Takeovers and the protection of non-shareholding stakeholders’ interests in the UK

Purpose: The purpose of this thesis is threefold. First, it carries out an assessment on the extent to which takeovers impact on the interests of employees, suppliers and senior management. Second, the primacy enjoyed by shareholders during takeovers is subject to scrutiny to determine whether their decision making powers can be rightly exercised to the detriment of the target company and its non-shareholding stakeholders post-takeover. This would determine whether calls to reform Rule 21 of the Takeover Code 2013 (the board neutrality rule) are justified. Third, in light of the empirical evidence carried out and findings from two case studies (Corus Steel and Cadbury), two reform proposals (the board-centric model and disenfranchisement of short-term shareholders’ voting rights) are critically examined. The aim is to find the most appropriate way of reforming the board neutrality rule, taking into consideration the opinions of the business community and academics, in order to offer more protection to employees, senior management and creditors’ interests during takeovers. Design/Methodology/Approach: This is a legal study that encompasses theoretical and empirical analysis of takeovers and their relationship with society and the state in a rapidly changing social and commercial landscape. It also assesses the experience of those affected by the process of law, for example employees who may find themselves disadvantaged by the operation of shareholder primacy during takeovers. Legal research has its theoretical and methodological base primarily in social sciences and this is why methodologies used in this study such as case study analysis and theoretical conceptualisations are mainly empirical and social-theoretical. Doctrinal analysis is also relied on when analysing case law and forms part of the wider discussion. Case studies on two formerly British companies (Corus Steel and Cadbury) which were taken over by foreign companies are also used. A case study methodology was selected, after considering all alternative methods, because it traces an event from its initiation until its completion and even beyond, in the process mapping all the important developments. For both Cadbury and Corus, the method helped to highlight how the takeovers impacted on the interests of employees, senior management and suppliers, and the predatory role played by arbitrageurs (short-term investors) during the offer period. Findings: Based on the findings from Cadbury and Corus case studies and the study as a whole, takeovers have an adverse impact on the interests of employees, senior management and suppliers while the target company’s shareholders stand to earn a premium on their shares. A sign of a takeover pulls arbitrageurs to buy the target company’s shares, no matter how inflated, in hope of a takeover deal. Since the decision making powers during takeovers lie in the hands of target company shareholders, they are unlikely to turn down a premium offer, regardless of the impact it may have on the interests of non-shareholding stakeholders such as employees. Both existing empirical studies and case studies on Cadbury and Corus showed that takeovers have a detrimental effect on the interests of non-shareholding stakeholders post-takeover. In light of these findings, two alternative regulatory models were considered: (1) disenfranchisement of short-term shareholders’ voting rights; and (2) adoption of a board-centric model of takeover regulation such as the Delaware model. After critically examining the two models, there was insufficient evidence to justify a fundamental change of UK takeover regulation to either model. A more appropriate solution was to give incentives to shareholders to think and act long-term such as strengthening the stewardship responsibilities under the Stewardship Code 2012. Originality/Value: This study contributes to a growing body of research on shareholder primacy under takeover law by providing empirical evidence on the relationship between takeovers and the impact on the interests of non-shareholding stakeholders. It also examines the role played by short-term shareholders in exercising their decision making powers during the offer period and considers specific reform proposals. This study aims to provoke legal reform that would lead to more protection for non-shareholding stakeholders during takeovers. Thus, this study will inform the academic and business community as well as policy makers in the UK on the impact of takeovers on company constituents post-takeover and the way forward in protecting non-shareholding stakeholders’ interests from potentially harmful takeovers.