INTRODUCTION

The principle that shareholders should make any decisions about the use of defences in a takeover lies at the heart of the UK takeover regime. In the past decade this central principle has formed the basis of newly introduced takeover regimes around the world. Since 1985 it has also formed the basis of the EU takeovers directive. Despite its success as an exportable regulatory regime, the adoption of the shareholder principle in many jurisdictions has not been without controversy as it is assumed to be a direct attack on employee job security. In particular, this controversy within the EU has resulted in an enormously compromised directive on takeovers, which allows each state to adopt or reject the principle. The intention of this paper is to examine the effect of adopting a takeover regime based on the UK takeover system on the market for corporate control in Australia. The reason why the Australia experience may offer some insight is that it exhibits similarities in terms of the relatively small size of its stock exchange, its concentrated shareholder ownership and its labour law protections, with more social market-oriented jurisdictions such as France and Germany than with the UK and the US. At the heart of this examination is an empirical study of the M&A transactions in Australia from 1992 to 2004, which clearly indicates that a weak market for corporate control is present in Australia on which the introduction of a new takeover regime based on the UK's has had little effect. The paper suggests that differences between the UK and Australia such as concentrated ownership, capital controls and labour law are likely to be responsible for the weakness of the market for corporate control. In the face of these factors the introduction of an anti-managerial pro-shareholder takeover regime based on the UK's is unlikely to have any significant effect on the weakness of that market. This suggests that the concerns evident in the debate on the EU directive that the introduction of a shareholder-oriented takeover regime would have a negative transforming effect in social market systems such as France and Germany were misplaced as long as shareholder concentration and direct labour protections remain in place in those jurisdictions.

TRANSPLANTING TAKEOVER MODELS

Australia exhibits similarities in terms of the relative unimportance of its stock exchange to its economy, its concentrated shareholder ownership and its labour law protections with more social market-oriented jurisdictions such as France and Germany than with the UK and the US.¹ As such the effect of transplanting a form of the UK takeover regime into the Australian market for corporate control, as the Australian Government did in 2000,² could offer some insight as to the effect of introducing such a shareholder-oriented regime into corporate governance systems like France and Germany, which have historically had a more social market focus. In particular, the effect of such an introduction may provide insight into the operation of the EU takeovers directive regime, which also has the UK shareholder-oriented takeover regime at its heart.

The UK and the US, although often described under the broad umbrella of Anglo/Saxon shareholder-oriented corporate governance systems, have historically approached takeover regulation in very different ways. In the US its regulatory system is a tale of two very distinct periods before and after c.1995. In the 1970s, 1980s and the early 1990s hostile takeovers were common and the ability of management to use defensive tactics was limited.³ Where defensive tactics were used in this period it has been claimed that this allowed the board to get a higher price for the shareholders.⁴ In the mid-1990s, however, it became clear that management could utilise strong defensive tactics in a hostile takeover battle in order to defeat the hostile bid.⁵ Additionally, partly as a reaction to the strength of the hostile takeovers market in the 1980s, by the early 1990s individual US states were passing laws designed to allow defensive tactics by target management.⁶ As a result, post-1995 target management have been able to take defensive action against a bid as long as it is broadly justified as being in the corporate interest.⁷ The US therefore offers an inconsistent model for jurisdictions interested in promoting a strong market for corporate control. Indeed, given that many jurisdictions interested in introducing takeover regulation already have a raft of defensive provisions available to management, the US may not offer any model at all.

In the UK a very different approach has been taken. By 1959 it was apparent that takeovers and particularly hostile takeovers needed regulating.⁸ In the traditional self-regulatory fashion a set of guidance notes were issued known as the 'Notes of Amalgamations of British Business', and later as a result of significant problems in the 1960s the London Stock Exchange (LSE) and the Bank of England set up the Panel on Takeovers and mergers to oversee takeovers in the UK.⁹ The central guiding principle upon which it acts is found in General Principle No. 7 of the City Code which states that: '[a]t no time after a bona fide offer has been communicated to the board of the offeree company, or after the board of the offeree company has reason to believe that a bona fide offer might be imminent, may any action be taken by the board of the offeree company in relation to the affairs of the company, without the approval of the shareholders in general meeting, which could effectively result in any bona fide offer being frustrated or in the shareholders being denied an opportunity to decide on its merits.'

