Legal Framework

European Competition Policy

As a closing to our Legal Framework chapter, we will discuss the European Competition Policy. In this article, you will learn about the European Union, the EU Merger Control Procedures and more. 

European Competition Policy

The European Union adopted what is most commonly referred to as the merger regulation as of December 1989. However, the merger regulation policy was not put into effect until September 1990, but it was later amended.

What did the regulation focus on? It focused on mergers and joint ventures that have an impact on the degree of competition beyond one nation’s border. All mergers that have significant revenues need to receive European Commission or EC approval under the regulation.

European competition policy vs U.S. system

The European competition policy is different from the U.S. system. In the U.S system, antitrust regulators must go to court to block a merger. However, the EC’s regulatory system does not dependent on the courts.

According to Mats A. Bergman, Malcolm B. Coate, Maria Jakobsson, and Shawn. Ulrick, “Comparing Merger Policies in the European Union and the United States, ”  the latest revision of the EC mergers and acquisitions regulations are now broader than the previous version. In this latest revision, they mention market dominance, however, it is now merely an example of an anticompetitive condition.

The market power is determined before and after every deal as part of its analysis. However, before that, the EC must first define the market. In addition to that, different factors including barriers to entry are taken into account as part of its determination.

European Commission Analysis

After the said analysis is finished, the EC does a further analysis. They do so by utilizing its own horizontal merger guidelines. The said merger guidelines start off with post-deal market shares greater than 50% giving rise to concerns. On the other hand, those shares that are below 25-30% tend not to raise much concern. 

Additionally, the EC is less likely to raise concerns when the HH indexes are below 1,000. The same can be said when the HH indexes are below 2,000 but the post-deal delta is low (for instance, the post-deal delta is between 150 and 250). For more information regarding HH indexes, refer to our previous article titled Measuring Concentration and Defining Market Share. On the other hand, the transactions that the EC finds particularly objectionable can or may be brought to the European Court of Justice. 

There are a number of companies from the United States that do business in Europe. These companies must first secure European Union approval first in addition to the approval by the U.S. antitrust authorities. 

European Union

As you might think, this can be a time-consuming process sometimes. For instance, the European Union once launched an investigation into Oracle Corporation’s $7.4 billion takeovers of Sun Micro systems Inc. that lasted for over six months. The EU later approved the deal in January of 2010. 

It is no secret that the U.S. antitrust authorities and their European counterparts sometimes disagree on the competitive effects of mergers and acquisitions. In fact, these instances receive a lot of attention. However, contrary to what the media says, the U.S. antitrust authorities and they often agree on the effects.  You may remember when the U.S. antitrust authorities and EC disagreed with the proposed $40 billion General Electric-Honeywell merger. 

The European Opposition

The European opposition to the GE-Honeywell deal raised a lot of eyebrows since there are some who felt that the European Union was using its competition policy to insulate European companies from the competition with larger U.S. rivals. There are also some who concluded that the decision was the product of an inadequate analysis on the part of the EC. The merger was not opposed to the United States. 

This $40 billion conflict led to a lot of discussions to make a more consistent competition policy in both markets. Then-antitrust chief Mario Monti, who also happens to be a former Italian economics professor, used an economic doctrine that is known as collective dominance when reviewing the impact that mergers may have on the level of competition within the EU for the EC antitrust regulators. 

In the EU those with market shares that are below 40% could draw enforcement of action. On the other hand, those with much higher thresholds such as 60% may apply in the United States of America.

As a way of limited monopoly power and helping consumer welfare, the European regulators have framed their opposition to certain mergers and acquisitions. However, not everyone was sold. There are still some that are cynical about their motives. 

For instance, Aktas, de Bodt, and Roll analyzed a sample of over 290 proposed acquisitions

that were examined by the European regulators in the 1990s. In their analysis, they found that there is a higher chance for regulators to oppose the merger and acquisition when there is a greater chance of adverse impact on European rivals resulting from deals by foreign companies. 

EU Merger Control Procedures

In able for the European Union to review a deal, the EC sets certain deal sizes or turnover thresholds. The size is defined in terms of both worldwide and EU business volume.

Before a merger is completed, the EC should first be notified. The merger partners should complete a number of prepared templates by the EC. 

There are plenty of deals that do not get much scrutiny from the EC. However, if a certain deal results in a combined horizontal market share of 15% or 25% in vertical markets, you can expect the EC to do an investigation. 

Usually, the investigation process starts with Phase I which is completed within 25 business days. A majority (90%) of all cases are expected to be cleared in Phase I.

The remaining 10%, however, have attracted competition concerns, these concerns will be addressed in Phase II. 

Phase II

The participants of the deal are expected to put forward or agree to remedies that will guarantee continued competition during Phase II. This phase is usually completed within 90 business days. However, should they wish, the EC can apply an additional 15 days to this time limit. 

