Edmund-Philipp Schuster

Efficiency in Private Control Sales – The Case for Mandatory Bids

There are two main regulatory approaches in relation to private sale-of-control transactions. The ‘market rule’ confers maximum freedom on a company’s incumbent controller by enabling sale shares (hence control over the company) to any acquirer offering an acceptable price. This concept applies to most private sale-of-control transactions in the US. On the other hand, the ‘mandatory bid rule’ requires a potential acquirer to offer a buy-out to all remaining shareholders once he obtains control over a company. The mandatory bid rule has its origins in the UK and now applies throughout the EU and in many other jurisdictions. Under a mandatory bid, the price offered to the remaining shareholders by the acquirer must be at least equal to the consideration received by the incumbent controller. This effectively prevents transactions with potential acquirers who are unable to offer a price acceptable to the incumbent controller to all shareholders of the company. While this warrants that no value-destroying control transfers can take place, some value-increasing takeovers are also prevented by the rule, potentially reducing the overall level of (beneficial) takeover activity. This “chilling effect” of the mandatory bid rule, it is often argued, is too high a price to pay for the few advantages offered in exchange. This paper seeks to analyse the determinants for a re-estimation of the efficiency costs entailed by the mandatory bid and market rules and argues that the efficiency advantages of the mandatory bid rule go far beyond simply deterring inefficient takeovers. The paper also emphasizes that private benefits of control – especially in the form of synergies – exist irrespective of the level of investor protection offered by a particular legal environment.

The Costs of Separation: Friction between Company and Insolvency Law in the Single Market

The increase in corporate mobility and choice of law within the EU has dominated much of the academic writing in European company law over the last two decades. One aspect that has not yet been appreciated in the debate relates to the way in which national company law interacts with and depends on features of the national legal system outside of company law. In this article, we explore this interaction and its role in the creation of integrated, coherent regulatory systems on the national level. We argue that increased corporate mobility has the potential to tear these coherent systems apart, creating significant frictions in the regulatory framework for internationally operating companies. These frictions may consist of regulatory gaps or multiplication of legal requirements, as private international law rules are applied inconsistently across Europe. More importantly, however, even consistent application of conflict rules would often fail to produce the desired regulatory outcomes due to cross-doctrinal interdependence within any national legal system. This paper examines both problems by analysing an area where functional interdependence is especially pronounced: the regulatory framework in relation to companies in the “vicinity of insolvency�?. We show how conflict of law rules and the territorial reach of administrative and criminal mechanisms create legal uncertainty and result in incoherent regulatory solutions, potentially impeding the efficient functioning of debt markets. We conclude that this is in essence a design flaw in the way we deal with the increasingly international reach of corporations within the EU.

The Mandatory Bid Rule: Efficient, After All?

The mandatory bid rule has its origins in the UK and now applies throughout the EU and in many other jurisdictions. Under a mandatory bid, an acquirer of a controlling stake in a listed company has to offer to the remaining shareholders a buy-out of their minority stakes at a price equal to the consideration received by the incumbent controller. While the rule warrants that no value-destroying control transfers take place, it is often criticised for preventing value-increasing transactions. This paper challenges some of the claims made by critics of mandatory bids. Highlighting the effects of synergy gains in private sale-of-control transactions, it is shown that mandatory bids prevent inefficient control transfers, where minority shareholder protection rules provide inadequate protection. Furthermore, mandatory bids help facilitate transfers to the most efficient bidders in multi-bidder settings. The mandatory bid is justifiable, on economic grounds, in wider circumstances than is commonly assumed by law and economics scholars.

The Evolving Structure of Directors’ Duties in Europe

Corporate mobility in Europe continues to be on the rise, both creating space for regulatory arbitrage by companies and influencing legislative decisions in corporate law and related fields. This has triggered debates in European company law that centre on questions of harmonisation, cross-jurisdictional convergence and the superiority of certain regulatory approaches and legal families. This article uses a large cross-country sample of EU Member States to classify legal strategies in corporate governance and assess claims of convergence and the superiority of legal families. We analyse board structure, the most important duties of directors, namely the duties of care and loyalty, questions of enforcement, and the position of directors in the vicinity of insolvency, and develop a taxonomy of legal strategies across the Member States. We find that, in spite of differences in regulatory technique and legal tradition, the effect of the legal strategies employed by the Member States is often remarkably similar and legal systems exhibit interconnections in the form of mutual learning across borders. In addition, we show that, in contrast to claims by parts of the literature, judicial innovation is not restricted to particular legal families. We argue that all legal families are, in principle, well equipped to react to new developments and draw on general or unwritten principles of law to fill regulatory gaps. However, a precondition for the emergence of effective rules seems to be a sufficiently large body of case law and, accordingly, access to the courts and an efficiently functioning judicial system. Consequently, we submit that questions of enforcement are of greater importance than a particular legislative or regulatory style.

Measuring Management Insulation from Shareholder Pressure

We propose a management insulation index based on banks’ charter and by-law provisions and on the provisions of the applicable state corporate law that make it difficult for shareholders to oust a bank’s management. We show that banks in which managers were more insulated from shareholders in 2003 were roughly 18 to 26 percentage points less likely to be bailed out in 2008/09. We also find that banks in which the management insulation index was reduced between 2003 and 2006 were more likely to be bailed out. We discuss alternative interpretations of the evidence. The evidence is mostly consistent with the hypothesis that banks in which shareholders were more empowered performed poorly during the crisis.We propose a management insulation measure based on charter, bylaw, and corporate law provisions that make it difficult for shareholders to oust a firm’s management. Unlike the existing alternatives, our measure considers the interactions between different provisions. We illustrate the usefulness of our measure with an application to the banking industry. We find that banks in which managers were more insulated from shareholders in 2003 were significantly less likely to be bailed out in 2008/09. These banks were also less likely to be targeted by activist shareholders, as proxied by 13D SEC filings. By contrast, popular alternative measures of insulation -- such as staggered boards and the Entrenchment Index -- fail to predict both bailouts and shareholder activism.