European Countries
The UK system in sharp contrast with their US counterpart legislation imposes a mandatory bid requirement.
The bidding company must present a fair price for the outstanding shares within the company; this is not existent in the US system. Board neutrality is another difference between the two, through the ‘City Code’; directors are under obligation to desist from any acts aiming at frustrating the bid without the shareholders’ approval. After contrasting the two systems, there seems to be a similarity in some policies. The best price rule of the US and the Bid Rule in UK are structurally the same, although only a few US states require compliance to the rule. UK has institutional investors who take part in the shareholder running of companies and present a sense of good organization.
The US, on the other hand has a characteristic aspect of disorganized shareholders and direct investment by small investors.The matter of contention in analyzing the truth behind Armour and Skeel’s paper is not the statement of existence of divergent regulatory policy. Study in related fields and domains, allow a critical analysis on the intricate reasons given by Amour and Skeel as the ones advancing and shaping the divergence. The studies indicate that the most outstanding concepts of the underlying factor are the role of institutional investors in the UK. The contention is that institutional investors are organized groups and principal shareholders who are in a position to influence policy makers. This underpins the theory that UK system favours institutional investors in takeovers.
The argument may proceed to point out that the reverse of the situation in the US was/is due to the absence of the institutional investors. The second concept of examining major the reasons, why corporate directors, and managers in American, are more successful in influencing takeover rules than their UK counterparts features. Research is under justification of using Armour and Skeel example while noting that its sublime contribution lies in their analysis of rule making process in determining outcomes of substantive regulation. It is clear that the presence of an influential group or its absence determines to what extent the resultant regulation favours it. There is an argument that UK’s organized investors are able to promote a private take over regime favouring minority investors.
On the other hand, the federal process in the US and its reliance of case law on judge made rules and litigation offers leeway to managerial and director’s resistance to the takeover. From evidence, it may not be erroneous to deduce that US regulation amplifies the voices of US corporate managers while muting that of lobby groups.This paper, upon reviewing other scholarly articles construes UK’s case as multidimensional. Armour and Skeel explanation may be consistent but not comprhensive. It is consistent with the theory pointing to the role of different actors in shaping substantive legislation. Reasoning that the UK takeover policy favouritism to shareholders is a result of; dispersion of ownership structures, presence of lobby groups and absence institutional investors raises other questions.
Raises questions of the identity of these lobbying groups and why some countries adopted the UK’s model even before the Thirteenth Directive. The analysis also questions whether UK is a unique case of legislative attentiveness to minority shareholder’s right. Armour and Skell assertions are not comprehensive since they cannot conclude the disparity. If their explanation were comprehensive, evidence would point to the same direction. That is, the absence of active institutional investors in some countries would qualify the non-adoption of the UK model. By using other European countries as a benchmark, the assertion seems wrong, and the opposite is true.
The question of legislative attentiveness is disqualified, since France and Italy had adopted British’s regulatory regime in the 1990s yet they were slow in enacting minority investor legislation. Extensive comparison also find in Armour’s assertions lacking; especially concerning the dispersion in structure of ownership being an influence in entrenching pro-shareholder and anti-director takeover regulation. For instance, Italy stands out as a country with extremely weak institutional investors whose association with the banking sector makes them less concerned with shareholder and investor protection. Italy’s corporations listed in its stock exchange display a structure of ownership concentration. According to Skeel and Armour, Italy should have a takeover regulatory framework sharply differs from those in the UK, however, Italy assumed UK’s model prior to the Thirteenth directive.A critical analysis of the Euro zone also points factors against the underlying tone that UK’s system policy always serves to protect the investor.
Under different considerations, the rule may allow the exact evil it was aiming at eliminating. Findings indicate a character of the British system as board neutral, but when applied to situations of widespread or clustered ownership structure results change. Armour and Skeel assertion seems consistent, since, in a case of dispersed investors, the agency problem is between directors and managers and the ability to convene shareholders to pass their interference is less likely. As such, dispersion of investors seems to hold true in reducing director’s interference. On the other hand, a case of concentration of ownership means there is the existence of a controlling shareholder. The agency problem shifts to the majority and minority shareholder; in this case, action against takeover is indeed by the shareholders but not to the interests of the minority shareholder.
There exist blatant loopholes in the UK system in protecting minority shareholders. Another regulatory requirement is the mandatory bid. The UK system requires the bidder upon acquiring a substantial percentage of ownership say 30% to give a reasonable offer for all the outstanding shares of the corporation. In a dispersed ownership model, akin to one in Armour and Skeel’s case, a controlling shareholder with only 10% controlling stake may arise. This essenntially dilutes the effects of the mandatory bid rule since a raider can succeed in acquiring about 17% without calling upon the need for a mandatory bid. This may be through bargains with minor shareholders with qualification, partial tenders or block negotiations as long as it is within the bids limit (in our case 30%).
The mandatory bid in this case does not protect the minor shareholders from absolute takeover and change in control; it only shields them from change in control, in the presence of large controlling shareholders. Consequent analysis reveals another aspect absent in Armour and Skeel’s paper, the issue of transplanting legal systems. The attempt by the Armour& Skeel work to illuminate the reader on historical aspects underpinning the divergence, succeed in, but failure to acknowledge implantation of legal systems stood out as an omission. In the context of UK it is imperative to expound that the UK’s zeal and move towards harmonization of the European region offer other explanations. There may be a chance that it escaped the notice of UK, to assess the performance of the rules in the new environment; the consequence of this importation may be that the new rules failed to operate as per the intensions due to the foreign effect.This article deduces that the US regulatory policy merits sharp criticism particularly the Delaware rules because they seem to pick winners.
Delaware rulings through the courts picked the winners; those standing the highest chance of winning were considered later. The United Kingdom also falls under criticism due to the self-regulation regime. They leave the market forces to decide even when imminent matters of inequality will result. England’s system has also been labelled as inferior to its dependence on the entire regions goodwill. England has binding agreements within the region; it faces an external restriction since its policies must not negate harmony efforts within the region.
As such, its adopted policies are not endogenously determined but externally influenced too. Its adoption of piecemeal policies in the regulatory endeavour is also a disadvantage in comparison to the US system. This piecemeal approach is due to the challenge of coming up with a single corporate governance code within the European Union. Comparison between the UK and US takeover policy continues with others calling the US system inferior to the UK’s. They quote the secondary positioning of shareholders as a key shortcoming. The UK is also superior to US since it allows a group to organize and influence policy since the system is under self-regulation.
This paper affirms that Armour and Skeel’s contention of divergence in policy is existent, what their paper cannot imply continuation divergence or reversal of the trend. England is now pursuing recently Takeover Panel policies, which requires a company’s disclosure of compliance or non-compliance with the reasons for that. The summery of the nature of the system self-regulatory approach of the UK, while the US takeover policy is court and case law regulated system. Nevertheless, England’s policies now will ultimately affect non-European companies including those trading in the New York Stock Exchange and other markets. We may expect extraterritorial application of corporate governance codes too, but does this mean pursuit of uniform policies? The convergence between US and UK systems is not a one country’s specify affair.
A myriad of factors such as primacy of shareholders’ interests, employees, fragmentation of economic power, management and supervisory relationships among others continue to influence convergence or divergence. Yet they seem to differ significantly taking away any hope of convergence.ersus the European Social Model’ (2001) Working paper, London School of Economics.