Upon further review, and if the EC agrees to the remedies, it will then appoint a trustee to oversee the implementation of the remedies. This is done to ensure that the remedies are enacted. 

Once Phase II is almost complete, the EC will indicate whether the deal is unconditionally clear or will be approved if remedies are implemented or if it is prohibited. All of the decisions made by the EC are also subject to a review by the General Court and potentially by the Court of Justice.

In 2014, the EU adopted a new set of rules in which companies can submit a shortened version of FormCO. Under these new rules, the parties could submit initial information-seeking EU approval stating that they did not believe the deal raises antitrust concerns. 

© Image credits to Steve Johnson

Measuring Concentration and Defining Market Share

The market share of the alleged violator of antitrust laws is one factor that courts rely on during antitrust cases, as well as the degree of concentration in the industry. Varying standards and methods in measuring market share and concentration of the Justice Department have been changing through the years. They have also been set forth in various merger guidelines.

Here are some of the changes that have occurred.

1968

The 1968 Justice Department merger guidelines were first issued and showed the types of mergers that the department opposes. These were utilized in interpreting the Sherman Act and the Clayton Act. These guidelines helped the government present definitions of highly concentrated industries in terms of specific market share percentages. They were also grounded on the idea that reduced competitions are a result of increased market concentration.

The 1968 guidelines made use of concentration ratios. These are the market shares of the top 4 or 8 in the industry. Here, a highly concentrated industry has 75% of the market acquired by the top four largest firms. It also set forth various share thresholds for acquiring and acquired companies that would drive regulatory attention. Compared to today’s standards, these share thresholds are way smaller.

1982

The 70s was a time when the 968 guidelines were criticized for their limitations. Many argued that a policy that allows more flexibility is needed, that is why in 1982, a new set of guidelines were instituted. William Baxter, a lawyer, and economist was the head of the antitrust division of the Justice Department. He introduced certain quantitative measures in the antitrust process to make it more predictable and consistent with prevailing economic theory. 

The HH index or the Herfindahl-Hirschman index was the chief measure in the American antitrust policy, which is the sum of the squares of the market shares of each firm industry. With this new index, a more precise measure is provided than the 1968’s top four or 8 firms in the industry. It accurately measures the impact of increased concentration that would be brought on by a merger of two competitors. However, when using this, it is important to examine the assumption that each of these merged firms would maintain their market shares’ needs. Always consider the post-merger combined market shared even when this may be difficult. 

This index has many properties that should always be taken note. For instance, it increases with the number of firms in the industry. It also weighs larger firms more heavily than smaller firms as it sums the squares of firms in the industry. 

1984

Another revised merger has been introduced on June 14, 1984, to further refine the antitrust enforcement policies. Just like the criticisms on the first guidelines, the 1982 guidelines were still inflexible and overly mechanistic, especially the HH index. To resolve this issue, the department permitted the consideration of qualitative information aside from the quantitative measures it has been using. This would include things like the efficiency of firms in the industry, the financial viability of potential merger candidates, and the US firms’ ability to compete in foreign markets.

It also introduced in the 1984 5% test, which requires the Justice Department to judge the effects of a potential 5% increase in the price of each product of each merging firm. This is anchored on the assumption that there may be an increase in market power due to the merger. If this happens, the merged firms may have the ability to increase prices. It also tries to know the effects of this increase in competitors and consumers.

Elasticity is one measure in macroeconomics that can indicate the responsiveness of consumers and competitors. The consumers’ responsiveness to a change in the product price can be indicated through the price elasticity of demand, measures are:

• e> 1 Demand is elastic, the quantity adjustment rate is more than the price change percentage.
• e=1 Unitary elasticity, the percentage change in quantity is equal to the percentage change in price.
• e<1 Inelastic demand, the percentage change in quality is less than the percentage change in price.

Greater market power is one implication of an inelastic demand over the 5% price change range. But if demand is elastic, then consumers are not as adversely affected by the merger.

This new guideline, along with the 1982 guidelines, recognized that efficiency-enhancing benefits from mergers are possible. Even if they do not have the force of law, the 1968 guideline can warrant legal considerations.

1992

The latest set of merger guidelines was introduced in 1992 by the Justice Department and the FTC. It was revised in 1997 and is similar to the 1984 guidelines since potential efficiency-enhancing benefits of mergers were also recognized. Here, a merger will be challenged through price increases even if demonstrable efficiency effects exist.

These guidelines clarified the definition of the relevant market which is critical to an antitrust lawsuit. They state that the market is the smallest group of products or areas where a monopoly could raise prices by a certain amount. It also employs the HH index to measure the competitive effects of a merger.

