Creeping acquisitions-grabs of a company's de facto control without the launch of a formal tender... more Creeping acquisitions-grabs of a company's de facto control without the launch of a formal tender offer-are an acquisition technique that presents many risks. Not only can stock prices be negatively affected in the short term (after the acquirer is satisfied by the stake it accumulates, the stock price is likely to drop below pre-acquisition values and the remaining shareholders are stuck with minority shares), but such acquisitions can also have long ranging consequences for the market for corporate control (too many acquisitions by suboptimal acquirers, as well as permanent loss of a company's contestability status and therefore of any prospects to obtain a control premium), as well as in the governance of a company (de facto control can lead to the extraction of higher private benefits of control). Notwithstanding all such risks, EU corporate and M&A laws largely fail to address the issue, both at the European level and in individual member states. As a result, European public companies can easily become the target of a creeping acquisition, whereas poison pills and other defensive mechanisms have shielded U.S. companies quite effectively. This paper argues that a legislative overhaul of current regimes-especially of the mandatory bid system-to address creeping acquisitions may well be overreaching given the drawbacks of one-size-fits-all solutions and the risk of shutting down the market for corporate control or clamping down hedge fund activism. Instead, this paper recommends a lift on existing limitations to a company's freedom to determine its preferred level of openness to creeping acquisitions (and takeovers more generally). European legislation should provide an optional regime whereby companies can select effective arrangements to thwart or limit creeping acquisitions.
Associate Professor of Business Law, University of Bologna. "tJ" J. DuPrattWhite Professor of Law... more Associate Professor of Business Law, University of Bologna. "tJ" J. DuPrattWhite Professor of Law, Cornell Law School. We would like to thank the John M. Olin Program in Law & Economics at Cornell Law School for its generous hospitality to Luca Enriques during the summer of 2000. We benefited from discussions with Jeffrey Rachlinski and Stewart Schwab, and from comments to an earlier draft of this paper by Brian Cheffins, Eilis Ferran, and Guido Ferrarini.
Inadequate regulation of the financial system is widely thought to have contributed to the financ... more Inadequate regulation of the financial system is widely thought to have contributed to the financial crisis. The purpose of the book is to articulate a framework within which financial regulation can be analysed in a coherent and comprehensive fashion. The book's approach is distinctive in several respects. First, it views the subject from a multidisciplinary perspective of economics, finance and law. Second, it takes a holistic approach, starting from the premise that financial regulation is best understood in the context of an appreciation of the entire financial system. Third it is international and comparative in nature, contrasting approaches, in particular in the EU and US. The book focuses on underlying policies and the objectives of regulation, using specific regulatory measures as examples. This allows the reader to compare choices in respect of the same policy issue in different regulatory frameworks. This introductory chapter sets out the motivation for the project and outlines the book's analytic framework and contents.
This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neu... more This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neutral approach toward takeovers, i.e. enact rules that neither hamper nor promote them. The rationale behind this approach is that takeovers can be both value-creating and value-decreasing and there is no way to tell ex ante whether they are of the former or the latter kind. Unfortunately, takeover rules cannot be crafted so as to hinder all the bad takeovers while at the same time promoting the good ones. Further, contestability of control is not cost-free, because it has a negative impact on managers' and block-holders' incentives to make firm-specific investments of human capital, which in turn affects firm value. It is thus argued that individual companies should be able to decide how contestable their control should be. After showing that the current EC legal framework for takeovers overall hinders takeover activity in the EU, the paper identifies three rationales for a takeoverneutral intervention of the EC in the area of takeover regulation (pre-emption of "takeoverhostile," protectionist national regulations, opt-out rules protecting shareholders vis-à-vis managers' and dominant shareholders' opportunism in takeover contexts, and menu rules helping individual companies define their degree of control contestability) and provides examples of rules that may respond to such rationales.
Regulators generally have tried to address the problems posed by the excessive risk-taking of Sys... more Regulators generally have tried to address the problems posed by the excessive risk-taking of Systemically Important Financial Institutions (SIFIs) by placing restrictions on the activities in which SIFIs engage. However, the complexity of these institutions makes such attempts necessarily imperfect. This article proposes to address the problem at its very source, which is the incentives that SIFI owners have to push for excessive risk-taking by managers. Building on the traditional rule of “double liability”, we propose to modify the current (general) rule limiting the liability of SIFI shareholders to the amount of their initial investments in such companies. We propose replacing the extant limited liability regime with a new system that imposes additional liability over and above what SIFI shareholders already have invested in a pre-set amount that varies with a SIFI’s centrality in the financial network. Our liability regime has a number of advantages. First, by increasing shareholder exposure to downside risk, it discourages excessive risk-taking. At the same time, by placing a clearly defined ceiling on shareholders’ total liability exposure, it will not obliterate shareholders’ incentives to invest in the first place. Second, the liability to which shareholders are exposed is carefully tailored to the level of systemic risk that their institution creates. Thus, our rule induces shareholders to account for the negative externality SIFIs can impose without unduly stifling such financial institutions’ role within the financial system and in the wider economy. Third, as the amount of liability is clearly defined ex ante using the rigorous tools of network theory, our rule minimizes the influence of interest groups and the impact of idiosyncratic government decisions. Last, as markets know in advance the amount of liability to which shareholders are exposed, our rule favors the creation of a vibrant insurance and derivative market so that the risk of SIFIs defaults can be allocated to those who can better bear it.
