With the non-frustration rule (‘NFR’) and the mandatory bid rule, the Takeover Bid Directive contains two principles which have strongly influenced British takeover law for approximately 50 years. However, the changes in the economic and legal framework of the market for corporate control which have occurred since the adoption of this Directive call into question the legitimacy of both principles.
Although the NFR is capable of disciplining board members, it also generates misguided incentives and is, at the most, suitable as a disciplining tool of last resort. The dominant idea of relying on increasing shareholder activism and of trusting the shareholders to discipline the board (also in a company with dispersed ownership) is compelling in principle; however, as active shareholders often seek the short-term maximisation of returns, misguided incentives cannot be avoided in the context of takeovers either. In view of these findings, in the article 'The Non-Frustration Rule and the Mandatory Bid Rule – Cornerstones of European Takeover Law?', I explore ways of structuring NFR optionality. The article submits that only the shareholders should be given the possibility to opt out of the strict NFR – which would continue to serve as the default rule – and that such an opt out should only be possible for a limited period of time.
With respect to the mandatory bid rule, its justification is becoming increasingly difficult since the exploitation of the offeree company by the controlling shareholder is more or less excluded by obligations to disclose information, by shareholder activism and by the reform of the Shareholder Rights Directive. In view of the foregoing, my article argues for reform of the Directive’s mandatory bid rule making it a mere default rule subject to shareholder-opt out. Furthermore, there is no compelling reason to take steps at the European level in order to prevent low-balling.
Mathias Habersack is Visiting Senior Fellow at the London School of Economics and Political Science and Chair of Private and Business Law at the Faculty of Law of the Ludwig-Maximilians-University, Munich.