The 5-step process that enforcement authorities follow

1. Market. Assess if the merger increases the concentration by considering the relevant market which can be an issue of dispute.
2. Competitive effects. Consider the possible anticompetitive effect of the contract.
3. Entry into the Market. Does the potential anticompetitive effect have the possibility of being mitigated by entry into the market? The existence of barriers to entry needs to be determined.
4. Efficiencies. Could there be certain offsetting efficiency gains that can happen due to the deal? And could offset the negative impact of the anticompetitive effects?
5. Failing firm defense: Know if the parties would fail or exit the market but for the merger. These possible negative effects are then weighed against the potential anticompetitive effects. Take note that antitrust authorities are willing to consider the net antitrust efforts of a merger. The participants need to show that the benefits are for the merger.

The 1997 revision highlighted how merger-specific efficiencies may allow companies to compete better and could possibly be translated to lower prices for consumers. However, they can only be attained through a merger.

It is also worth noting that the 2010 merger guidelines clarified that the Justice Department did not really follow the mechanistic, step-by-step process but focused on competitive effects and the analysis and research needed to clarify. 

In 2011, the Antitrust Division of the Justice Department issued a Guide to Merger Remedies, emphasizing the proposed remedies for mergers to ensure preserved competitions. They must also guarantee that these have benefits for consumers instead of market participants.

© Image credits to Suzy Hazelwood

REGULATION OF INSIDER TRADING

There are remedies for shareholders who have had losses due to insider trading specified by the SEC. The SEC Rule 10b-5 bound insiders, stating that the insider is required to disclose or abstain from trading the securities of the firms. 

This rule derives from an SEC response to a 1940s complaint regarding a company that provided indications. That earnings would be weak while it planned to announce much stronger performance. The company’s president then bought shares knowing the true earnings. Two decades later, the SEC informed the market that it would bring civil claims under this little-known rule. However, it was not until the late 1970s that the SEC and federal prosecutors used the rule to bring criminal lawsuits.

Securities Fraud Enforcement

Insider Trading and Securities Fraud Enforcement passage underpinned the law on insider trading. This provision required maximum penalties reaching up to $1 million, as well as 10 years of imprisonment. While also setting up a bounty program where up to 10% of the insider’s profits can be collected by the informants. 

This law also developed the possibility of top management being responsible for the insider trading of their subordinates. During the wake of Enron, the Sarbanes-Oxley law increased the maximum penalty for insider trading. It reached up to $5 million and a possible 20-year sentence in jail. The 1988 law followed the passage of the Insider Trading Sanctions Act of 1984. This gave SEC the power to seek treble damages for trading on inside information. The statute offered a 2-pronged approach for regulators. They can finally seek remedies aside from the criminal alternatives available way before the 1984 act was passed. It is possible for illegal insider trading to occur. 

For instance, it is possible for insiders, acting on information that is unavailable to other investors. To sell the firm’s securities before an announcement of poor performance. The investors who do not know about this bad news might pay a higher price for the securities of the firms. The opposite may happen if the case is insiders bringing the firm’s stock or calling options before announcing a bid from another firm. Here, stockholders may not have sold the shares to the insiders. If they had known of the upcoming bid and its associated premium. 

The Insiders

The insiders are more than just the management of a company. They may involve outsiders like attorneys, investment bankers, financial printers, or consultants who can be deemed as the temporary insiders. However, under rule 10b-5, the US Supreme Court held outside parties. Those who trade for profit according to their acquired information did not have to disclose their inside information. This was the case during 19801980 in Chiarella v. U.S. During the case.  A financial printer acquired information on an upcoming tender offer by reviewing documents in his print shop. 

Rule 10b-5 will apply if an individual misappropriates confidential information about a merger or acquisition and bases the trade on it. This rule is only applicable to proceedings of SEC enforcement or criminal actions. However, it is not applicable to civil deeds under the Insider Trading Sanctions Act of 1984. It’s because this permits the recovery of treble damages on the profits earned or the loss avoided. One example of an illegal insider trading was the well-known 1963 Texas Gulf Sulphur case.

The company discovered which were not disclosed for many months. In fact, the firm even denied the public the discovery in a false press release. On the other hand, the directors and the other members bought undervalued shares based on their inside information. The insiders faced a lawsuit successfully filed by the SEC. The short-swing profit rule does not allow any officer, director, or owner. With 10% of a company’s stock from a purchase and sale, or a sale and purchase within six months. Profits obtained from the purchases should be paid to the issuer whether or not the transactions were made based on insider information. 

When Insider Trading Violation Occurs

Just because a provision of insider information by a tipper to another party or a tippee exists does not necessarily mean it constitutes a violation that requires penalties related to insider trading laws. A personal benefit is required to be derived by the tipper, and this was clarified in 2017. During this time, the Salman decision showed that the US Supreme Court concluded that a tipper giving such valuable information to a family member or friend could be considered to have derived a profit even if there was no monetary exchange.

Can Insider Trading Laws effectively Determine Insider Trading? 

A study by Seyhun questioned the effectiveness of laws in stopping insider trading. Another empirical study by Meulbroek confirmed that stock price run-ups before takeover announcements reflect insider trading. There is more research that indicates how these laws have significant effects that are deterrent. For instance, Garfinkel investigated insider trading around earnings announcements and knew that insiders adjusted the timing of their transactions after the passage of the Insider Trading and Securities Fraud Enforcement Act. 

