The Availability of Takeover Defenses and Deal Protection Devices for Anglo-American Target Companies
Albert O. “Chip” Saulsbury, IV
On September 19, 2011 the United Kingdom’s Panel on Takeovers and Mergers (the “Panel”) enacted amendments to the City Code on Takeovers and Mergers (the “Takeover Code”). These amendments will have a significant impact on the manner in which companies in the U.K. engage in mergers and acquisitions (“M&A”) and will amplify the differences between British and American deal activity. The board of directors for U.S. target companies can use takeover defenses to divert hostile offers into a negotiated acquisition process, which generates more negotiating power and ultimately allows the board to maximize shareholder value in M&A transactions. During negotiations, directors also have the ability to incorporate provisions in the merger agreement known as deal protection devices, which ultimately lead to an increased price and higher premiums for shareholders. The substantive rules developed through the Delaware common law and the Delaware General Corporation Law place the ultimate power and authority in the hands of the board of directors during the sale of the company. Directors of target companies in the U.K. are not vested with the same ability to divert offers into a negotiation process. Instead, takeover defenses are strictly prohibited in the U.K., and the Panel’s recent revisions to the Takeover Code prohibit the use of deal protection devices. By eliminating takeover defenses and deal protection devices, the Takeover Code significantly reduces the board’s negotiating power.
This Article argues that the availability of takeover defenses and deal protection devices under Delaware corporate law gives directors of U.S. target companies more negotiating power and allows them to generate higher premiums for shareholders in M&A transactions compared to their colleagues in the U.K. The Delaware courts’ use of a malleable reasonableness standard allows directors to adapt to the unique circumstances surrounding each deal, while holding directors accountable under a fiduciary duty analysis. This is in stark contrast to the bright line rules of the U.K.’s recently amended Takeover Code, which strip the board of any ability to use takeover defenses and deal protection devices. Instead, the authority to decide on the merits of a transaction in the U.K. rests solely with the shareholders of the company, which prohibits directors from negotiating higher priced deals.