Northwestern journal of international law and business, Dec 31, 2007
I. INTRODUCTION Company and capital markets laws are rapidly evolving everywhere: there are few c... more I. INTRODUCTION Company and capital markets laws are rapidly evolving everywhere: there are few countries around the world where they have not been the subject of reform or where at least a reform agenda has not been devised. There are various reasons for this, both global and local. Among the global (or common) reasons for reform, two at least deserve to be singled out: large-scale market crises or prominent economic scandals, and financial development. Corporate frauds and stock market collapses are traditionally the main drivers of company and securities law reforms. 1 After major scandals first erupted in the United States, the U.S. Congress quickly reacted to them with broad-sweeping reforms. Policymakers in other countries also felt compelled to react in a similar way, often even in the absence of local scandals (or before they erupted). G~rard Hertig has used the term "me too reforms" to highlight the fact that the Sarbanes-Oxley Act (SOX) 2 had a ripple effect on company and securities lawmaking. 3 * Professor Enriques is a Consob Commissioner and an ECGI Research Associate. Mr. Gatti is an associate at Cleary Gottlieb Steen & Hamilton LLP, New York. This essay was prepared for the 2006 Policy Dialogue on Corporate Governance in India, co-organized by the Indian Ministry of Company Affairs and by the OECD, Delhi, 16-17 February 2006. We wish to thank Martin Gelter and Marcello Tarabusi for helpful comments to an earlier draft. Opinions expressed in this article are exclusively the authors' and do not necessarily reflect those of Consob and/or Cleary Gottlieb Steen & Hamilton LLP. Usual disclaimers apply.
What role does European Community ("EC") legislation in the corporate law area play within the Eu... more What role does European Community ("EC") legislation in the corporate law area play within the European Union ("EU")? How much does it shape Member States' corporate laws? And how relevant is it for the corporate governance of EU companies and their management? At first sight, the EC appears to have played and to be playing a central role in shaping EC corporate law, with the high number of directives and regulations covering a wide range of corporate law issues. One might then think that EC institutions have a strong influence upon Member States' corporate laws, whether because they have intervened in the area or because they may do so. Quite to the opposite, EC company law directives and regulations appear to have had very little impact on national
Creeping acquisitions-grabs of a company's de facto control without the launch of a formal tender... more Creeping acquisitions-grabs of a company's de facto control without the launch of a formal tender offer-are an acquisition technique that presents many risks. Not only can stock prices be negatively affected in the short term (after the acquirer is satisfied by the stake it accumulates, the stock price is likely to drop below pre-acquisition values and the remaining shareholders are stuck with minority shares), but such acquisitions can also have long ranging consequences for the market for corporate control (too many acquisitions by suboptimal acquirers, as well as permanent loss of a company's contestability status and therefore of any prospects to obtain a control premium), as well as in the governance of a company (de facto control can lead to the extraction of higher private benefits of control). Notwithstanding all such risks, EU corporate and M&A laws largely fail to address the issue, both at the European level and in individual member states. As a result, European public companies can easily become the target of a creeping acquisition, whereas poison pills and other defensive mechanisms have shielded U.S. companies quite effectively. This paper argues that a legislative overhaul of current regimes-especially of the mandatory bid system-to address creeping acquisitions may well be overreaching given the drawbacks of one-size-fits-all solutions and the risk of shutting down the market for corporate control or clamping down hedge fund activism. Instead, this paper recommends a lift on existing limitations to a company's freedom to determine its preferred level of openness to creeping acquisitions (and takeovers more generally). European legislation should provide an optional regime whereby companies can select effective arrangements to thwart or limit creeping acquisitions.
Associate Professor of Business Law, University of Bologna. "tJ" J. DuPrattWhite Professor of Law... more Associate Professor of Business Law, University of Bologna. "tJ" J. DuPrattWhite Professor of Law, Cornell Law School. We would like to thank the John M. Olin Program in Law & Economics at Cornell Law School for its generous hospitality to Luca Enriques during the summer of 2000. We benefited from discussions with Jeffrey Rachlinski and Stewart Schwab, and from comments to an earlier draft of this paper by Brian Cheffins, Eilis Ferran, and Guido Ferrarini.
Inadequate regulation of the financial system is widely thought to have contributed to the financ... more Inadequate regulation of the financial system is widely thought to have contributed to the financial crisis. The purpose of the book is to articulate a framework within which financial regulation can be analysed in a coherent and comprehensive fashion. The book's approach is distinctive in several respects. First, it views the subject from a multidisciplinary perspective of economics, finance and law. Second, it takes a holistic approach, starting from the premise that financial regulation is best understood in the context of an appreciation of the entire financial system. Third it is international and comparative in nature, contrasting approaches, in particular in the EU and US. The book focuses on underlying policies and the objectives of regulation, using specific regulatory measures as examples. This allows the reader to compare choices in respect of the same policy issue in different regulatory frameworks. This introductory chapter sets out the motivation for the project and outlines the book's analytic framework and contents.