Despite the positive effects, insider training seems to remain a part of the merger and acquisition activity of public companies. In more recent research, Augustin, Brenner, and Subrahmanyam found statistically significant abnormal trading volume in US equity options within 30 days before the announcement of an M&A. 

They tried to study the trading volume in equity options in days before announcing an M&A in 1,859 corporate transactions from 1996-2012. Then, they compared them to randomly selected days. The obvious observation was that unexpected M&A announcements mean no statistical significance in the trading volume, But the results were opposite as the volume preceding M&A announcements was significantly greater. 

This occurred so often in their samples. It proves that, while the SEC exerted effort to publicize its insider trading enforcement actions in some high-profile cases, M&A-related insider trading is not only quite prevalent but also largely unpunished by the SEC. This is evident in smaller M&As as many traders are engaging in insider trading here and get away with it.

© Image credits to Steve Johnson

U.S. STATE CORPORATION LAW AND LEGAL PRINCIPLES

There are major issues concerning US state corporation laws. As well as legal principles underlying some court law rulings that have analyzed these statutes. Here are some of them.

Business Judgment Rule

This term refers to the standard where corporate directors are judged. They exercise their fiduciary roles when trying to employ a takeover. Here, it is presumed that they will act consistently with their fiduciary duties to the shareholders. Hence, any party that contests this presumption is required to conclusively demonstrate a breach of fiduciary duties.

If the company or individual in the US brings a case against a company’s directors and establishes this. Then the directors will carry the burden of establishing that the transaction was “entirely fair”. There have been certain court law decisions that emphasized relevant issues. About how directors should act when employing anti-takeover defenses. Through such choices, standards like the Revlon duties and the Unocal Standard have been established.

Director’s duties

With regard to the Delaware Law, the directors’ duties are to manage the affairs of the company. This is by taking these three obligations into consideration:

1. They should be loyal.
2. Will demonstrate care for the interest of the shareholders
3. They have the duty of carrying these in a manner that is always n the best interest of the corporation and its shareholders.

In terms of mergers and acquisitions, the business judgment rule does not necessarily mean that the directors of the target have to jump up. And react emphatically to bids that come down the pike. It is important for them to be informed about their company’s value and other details being presented to them. They don’t have to enter an active negotiation with the bidder. They can just say no to the bid, stay apathetic, and be uninformed about its financial aspects. And what merits it may have for their shareholders.

Delaware Supreme Court

Directors are also vulnerable to lawsuits, even for approved deals by the shareholders. There are two Delaware decisions that have been improved for the legal position of director defendants. In one case (Singh v. Attenborough), the Delaware Supreme Court law favored the director defendant. As it made it easier for them to obtain early dismissal of the claims thrown at them. If the sale was an orderly one in which shareholders were fully informed and not coerced.

After two months of making this decision,  the Delaware Chancery Court law extended those protections to two-step mergers done pursuant to Section 251(h) deals. This section of the statute allows deals to go through without a formal shareholder vote. If the percentage of shareholders that would have been necessary to win such a vote tendered their shares to the bidder. As a result, the tender offer then has a cleansing effect on the fairness of the said deal.

Unocal v. Mesa Petroleum

Meanwhile, in Unocal v. Mesa Petroleum, the actions of the Unocal board of directors were reviewed by the Supreme Court of Delaware. As they implemented an anti-takeover strategy in order to thwart the unwanted tender offer made by Mesa Petroleum. Its CEO was Boone Pickens. This strategy included a self-tender offer in which the target made a tender offer for itself in competition with the offer initiated by the bidder.

Upon making a decision, the court law considered its concern that directors might be acting for their own interests, such as in this case. In which they were allegedly favoring the self-tender as opposed to simply objectively searching for the best deal for shareholders. When this is the case, directors should demonstrate their reason to believe. That there was a danger in pursuing a corporate policy that was in the best interest of shareholders. Moreover, they should show that their actions served their interests.

Responsibilities

The Unocal Standard made subsequent courts refine their responsibility:

1. Reasonableness test. The board should clearly demonstrate that its actions were reasonable. In terms of the perceived beliefs about the danger to their corporate policies. 
2. Proportionality test. They are also required to show that these defenses were aligned to the magnitude of the perceived danger to the policies.

The normal presumptions about the director’s behavior under the business judgment rule may apply once the standards are met. When a board is offered by an unwanted bidder and is trying to know whether to accept it or not, the business judgment rule is the operative standard. But when they move from rejection to taking active steps to fight off the bidder, then the Unocal Standard kicks in.

There is a contradiction between the standards of the directors’ fiduciary role in the US. And those of some other nations that have active takeover markets. For instance, the United Kingdom’s self-regulatory system in effect precludes the development of detailed case law on this issue. As such cases rarely reach the courts in the United Kingdom.

