Society’s interest in contested takeovers

As stated under 2.3., the shareholders’ prime interest is to maximize the value of their equity investment in the company. This interest is promoted and protected by establishing an efficient system of disciplining manage­

ment, cf. 2.6. One of the elements of such a system is the right of an ac­

quiror, or any other shareholder or group of shareholders, to remove the management of a company, cf. 2.7.

The next question is if these interests of shareholders are shared by so­

ciety as such. Maximizing shareholder wealth is not, per se, a goal that society would want to pursue.

However, society and the shareholders have a common interest in Dan­

ish companies being competitive compared to foreign competitors. Only by having competitive companies will the Danish society benefit from jobs offered to Danish employees as well as revenues paid in the form of

taxes and other duties to state and local authorities.

Shareholders pursue competitiveness in order to protect their investment and to achieve an increase of the value of the shares they hold. The more

34 See the study referred to under X III.5.1.

35 See IX.

V. Are contested takeovers beneficial for the Danish society ?

competitive a company is, the better are the chances that the shareholders’

investment will prove successful.

To achieve competitiveness it is important to understand that the busi­

ness world, like almost any other thing, does not present a static picture.

Rather, it is in a constant flux due to changes in consumer behavior and demands, the appearance of new suppliers, changes in the economic and legal structure of the markets, etc. Only if companies succeed in adapting to such changes will they remain competitive. Companies which perform well today may face serious trouble tomorrow if they fail to respond to changes in the markets for their products or services.

Management which lacks the skills or motivation to initiate or adopt the necessary changes in business strategies etc. should be removed. Removal in this case would be in the best interest of society as well as the share­

holders. The more difficult it is to remove management, the more society and shareholders will suffer due to the lack of flexibility of the company.

If it is impossible for shareholders to intervene, the ultimate result may be that the company “loses the race”, and society suffers loss of jobs and revenues.

There is another aspect of the competitiveness issue that should be bome in mind. If investors lose faith in the shares of Danish companies because they do not believe that such companies will remain competitive, the stock market will lose its attraction to investors. This will lead to smaller amounts of money being invested in Danish shares, which, in turn, means that the funds raised through the stock market will be more expensive to the companies.

Both society and shareholders of a company thus have a common inter­

est in the shareholders retaining the right to effect removal of and thereby motivate management to keep alert.

The question remains, however, if contested takeovers have “side ef­

fects” which cannot be reconciled with the interests of society. Since there is hardly any doubt that the above mentioned motivating effects of con­

tested takeovers also benefit society, the following discussion can be nar­

rowed down to evaluating if there are particular drawbacks connected to contested takeovers, which are unacceptable when compared to the advan­

tages connected to the concept.

There are scenarios where the effects of a given contested takeover are difficult to assess. The consequence of some contested takeovers may be the closing down of plants and factories, the laying off of employees, the elimination of one of the suppliers in a market and the loss of a taxpayer.

V. Are contested takeovers beneficial for the Danish society ?

At first blush, such consequences may appear always to be negative, seen from society’s viewpoint. However, if viewed in the context, the closing down may be a part of a desirable development towards more competitive undertakings. Frequently, companies that are shut down are the weaker participants in the “race” and, therefore, may be in a position where they would under all circumstances be forced to give up within a not too distant future.

In many cases the loss of jobs as a consequence of the closing down of a factory will be counterbalanced by new jobs created with other companies in the business that can now increase their market share. In other cases there is little doubt that jobs will be lost and no new ones created.

A similar picture may be drawn with respect to the revenues that society loses in connection with a company going out of business. If other com­

panies pick up the activities of the company that has been shut down, so­

ciety may at the end of the day receive unchanged revenues. If, on the other hand, e.g. a foreign competitor has acquired the company in order to shut it down, it is not at all certain whether the country will be able to re­

coup the loss of revenues.