This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neu... more This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neutral approach toward takeovers, i.e. enact rules that neither hamper nor promote them. The rationale behind this approach is that takeovers can be both value-creating and value-decreasing and there is no way to tell ex ante whether they are of the former or the latter kind. Unfortunately, takeover rules cannot be crafted so as to hinder all the bad takeovers while at the same time promoting the good ones. Further, contestability of control is not cost-free, because it has a negative impact on managers' and block-holders' incentives to make firm-specific investments of human capital, which in turn affects firm value. It is thus argued that individual companies should be able to decide how contestable their control should be. After showing that the current EC legal framework for takeovers overall hinders takeover activity in the EU, the paper identifies three rationales for a takeoverneutral intervention of the EC in the area of takeover regulation (pre-emption of "takeoverhostile," protectionist national regulations, opt-out rules protecting shareholders vis-à-vis managers' and dominant shareholders' opportunism in takeover contexts, and menu rules helping individual companies define their degree of control contestability) and provides examples of rules that may respond to such rationales.
Regulators generally have tried to address the problems posed by the excessive risk-taking of Sys... more Regulators generally have tried to address the problems posed by the excessive risk-taking of Systemically Important Financial Institutions (SIFIs) by placing restrictions on the activities in which SIFIs engage. However, the complexity of these institutions makes such attempts necessarily imperfect. This article proposes to address the problem at its very source, which is the incentives that SIFI owners have to push for excessive risk-taking by managers. Building on the traditional rule of “double liability”, we propose to modify the current (general) rule limiting the liability of SIFI shareholders to the amount of their initial investments in such companies. We propose replacing the extant limited liability regime with a new system that imposes additional liability over and above what SIFI shareholders already have invested in a pre-set amount that varies with a SIFI’s centrality in the financial network. Our liability regime has a number of advantages. First, by increasing shareholder exposure to downside risk, it discourages excessive risk-taking. At the same time, by placing a clearly defined ceiling on shareholders’ total liability exposure, it will not obliterate shareholders’ incentives to invest in the first place. Second, the liability to which shareholders are exposed is carefully tailored to the level of systemic risk that their institution creates. Thus, our rule induces shareholders to account for the negative externality SIFIs can impose without unduly stifling such financial institutions’ role within the financial system and in the wider economy. Third, as the amount of liability is clearly defined ex ante using the rigorous tools of network theory, our rule minimizes the influence of interest groups and the impact of idiosyncratic government decisions. Last, as markets know in advance the amount of liability to which shareholders are exposed, our rule favors the creation of a vibrant insurance and derivative market so that the risk of SIFIs defaults can be allocated to those who can better bear it.
Northwestern journal of international law and business, Dec 31, 2007
I. INTRODUCTION Company and capital markets laws are rapidly evolving everywhere: there are few c... more I. INTRODUCTION Company and capital markets laws are rapidly evolving everywhere: there are few countries around the world where they have not been the subject of reform or where at least a reform agenda has not been devised. There are various reasons for this, both global and local. Among the global (or common) reasons for reform, two at least deserve to be singled out: large-scale market crises or prominent economic scandals, and financial development. Corporate frauds and stock market collapses are traditionally the main drivers of company and securities law reforms. 1 After major scandals first erupted in the United States, the U.S. Congress quickly reacted to them with broad-sweeping reforms. Policymakers in other countries also felt compelled to react in a similar way, often even in the absence of local scandals (or before they erupted). G~rard Hertig has used the term "me too reforms" to highlight the fact that the Sarbanes-Oxley Act (SOX) 2 had a ripple effect on company and securities lawmaking. 3 * Professor Enriques is a Consob Commissioner and an ECGI Research Associate. Mr. Gatti is an associate at Cleary Gottlieb Steen & Hamilton LLP, New York. This essay was prepared for the 2006 Policy Dialogue on Corporate Governance in India, co-organized by the Indian Ministry of Company Affairs and by the OECD, Delhi, 16-17 February 2006. We wish to thank Martin Gelter and Marcello Tarabusi for helpful comments to an earlier draft. Opinions expressed in this article are exclusively the authors' and do not necessarily reflect those of Consob and/or Cleary Gottlieb Steen & Hamilton LLP. Usual disclaimers apply.
What role does European Community ("EC") legislation in the corporate law area play within the Eu... more What role does European Community ("EC") legislation in the corporate law area play within the European Union ("EU")? How much does it shape Member States' corporate laws? And how relevant is it for the corporate governance of EU companies and their management? At first sight, the EC appears to have played and to be playing a central role in shaping EC corporate law, with the high number of directives and regulations covering a wide range of corporate law issues. One might then think that EC institutions have a strong influence upon Member States' corporate laws, whether because they have intervened in the area or because they may do so. Quite to the opposite, EC company law directives and regulations appear to have had very little impact on national
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