Revlon Duties

In the prominent case of Revlon v.MacAndrews and Forbes Holdings, the Delaware Supreme Court law ruled on what obligations a target board of directors have when they are faced with an offer for control of their company. Court law ruled in this transaction that there are certain anti-takeover defenses that are in favor of one bidder over another and was invalid.

The court laws knew that instead of promoting the auction process, which should result in maximizing shareholder wealth, these antitakeover defenses which are a lockup option and a no-shop provision inhibited rather than promoted the auction process. It’s clear that the sale or breakup of the company is inevitable and Revlon duties come into play here. Here, the directors are responsible for changing their focus from actions that they normally would take to preserve the corporation and its strategy to actions that will lead to the greatest gains for shareholders, such as making sure they get the highest bid possible. 

Auction Process

The court law decided that the use of these defenses was invalid. These actions may be consistent with the board’s Revlon duties if they promoted the auction process by letting one bidder be more competitive with another for prices to get higher. They also did not go as far as to require the target boards to solicit bids. They chose not to narrowly circumscribe the actions that target boards can take. But the court law implied that directors should have a good reason for not considering an auction process.

Remember that Revlon duties do not necessitate the conduction of an actual formal auction to the target’s board even if it is preferable, as long as the directors can show that they possess reliable information about the company’s market value.

The Supreme Court of Delaware stated in 2015 that if a deal receives majority approval from fully informed, non-coerced, disinterested shareholders then the Revlon Standard is not enough for post-cloning the damage claims.

Blasius Standard of Review

The Delaware Chancery Court put forward the compelling justification in 1988. This was in support of a target board’s decision to take action to limit a dissident shareholder’s abilities to elect a majority of the board. Along with the Unocal Standard, this gives relevant power to a target’s board which makes abuse of power more possible.

This standard was clarified in later decisions where the Delaware Chancery court noted that it would carefully analyze a board’s decision to guarantee that shareholders’ rights are being exercised and that the board would not abuse them.

Mercer v. Inter-Tel

In the 2007 case of Mercer v. Inter-Tel, the Delaware Chancery Court saw that the directors had a reasonable argument for postponing a shareholders’ meeting to prevent the defeat of a merger proposal. But the court’s concern was an abuse of the Unocal and Blasius standards, which is also parallel to other cases like Portnoy v. Cryo-Cell International. Here, the court noted that if the interests of shareholders were thwarted by a board, it would grant shareholders relief.

Entire Fairness Standard

When considering steps in approving the sale of a company or opposing a bid, directors need to remember that a Delaware court will determine their decisions based on fairness to the shareholders. They have agreed that there is no single characteristic that determines fairness and that each matter brings its own unique factors that are important to the overall fairness of a transaction or the steps fo the deal to be stopped.

© Image credits to Frank Cone

Components of Second-Generation Laws

Second-generation rights are also known as social and economic rights. These laws incorporated provisions on the following:

• Fair price
• Business combination
• Control share
• Cash-out statute

Fair Price Provision

This provision aims to discourage hostile takeovers. A successful tender offer lets shareholders receive the same price whether or not they have accepted the offer. This will help with the prevention of abuses occurring in two-tiered tender offers. These typically encompass first-tier tenders being offered a high price. Meanwhile, second-tier members are offered lower prices or with fewer advantages such as securities of uncertain value instead of cash.

Business Combination Provision

Here, target companies and the bidding company are not allowed to have business agreements for a certain period. The provision helps prevent leveraged hostile acquisitions and to avoid the transformations of local firms with low-risk capital structure into riskier companies. The wording of a business provision, for instance, may rule out the sales of the assets by the bidding company. Another example is when an acquiring company may be relying on the sale on the sales of assets by the target since it assumes a huge debt to finance a takeover. By doing so, they can pay the high-interest fees required.

Control Share Provision

Before purchases are allowed in acquisitions, current target stockholders should first approve. They usually apply to stock purchases beyond a certain percentage of the outstanding stock. Control share provisions are effective if the current share ownership has groups of stockholders who support the management. This may include employee stockholders. 

This also sets limits on “creeping acquisitions” above 20%. Once it exceeds, the other shares must approve the controlling shareholder of the other shares prior to exercising its votes associated with the shares it owns.

Bidders usually have neutral feelings about this provision they do not like nor dislike it. Hence, they can serve as an early referendum on the possibility of a bid. Shareholders usually not vote against the bidder since they do not want to be deprived of the chance to get a good takeover premium. With that, the bidder can use this to put pressure on the board of the target. They may say that the shareholders are in full support of the bidder, not the board. 

Not all states have this statute, such as Delaware. Ohio, Michigan, and Pennsylvania are among the states who practice this law.