Sometimes the purpose of an acquisition is to obtain a profit by selling certain undervalued assets of the company after the acquisition. Among the assets of a company may be real property, the value of which is not fully reflected in the price quoted for the company’s shares. By selling the property, the acquiror may reap the benefits from such “hidden” values. If the mere purpose of the acquisition is to gain access to undervalued assets, the question is if this is in society’s interest. Sometimes the company will continue its operations, and in other events the company will be closed down and the employees laid off. It is impossible to tell if, in general, society will benefit from such transactions, which in some cases will allow undervalued assets to be employed for better purposes and in other in­

stances will merely harm the interests of society.

The fact that a contested acquiror will have to pay a premium price for the target-shares will, ordinarily, be a strong incentive for him to exploit the potential of the target-company in the best possible fashion in order for his acquisition to make sense from a business point of view. Frequently, this will lead to a more efficient use of the capital invested in the target- company. On the other hand, not all contested acquisitions are likely to lead to such increased efficiency. The desire by some managers to build empires may sometimes lead to acquisitions that do not carry with them any benefits for society.

Some acquisitions may constitute a step towards concentration in the particular line of business where the target-company operates. This may be the case if one competitor attempts to eliminate another by acquiring the latter and, upon the acquisition, closing down its operations. Concentra­

tion frequently harms consumers, who will be facing increased prices once competition is reduced or has ceased to exist.

The examples discussed here serve to illustrate the point that contested takeovers, despite their motivating effect on management, sometimes have side effects that are extremely difficult, if not impossible, to evaluate, but which, at least in some instances, probably do not coincide with the inter­

ests of society.

The important point is, however, that this is not an inherent or typical feature of contested takeovers. Any corporate acquisition, be it “friendly”

or contested, may lead to loss of jobs, closing down of factories, loss of revenues for society, etc. Also, the creation of concentrations or mono­

polies may be founded upon friendly just as well as contested acquisitions.

There are numerous examples of friendly corporate acquisitions that have had one or more of these consequences. This has not given rise to de­

mands to outlaw friendly acquisitions.

The fact that contested and friendly acquisitions are not different in this regard may be illustrated by referring to a statement made by the President of the United States’ Council of Economic Advisers that reads:

“Although extensive research has established that takeovers tend to be beneficial, not every takeover is successful in attaining its originally con­

templated benefits, and there are many examples of takeovers that, in hindsight, appear to have been misguided. Takeovers should not, however, be singled out in this regard because investments in physical plant, re­

search and development, petroleum exploration, and numerous other ac­

tivities also often appear misguided in hindsight.”36

Since there is no reason to believe that contested takeovers, in general, have more harmful side effects than friendly acquisitions, there is no basis for concluding that it would be in society’s interest to rule out contested takeovers. On the contrary, the point still stands that society and share­

holders have a common interest in the beneficial effects connected to contested acquisitions. Both shareholders and society should support a corporate environment that creates the best possible conditions for com­

panies to adapt to changes in the business world. Contested takeovers are

V. Are contested takeovers beneficial for the Danish society ?

36 See Econom ic Report o f the President p. 191 (February 1985).

V. Are contested takeovers beneficial for the Danish society ?

one of the remedies available and society has no interest in preventing this remedy from being used.

This is not m eant to suggest that any com pany w hatsoever should be subject to takeovers. Some com panies, in particular public utilities, have special tasks where security o f supply or the defense o f the country play a role. For such com panies it makes little sense merely to discuss a maxim ization o f the value of the shareholders’ investment. As to these kinds o f special com panies it may som etim es seem appropriate to have special laws that prevent contested acqui­

sitions. The advisability o f having such laws was illustrated when a foreign ac­

quiror in the spring o f 1989 attem pted to acquire control o f the sem i-public util­

ity SEAS, see also XIII.4.3.

The focal point is not how to prevent contested acquisitions but how to create a “level playing field” that allows shareholders to decide on the fate of a contested takeover attempt but also protects the interests of the share­

holders, including, in particular, minority shareholders.