As such it neutralises management while a bid is in progress. Additionally, the judiciary in the UK have been highly protective of the Panel's jurisdiction in takeover matters by refusing to allow any legal challenge until the takeover is completed.¹⁰ In the UK even where the board of directors has a negative view of the takeover it has been suggested it has little effect on the outcome.¹¹

In the choice of regulatory model offered by the world's two most successful stock exchanges the UK model has been the more successful. Over the past decade as various countries have tried to kick start an equity culture, General Principle No. 7 of the City Code has been central to the implementation and operation of takeover regulation in Australia, Switzerland, Italy, Portugal, Austria, Spain, Hong Kong, New Zealand, Ireland, South Africa, Malasia, Singapore and has formed a core part of the EU takeovers directive.¹² The adoption of a principle with such a strong shareholder orientation can, however, create difficulties for systems that have traditionally had strong employee protection at the core of their corporate governance systems. Indeed, the story of the EU takeovers directive illustrates the tensions inherent in adopting a key part of a shareholder-oriented corporate governance model into corporate governance systems like Germany and France that have a more social market focus.

The EU takeovers directive

In 1985 the European Commission as a key part of completing its plans for the EU internal market proposed drafting a directive to create a standard set of rules for takeovers in Europe.¹³ In January 1989 the Commission put forward its draft directive on European takeovers, which became a lightning rod for tensions between the more shareholder-oriented Anglo/Saxon corporate systems in the UK and Ireland and the more social market Continental Corporate systems within the EU.¹⁴ One of the central points of tension was that the directive had at its heart the UK Takeovers Panel's key Principle 7 (Article 9 of the Directive) that management cannot take defensive action in a takeover without shareholder approval. In essence, the directive was viewed as favouring shareholders over social market concerns such as employee welfare. As a result of these very different perspectives on the draft directive, it lay dormant for nearly a decade.

By the mid-1990s with an emerging equity culture in many Continental European states, new life was breathed into the draft directive and by 1999 it was re-established within the Commission's plans as possible EU legislation.¹⁵ The successful hostile takeover of Mannesmann by Vodaphone in 2000, however, firmly moved the German Government and German members of the European Parliament against the takeovers directive because of fears about employee protection. Subsequently, the draft directive was rejected by the European Parliament in July 2001 in one of the narrowest votes in its history.¹⁶ In response the Commission set up a Group of High-Level Company Law Experts under the chairmanship of Professor Jaap Winter in order to try and navigate a compromise solution.¹⁷ Over the course of 2003 the Commission negotiated a new version of the takeovers directive and in April 2004 a much compromised directive was eventually agreed upon in which among other changes Article 9 was made optional for member states.¹⁸ Thus a member state can now choose whether to have takeover defences or not.

While the saga of the directive gives some insight into the tensions between legal systems on this issue it does not tell the full story. Many European jurisdictions (Italy, Portugal, Spain, Austria and Switzerland¹⁹) with more social market systems than the UK have quite separately from the EU directive process implemented a takeover regime based on the UK system in an attempt to stimulate a market for corporate control and in turn encourage a vibrant equity market. As was also noted above, many countries with a common law heritage have also based their takeover regime around the UK system. Again many of these common law heritage counties have similarities with social market systems in that they have less-significant stock exchanges than the UK, the make up of their shareholding base is more concentrated and employment protections are more extensive.²⁰ A central jurisdiction in that overlap is Australia with exactly this combination of small stock exchange, concentrated ownership and relatively high employment protection.²¹ The purpose of this paper is to examine the historical effect of introducing UK takeover principles into the Australian system. As such it should give some insight into the effect if any that adopting the full EU takeover regime or independently adopting the UK regime would have on a social market system. Before turning to that issue, however, the paper first considers the question of why takeovers matter?