Cash-Out Statute

The cash-out statute also sets boundaries to tender offers, just as the fair price provision does. If a bidder buys a percentage of stock in a target firm, they will be required to purchase every other outstanding share at the same terms during the first transaction. Acquiring firms who lack financial resources for a 100% stock acquisition are the most affected in this statute. Bidders who want to assume an even greater amount of debt with the associated high debt service are also at risk in terms of leveraged acquisitions. They may be discouraged to receive financing for a 100% purchase or simply because they do not believe their cash flow will service the increased debt.

Constituency Provisions

This provision lets the board consider how a deal may affect the relevant stakeholders like the worker or the community. In an offer that is in the financial interests of the shareholders, this is not so powerful. Still, it may give the board a secondary point to raise after saying that the offer is insufficient. 
This statute is not present in all states.

Delaware Anti-Takeover Law

Deemed as one of the most important anti-takeover laws, this has helped the 850, 000 corporations in the state which are abundant compared to other states. Examples of corporations here are General Motors, Exxon Mobil, Wal-Mart, and DuPont. Half of all publicly traded companies are incorporated here, along with 63% of the Fortune 500 companies.

Many companies really prefer to incorporate in the state since its laws are developed well and the court system is sophisticated. It is considered sophisticated because it has very knowledgeable judges that can handle corporate lawsuits better than juries. 

The low incorporation fees are also an obvious reason why Delaware is preferred by many companies. In fact, they are cheaper than all but 8 states. They also do not charge non-Delaware companies with Delaware corporate taxes. Lastly, companies love Delaware since companies and their shareholders do not need to be a resident of the state to incorporate there.

Researchers Bebchuk and Cohen stated that the law on anti-takeover has been an essential factor in decisions about which state to incorporate in. Meanwhile, Robert Anderson found that one of the most important factors influencing a company’s decision on where to incorporate was what law firm was representing the company around the time when the firm was formed. Delaware is the best selection when the law firm is a major national firm. But if it is merely local, the choice is usually incorporating in the particular state.

Wisconsin law

The anti-takeover law was actually passed on and signed late, as compared to the Wisconsin law which is more restrictive. The Wisconsin law was passed in 1988 but was made retroactive on December 23, 1987, the day before corporate raider Carl Icahn acquired 15% of Texaco Corporation. It was a response to an intense effort by companies to have a protective statute. They said they will reincorporate in states without anti-takeover laws if such a protective statute was not passed. Of course, the threat was effective as their fees account for about 20% of the Delaware state budget. The choice of the effective date testifies to the power of this lobbying effort. It states that an unwanted bidder who buys more than 15% of a target company’s stock may not complete the takeover for three years except under the following conditions:

• the bidder buys equal too more than 85% of the target company’s stock. This percentage may not include the stock held by directors or those by employees.
• If two-thirds of the stockholders approve this acquisition
• if the board of directors and the stockholders decide to waive the antitakeover provisions of this law.

Officially Section 203 of Delaware Corporation Law, this statute is designed to set limitations on takeovers financed by debt. The need to pay off the debt quickly becomes significant in the case of the billion-dollar takeover, as in the 1980s when interest payments were as much as half a million dollars per day. However, the law may not be effective when it comes to cash offers. 

Effects of Anti-Takeover Laws on Wealth

In a study done by Karpoff and Malatesta, 40 state anti-takeover bills introduced from 182 to 1987 were examined. It is discovered that there is a small but statistically significant decrease in stock prices of companies incorporated in the various states contemplating the passage of such laws. Even those well-known businesses suffered the phenomenon. Additionally, Szewczyk and Tsetsekos found that Pennsylvania firms lost $4 billion during the time this state’s antitakeover law was being considered and adopted. Despite this, the loss was a short-term effect only as it was a result of the reactions of traders in the market during that time.

In another study, Comment and Schwert analyzed a large sample of takeovers in an effort to determine the impact of both the passage of state antitakeover laws and the adoption of poison pills. The found that laws didn’t really deter takeovers, but enhance them in terms of bargaining power. This, in turn, raised takeover premiums.

Effects of the 2nd-Generation laws

On the other hand, Bertrand and Mullainathan were curious about the effects of the 2nd generation laws on blue- and white-collar wages. They found that their wages went higher but did not pay for themselves. This is because operational efficiency was lower even years after the law was passed. There was a decline in plant creation and destruction. They generalized that the law insulates entrenched managers to “live the quiet life,” which may come at the expense of shareholders, although not of workers.

The impact of the passage of the 30 business combination statues on the performance of companies was studied by Giroud and Mueller. It was realized that in uncompetitive industries, there was a deterioration in the operating performance after the passage. In such industries, input costs, wages, and overhead increased, meaning competition can help reduce “managerial slack. The researchers also knew that the market correctly expected this. 

In recent studies by Cain, McKeon, and Solomon, hostile takeovers and the passage of 17 takeover laws in 1965-2014 were the focus. Their results contradicted the usual results garnered. For instance, there were no wealth effects from the new laws while they found that fair price statutes were associated with reduced takeover activity, which, in turn, translates to fewer takeover premiums. They also found that greater takeover protection has a relationship with higher premium takeovers.

