and not on its partners or members. Despite this, not all types of businesses can be limited liability partnerships because this type of business entity or association is usually restricted to particular professions such as lawyers and accountants. It differs from a company despite being similar to a company in various ways such as taxation whereby a limited liability partnership does not pay corporate tax which encompasses taxes on profits and taxation is done on an individual that is the partner’s income hence a tax-effective form of business association. Limited liability partnerships also are not required to have a board of directors to run the entity as the partners are responsible for its operations hence more flexible than companies.
On the other hand, a limited liability company is a form of business entity where the members are not liable for the liabilities of the business. The business is a separate and distinct legal person with the capabilities of suing, being sued, owning property or assets, entering into contracts among others. The members have limited liability to the debts, contractual obligations, and other liabilities of the business. A limited liability company or LLC in this sense is a hybrid business structure that provides the limited legal liability of a corporation as well as the operational flexibility similar to that of a partnership or sole proprietorship. Despite this, the formation of a limited liability company is more complex as well as formal in comparison to that of a general partnership. Different nations provide different regulations for limited liability companies where in some cases they are required to pay corporate tax and tax on profits while in others profit and losses usually pass directly to the personal income tax returns of the members and hence can elect to be taxed as a corporation, a partnership or as a sole proprietorship. Moreover, the laws governing limited liability companies which entails companies’ regulations and laws are different from the laws governing limited liability partnerships which entail partnership laws and regulations.
B
In the past 20 years, there are various trends that have emerged in limited liability business associations across various jurisdictions. This entails various types of limited liability companies such as public limited companies which offer shares of stock to the general public and the buyers of the stock have limited liability in addition to being allowed more members as well as private limited companies which is not allowed to offer its shares of stock to the general public and its membership usually restricted to 50 members. There are also limited liability companies that are limited by guarantee as opposed to shares where there is no share capital and or shareholders but rather members who act as guarantors. Moreover, there is an increase in the mergers and acquisitions (takeovers) in various limited liability business organizations which is necessitating the evolution of corporate law to a large extent (Armour et al., 2011).
3
A
The substantive law on self-dealing that is recommended for Noricum is the strict no-conflict rule which bans self-dealing by directors categorically that is adopted by the United Kingdom. The no-conflict rule, therefore, prohibits self-dealing transactions despite the fact that they may be fair or not fair hence formulated as a loyalty rule. The no-conflict rule is to the effect that companies can craft exceptions to the self-dealing transactions which require directors to get some form of approval from their fellow directions in the event that they want to engage in transactions that are categorized as self-dealing. Consequently, the no-conflict rule prohibits fiduciaries from occupying any position of conflict as was presented in the case of Aberdeen Railway Co. v. Blaikie Bros (1854) 1 Macq. 461 (appeal taken from Scot.) by Lord Cranworth that no person who has fiduciary duties to carry out should be permitted to enter into engagements in which he has or may have a personal interest that is conflicting or which has the possibility of conflicting with the interests of those that he has a duty to protect. In the course of operation, the no-conflict rule admits no inquiry into the various merits of a transaction that is self-dealing in nature. As a result, the directors are not able to save a transaction through portraying that that it is fair to the company. Lord Cranworth in the Aberdeen case asserted that this principle is adhered to so strictly such that no question is permitted to be raised with reference to the fairness nor unfairness of a contract that is entered into. Despite the fact that the transaction is better than or as good as any alternative transaction that is available to the organization, it is voidable with reference to the no-conflict rule. The rule therefore effectively makes directors act in the sole interest of the principal because it prohibits the transactions that benefit a director despite the fact that they benefit the company or not hence is known as the sole-interest rule. The outright ban on self-dealing in this sense saves adjudication costs that usually relate to resolving complex questions that revolve around fairness that is usually required in the fairness rule of self-dealing. In this regard, these cost savings to a large extent offset losses from the overbreadth of the rule (Tuch, 2019). Additionally, the rule depicts an unforgiving approach towards disloyalty hence requiring a high standard of conduct. The no-conflict rule has two major exceptions that is the disclosure of the self-dealing transactions to the shareholders and getting their approval and secondly satisfying the conditions if any that are specified in the charter. The no-conflict rule as a substantive law would, therefore, be effective for the Republic of Noricum as most of its publicly trading corporations are owned by financial institutions or families hence a high chance of self-dealing as well as having high cases of blatant self-dealing by controlling shareholders which have become public. In addition to that, the directors have a general duty of care and loyalty to the various corporations and the recent codification of the no-conflict rule would be appropriate for a civil law nation like Noricum. For this reason, the strict no-conflict rule with reference to self-dealing would act as a deterrent to self-dealing as all transactions of self-dealing would be prohibited which would tremendously reduce the cases of self-dealing that are on the increase in the nation. This is despite the fact that the transactions are fair or not and it would also save costs of litigation as to the fairness of the self-dealing transactions.
B
Changes are recommended to the law in Noricum nation to facilitate the enforcement and existence of derivative suit actions. It is vital that a shareholder on behalf of the company be able to institute derivative claims with respect to the breach of director duties (Greco, 2018). This is because the majority shareholders may prevent the minority shareholders from protecting the interest of the company hence this can be avoided by enacting laws that permit a shareholder or shareholders despite their number(s) to institute derivative action claims against the director(s) for breach of director duties hence removing the restriction of the number of shareholders who could institute derivative action claim. To prevent the abuse of this privilege to shareholders, the procedure to institute a derivative claim should encompass seeking leave (permission) from the court which will weigh the merits of the request with the laws in question with reference to the rights of the majority of the shareholders being respected on one hand and on the other hand the need to have an improvement of the protection of the minority shareholder while at the same time preventing a rise in malicious and frivolous claims. Consequently, the court will make a determination on the request by the shareholder to institute derivative claims and if it is merited would grant permission where the shareholder may institute the derivative claim. In addition to that, specific guidelines will be in place with reference to the range of acts or omissions that may give rise to a derivative claim and this would encompass an act or omission that arises from a proposed or actual act or omission that relates to default, negligence, breach of trust or breach of duty of a director of a company. Moreover, the cause of action ought to be vested in the company while the member that is bringing the course of action ought to be seeking relief on behalf of the company hence avoiding personal remedies for disgruntled minority shareholders. In this sense, no voting should be required to bring a derivative claim. Consequently, this change of law would provide a conducive environment for the derivative suits with the objective of protecting the interests of the company.
References
Greco, E. (2018). Shareholders’ remedies: the derivative action in the UK, the USA, and Italy.
Aberdeen Railway Co. v. Blaikie Bros (1854) 1 Macq. 461 (appeal taken from Scot.)
Tuch, A. F. (2019). Reassessing Self-Dealing: Between No Conflict and Fairness. Fordham L. Rev., 88, 939.
Armour, J., Jacobs, J. B., & Milhaupt, C. J. (2011). The evolution of hostile takeover regimes in developed and emerging markets: An analytical framework. Harv. Int’l LJ, 52, 219.
Grossman, S. J., & Hart, O. D. (1980). Takeover bids, the free-rider problem, and the theory of the corporation. The Bell Journal of Economics, 42-64.
Anderson, R. D., Bromberg, A. R., Egan, B. F., Griffin Jr, C. A., Schoenbrun, L. L., & Szalkowski, C. (1991). Registered Limited Liability Partnerships. Bull. Bus. L. Sec., 28, 1.