Global Antitakeover and Antiactivist Devices

Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and a Research Fellow at the Harvard Law School Program on Corporate Governance. Adi Libson is an assistant professor in the Bar-Ilan University Law Faculty. This post is based on their recent article, published in the Yale Journal on Regulation. Related research from the Program on Corporate Governance includes Why Firms Adopt Antitakeover Arrangements by Lucian Bebchuk; and The Elusive Quest For Global Governance Standards, by Lucian Bebchuk and Assaf Hamdani.

Corporate activity is becoming ever more global. The increase in global activity is reflected both in the growing number of cross-border M&A transactions (which have reached over $1 trillion in the first half of 2018) and the pervasive phenomenon of cross-listing, through which companies raise equity from various financial markets located in different jurisdictions. In our recent article, published in the Yale Journal on Regulation, we explore the impact of this global corporate activity on the insulation of public companies from takeovers and activist interventions. We label this impact of corporate global activity “Global Antitakeover Devices” (GADs).

A GAD is based on the ability of public companies to “mix and match” between different forms of regulation by cross-listing on multiple stock exchanges or incorporating in foreign jurisdictions. This action subjects any hostile engagement with these companies to multiple jurisdictions’ regulatory frameworks and creates regulatory barriers, complexity, and uncertainty. Our Article provides a comprehensive analysis of these GADs, their unique features, and the additional costs they may generate to potential acquires and activists.

Consider a hostile acquirer, which is interested in taking over a target that is cross-listed in the U.S. and in another foreign jurisdiction. As is often the case in large takeovers, the hostile offer consists of both cash and stock. The inclusion of a stock component in the merger offer complicates the takeover: it may force the acquirer to launch the offer in two different jurisdictions, one of which is foreign and may have distinctive regulatory requirements that significantly increase the transactions costs. These increased costs include those associated with forcing a public offering or an additional listing in a foreign jurisdiction; hiring lawyers, accountants and other professionals in the foreign jurisdictions; potential delays in the process and associated opportunity costs; and the exposure to foreign law which may generate significant uncertainty, require higher disclosure standards, and impose certain additional legal restrictions on the acquirer. These costs, in the aggregate, could be significant and cause acquirers to refrain from executing their planned takeover.

To illustrate this effect, consider the example of BHP Billiton’s intent to purchase rival mining company Rio Tinto Group in an all-stock deal. By its sheer size alone, BHP Billiton’s $147 billion hostile offer was a landmark deal, aimed at creating the largest mining company in the world. Due to the cross-listing of both companies, the takeover required three separate offers in three jurisdictions: U.K, Australia and the U.S., of which the offers in the U.K. and Australia had to be closed simultaneously. BHP Billiton also needed to comply with different accounting regimes as well as various governance and administration requirements for each jurisdiction, and its legal advisor had more than 30 lawyers working on the project at any one time. Eventually the complexity of the deal was one of the reasons for BHP Billiton’s announcement over a year later, that it was dropping its bid.

An additional example, from the pharmaceutical sector, is the $32.7 billion hostile takeover attempt of Mylan—a Dutch company, based in the U.K., and listed in the U.S—over Perrigo, an Irish company with dual listings on the NASDAQ and the Tel-Aviv Stock Exchange (TASE). In that case, in order to proceed with the hostile takeover attempt (that eventually failed), Mylan had to list its shares in TASE. That process also involved litigation in a foreign forum to permit Mylan to be listed in Israel, despite Mylan’s poison pill, and it exposed Mylan to significant deal uncertainty.

A GAD could also result from an initial incorporation or reincorporation of a U.S.-listed company in a foreign jurisdiction. Consider the example of Spotify, which is headquartered in Sweden, incorporated in Luxembourg, and as of April 2018 listed on the NYSE. Luxembourg is an attractive jurisdiction for the sake of limiting takeover or activist engagements: it endows the board of directors wide powers vis-à-vis shareholders, and deprives shareholders of some important rights, such as the right to file class action or derivative lawsuits. Another prominent example is the stichting mechanism used in the Netherlands, which provides companies that decide to re-incorporate in that country with a powerful protection against hostile bids.

The Article makes several contributions to the existing literature. First, it demonstrates how new forms of antitakeover and anti-activist devices may emerge in a quickly evolving global financial market and how such devices should be evaluated by policymakers, market participants, and academics. To that end, it discusses the two central means of creating GADs—cross-listing and foreign incorporation—explains how they operate, and underscores the unique features of GADs.

Second, it expands the existing scholarship on cross-listing by locating GADs in the wider theoretical literature on cross-listing. Previous studies on cross-listing highlight different potential motivations behind this action, such as the willingness of a foreign firm to credibly commit to a regime of enhanced disclosure and greater exposure in a shareholder-protective legal regime (John Coffee’s “legal bonding hypothesis”), the willingness to decrease disclosure liabilities (Amir Licht’s “avoidance hypothesis”), and the desire to enhance a firm’s presence in foreign markets (Nicholas Howson’s and Vikramaditya Khanna’s “commercial bonding hypothesis”). This Article presents the “insulation hypothesis,” which suggests that cross-listing can also be used as a device that grants management additional insulation from market disciplinary forces.

Third, this Article provides preliminary evidence with respect to the economic significance of GADs. By presenting data on the growing activity of cross-listing and global M&A activity, it shows that GADs are more prevalent in the U.S. market than initially presumed. For instance, foreign companies constitute over 15% of the companies listed on U.S. exchanges, and thus any hostile bid submitted to these foreign companies is subject to the corporate law of the foreign jurisdiction in which they are incorporated. This suggests that one out of every seven companies listed in the United States has a potential GAD in place.

The Article also provides initial evidence on how GAD might extend beyond the corporate control market and enhance the insulation of target companies from activist interventions by hedge funds, which have become critical players in the corporate governance arena in the past decade. In particular, we show that foreign incorporation diminishes the level of activism and negatively impact activist’s success rate. This view is also supported by recent empirical research by Becht et al (2017) on shareholder activism around the world.

Finally, this Article presents certain tools for mitigating the antitakeover and anti-activist protections generated by GADs. In particular, it calls for increasing investors’ and policymakers’ awareness to GADs’ potential entrenchment effects, suggests enhancing cooperation between exchanges around the world, and subjecting the use of GADs through cross-listing to enhanced judicial review in the appropriate cases.

The complete Article is available for download here.

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