© Image credits to Anni Roenkae

Hart-Scott-Rodino Antitrust Improvements Act of 1976

It is no secret that the United States went through two decades of vigorous antitrust improvements and enforcement. Before the Hart-Scott-Rodino Antitrust Improvements Act was passed, the enforcement agencies weren’t powerful enough to require private economic data from third parties, and the competitors of the merging company, like what we discussed in Williams Act. And because of that, the enforcement agencies were forced to drop countless investigations due to the lack of hard economic data.

When the Hart-Scott-Rodino Antitrust Improvements Act was passed in 1976, the power of the Justice Department and the Federal Trade Commission, the two antitrust enforcement agencies, increased significantly. This means that the HSR law gave the Justice Department the right to issue “Civil Investigative Demands” to the merging companies. It also has them the right to require third parties to gather data prior to filing a complaint.

Additionally, thanks to the HSR, it is now possible for the government to require the postponement of proposed M&As until the authorities gave their approval of the deal. This wasn’t possible before the passage of HSR.

Moreover, the HSR law requires that the Bureau of Competition of the FTC and the Antitrust Division of the Justice Department be given the opportunity to review any proposed Mergers and Acquisitions in advance. An acquisition or a merger is not allowed to be consummated until the authorities have reviewed the transaction – this is all according to the HSR act. 

It is up to the two agencies to decide which of them will investigate the particular transaction. The HSR also prevents consummation of a merger until the end of specified waiting periods. This means that failing to file in a timely manner could lead to the delay of completion of the transaction. 

One of the main reasons why HSR was passed is to prevent the consummation of transactions that would ultimately be found to be anticompetitive. This way, the Justice Department will have the capability to avoid disassembling a company that had been formed in part through an anticompetitive merger or acquisition. Some might even hear others refer to this process as “unscrambling eggs”

The HSR is a big help and has given the government enough power to halt any transaction by means of granting of injunctive relief while it attempted to rule on the competitive effects of the business combination in question. During the times when injunctive relief was not possible yet, it would take many years for the mandated divestiture to take place after the original acquisition or merger. 

With the HSR, these problems could be prevented before they even occur. The HSR added another layer of regulation and a waiting period for tender offers.

Size Requirements for Filing

The law established size thresholds for filing because there are times where small mergers and acquisitions are less likely to have anticompetitive effects. There are two thresholds: the size-of-transaction threshold and the size-of-person threshold. We will look into both of those thresholds in a little bit. Those who failed to file is subjected to monetary penalties of $16,000 for each day that the filing is late. 

The Two Thresholds

• Size-of-Transaction Threshold – this threshold is only met if the buyer is acquiring voting securities or assets of $80.8 million or more. This is updated as of the year 2017. Any deal above that level requires a filing. Deals beneath that level require no HSR filing. 
• Size-of-Person Threshold – on the other hand, there’s the size-of-person threshold where if one party to a transaction has $161.5 million or more in sales or assets, and the other has $16.2 million or more in sales and assets, the test is met. There is a contingency to this threshold, too. The contingency is that all deals that are valued at $32 million or more have to be reported regardless of the size-of-person test.

Additionally, it is also important to understand that the Justice Department and the Federal Trade Commission are still authorized to challenge any M&A on antitrust grounds. This is true even if a filing is not required under HSR thanks to the Sherman Act and the Federal Trade Commission act.

As expected, there are also deadlines for filing. As soon as a bidder announces a tender offer or any other offer, they must immediately file under the HSR Act. This response comes in the form of the target’s filing which must be within 15 days after the bidder has filed. 

How does one file? There is a 15-page form which is available for download on the Federal Trade Commision website. The form requires the bidder to submit business data describing the business activities and revenues of the acquiring. Additionally, the target firms’ operations must also be provided according to the North American Industrial Classification System or NAICS codes.

Most of the time, a lot of the firms already have this information as it is also required to be submitted to the U.S. Bureau of the Census. Additionally, the acquiring firm is also required to attach any reports the firm has compiled to analyze the competitive effects of this transaction in their file.   

Under the HSR Act, there is a 30-day waiting period unless the deal is a cash tender offer or a bankruptcy sale. In those cases, the waiting period is only 15 days. Now, if either the Justice Department or the Federal Trade Commission concludes that a closer inquiry is necessary, they may push for a second request for information.

This second request adds another 30 days to the waiting period, or 10 days in case of cash tender offers or bankruptcy sales. 

The filing companies may also request for early termination of the waiting period. This is on the grounds that it is clear there are no anticompetitive effects. In most cases, these requests are granted. However, as expected, there are also some investigations that can be lengthy. 

The HSR filing is also considered as a confidential filing with the government. This means that it is not meant for public disclosure. However, the target is also made aware of the bidder’s intentions because the target company receives a notice and is required to respond to the government. 

