White Knights and Black Knights: Does the Search for Competitive Bids Always Benefit the Shareholders of 'Target' Companies?
14 Pages Posted: 21 Jun 2006
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White Knights and Black Knights: Does the Search for Competitive Bids Always Benefit the Shareholders of 'Target' Companies?
White Knights and Black Knights - Does the Search for Competitive Bids Always Benefit the Shareholders of 'Target' Companies?
Date Written: June 15, 2006
Abstract
According to Article 9 of the Directive, which follows the City Code on takeovers and mergers of the London stock exchange and many other European legal systems, the board of the "target" company should remain passive in front of a takeover bid. This "passivity" or "neutrality" rule was nonetheless weakened by an "opt-out" option given to the Member States by the Directive itself.
Defensive measures are not forbidden at all, on the contrary they are allowed if they are expressly authorised by the shareholders. The board of the target company can nevertheless seek a competing bid without being authorised by the general meeting (s.c. "white knight"), even if the competing bid may in practice frustrate the first takeover bid.
I will argue that this exception could be in few situations unfair for shareholders' interests and inefficient.
After the launch of a takeover bid, shareholders face collective action problems, which compel them to tender even though this is not in their collective best interest (s.c. pressure to tender). As is widely accepted among legal and economics scholars, almost every takeover bid could place collective action problems to shareholders.
Competing bids could be coercive as well, so that they could "force" shareholder to tender although the bid launched at first is to be considered as more convenient. We should therefore ask ourselves whether a board seeking a coercive competing-bid really enhance shareholders wealth. I will argue that it is not the case and, therefore, if the competing bid sought by the target board is coercive, the "white knight exception" is neither efficient nor fair. Hence, the law should provide for a set of rules which level the playing field of all offers, hindering coercive competing bids.
Keywords: Takeover bid, defesive measures, white knight, competing bids, pressure to tender
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