There are also certain exemptions to the HSR Act. This includes certain acquisitions that are supervised by governmental agencies as well as certain foreign acquisitions. This exception allows an individual to acquire up to 10% of an issuer’s voting securities for as long as the acquisition is solely for the purposes of investment. 

Friendly Mergers vs. Hostile Deals

We have discussed everything there is to know about mergers and acquisitions in several articles prior to friendly mergers vs hostile deals. In those articles, we have also established the different kinds of mergers and how these affect a company. Some mergers lead a company to the right path to success, while some are simply a means to an end.

With that said, there is more to cover about mergers and acquisitions. In this article, we will discuss the different types of friendly mergers and how they can help a corporation. We will also dive deeper into the different types of hostile deals, what they are, and how they affect a corporation.

Additionally, we will learn the difference between friendly mergers and hostile deals. Hopefully, by the end of this article, a lot of you will understand the differences and similarities between the two. 

The legal regulations governing mergers and acquisitions will also be discussed. Depending on whether a transaction is a friendly merger or a hostile deal, the legal requirements governing mergers and acquisitions differ in the different states within the United States. It is also important to mention that within friendly mergers and hostile deals, the rules vary depending on two factors. These factors are whether the transactions are financed by cash or financed by stocks. 

Check out the regulatory framework of each of these alternatives below:

Friendly Mergers

Cash financed

In a cash financed friendly merger, the bidder is required to file a proxy statement with the Securities and Exchange Commission (SEC). This describes the deal. To make the deal happen, it is only usual for the bidder to file a preliminary statement first. 

There will also be instances where the preliminary statement is changed before it is finalized. This usually happens if the Securities and Exchange Commission makes a comment or request some changes. 

Once the proxy statement is finalized, it will then be mailed to shareholders along with a proxy card. The shareholders will fill out and return the said proxy cards. After this, the shareholders will hold a meeting and approve the deal. This is also where the deals are closed. 

Stock financed

The friendly mergers that are financed by stock have a similar process to those friendly mergers financed by cash. The difference is that the securities used to purchase target shares have to be registered. 

The process usually starts when the bidders file a registration statement. Once the registration statement is approved, the combined registration and proxy statement can be sent to shareholders. 

Additionally, this can also have deals where a combination of stock, cash and even other securities are used. 

Hostile deals

Friendly mergers are focused on cash and stock financed. What happens now with hostile deals?

Cash tender offer

In hostile deals where cash tender offers are used, the bidder is the first one to initiate a tender offer. The bidder does so by disseminating tender offer materials to his or her target shareholders. 

Offers like these have to be made pursuant to the requirements of the Williams Act. The Williams Act was passed in the year 1968. It is one of the most important pieces of securities legislation when it comes to the field of M&A. 

Since it was passed, this bill had a pronounced impact on merger activity, especially in between the 1970s and 1980s. Before the Williams Act was passed, tender offers were largely unregulated. However, in the 60s, these types of offers became a more popular means of taking control of corporations and ousting entrenched management. 

There are four major objectives under the Williams Act. These are as follows:

• To regulate tender offers – as previously mentioned, before the Williams Act was passed, the world of mergers and acquisitions was very different. Back then, stockholders of target companies often were stampeded into tendering their shares quickly to avoid receiving less advantageous terms. 
• To provide procedures and disclosure requirements for acquisitions. Through the Williams Act, there are now better disclosures. This means that stockholders can now make more enlightened decisions with regard to the value of a takeover offer. 
• To provide the shareholders with time so they can make informed decisions regarding tender offers. Everyone needs ample time to analyze the data given to them. With the help of the Williams Act, shareholders are now equipped with enough time to review the data and make more informed decisions. 
• To increase the confidence in securities markets. If investors are confident in the securities market, the market can attract more capital. It’s a win-win situation where the investors will be less worried about being placed in a position. Where incurring losses happen when they make decisions based on limited information. 

However, unlike the friendly transactions we discussed, the Securities and Exchange Commission or SEC does not have an opportunity or the right to comment. The materials that are sent to the shareholders prior to their dissemination. However, the SEC does have the right to do so during the minimum offer period and only in that minimum offer period.

Stock tender offers

Now we have the final type of hostile deal, the stock tender offers a hostile deal. In deals like these, the bidder is required to submit a registration statement first and wait until it is effective prior to submit the tender offer materials to the shareholders.

In cases like these, the SEC may have comments on the preliminary registration statement. It has to be resolved before the statement can be considered effective. Once all of these requirements are done, the process of a hostile deal stock tender offer proceeds similarly to a cash tender offer. 

Now that we have all of the friendly mergers and hostile deals covered, you now have a basic understanding of the difference between the two. We hope that this article has helped you gain some more insight into these types of mergers and deals, and use this knowledge to your full advantage. 

If you have more questions and additional information regarding friendly mergers and hostile deals, be sure to let us know, we’d be more than happy to help!