WHY TAKEOVERS MATTER

The market for corporate control is said to operate as a key corporate governance mechanism in that if all else fails shareholders can rely on it as a mechanism to discipline management. In the 1950s economists began to view hostile takeovers as having this important role in constraining management discretion. Baumol for example argued that the threat of a hostile takeover would force managers to exercise their discretion to achieve 'profit satisfising' for their shareholders. In other words, providing the minimal amount of profit necessary to stop the shareholders exercising their removal power or selling their shares.²² Crucially, the evidence and analysis of managerial economists like Baumol began to influence mainstream corporate theory. In a series of articles over the course of the 1960s, Manne utilised a managerial market-oriented analysis to argue that managers were more accountable to shareholders than was assumed. He argued that managers have to behave, if they are to tap capital markets in the future, if they are to enhance the firm's reputation and their own and if they are to avoid being taken over.²³ Until 1983 however, takeovers, while viewed as having a role in the efficient allocation of resources, were largely studied through the prism of the shareholders and lenders role in taking control of a company and removing management to ensure those efficiencies.²⁴ In 1983 Jensen and Ruback introduced the 'management competition model' in which: 'competition among managerial teams for the rights to manage resources limits divergence from shareholder wealth maximization by managers and provides the mechanism through which economies of scale or other synergies available from combining or reorganizing control and management of corporate resources are realized.'²⁵

The Jensen and Ruback paper was significant both because they introduced a new perspective on takeovers but they also tied together the diverse empirical literature to make the important observation that 'the evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose.'²⁶ While their claims about the benefits of takeovers have since been contested,²⁷ there is no doubt that since the early 1980s the efficient operation of the market for corporate control has become a significant concern for both the state and private sector.²⁸

If the market for corporate control is operating effectively, then once a company is listed on a stock exchange its shares may be freely traded. This creates the possibility that another individual or more likely another company can gain control of a listed company by buying up the shares in the company. In theory, at least, an under-performing management in a listed company will cause shareholders to exit the company. If this continues for a long period it will drive the share price so low that another company will try to take over the under-performing company and either manage it more efficiently or sell off its assets for a profit. The possibility of a hostile takeover is therefore extremely important as management have an incentive to perform because if they do not they risk losing their jobs if the company is taken over.²⁹

A number of empirical studies have found this mechanism at work in the UK and US markets. In the UK, Kennedy and Limmack³⁰ looked at a sample of 233 completed takeovers between 1980 and 1989 and found that there was a strong correlation between management underperformance prior to the takeover and the removal of the Managing Director afterwards. In the US, Walsh and Ellwood³¹ found that the removal of a managing Director within two years was significantly more likely after a takeover. Martin and McConnell³² taking a sample of US takeovers similarly found an increased likelihood of departure of a managing director of an underperforming company that had been taken over. While the literature, however, assumes that management performance should be positively affected by the market for corporate control another possibility, however, is that management try to avoid its effects. In turn, one of the major challenges to the efficient operation of the market for corporate control is that management may just under perform and try to frustrate such a bid.³³ As such the regulation of takeovers is important for shareholders, managers and, in turn, regulators if market confidence is to be maintained.

AUSTRALIAN TAKEOVER REGULATION

Significant corporate governance problems from the late 1980s through to the beginning of the 21st century brought about wholesale reform of a relatively weak Australian corporate regulatory structure.³⁴ In 1991, as part of a first attempt at reform of takeover regulation, the Corporations and Securities Panel was introduced. Although it was based on the UK Panel, it proved a weak model dealing with a very small number of cases and making only four decisions as crucially it could not act independently but needed authority to act from the general corporate regulator the Australian Securities Commission (itself a relatively weak regulator).³⁵ As a result takeover disputes were almost entirely resolved by the courts. This changed in 2000 when the current Takeovers Panel was introduced by the Corporate Law Economic Reform Program Act 1999 and this time more effectively modelled on the UK Panel on Takeovers and Mergers.³⁶ Crucially, it placed shareholders centrally within its principles, it could intervene through interested party referrals and the parties to a dispute had to use the Takeovers Panel as their rights to litigate in a takeover were severely reduced by the reform process.³⁷ While the regulatory principles of the UK Panel may have been transplanted, the markets for corporate control in the UK and Australia are, however, very different.

One of the obvious differences in the markets for corporate control in Australia and the UK and US and a similarity Australia has with many Continental European countries is that the stock exchange is a relatively small part of the Australian Economy.³⁸ Only about a third of its largest companies are listed on its stock exchange compared with two thirds of the UK's largest companies and nearly all the largest US companies.³⁹ The second difference is the make up of its shareholding base. In the US dispersed shareholding emerged in the 1930.⁴⁰ In the UK dispersed shareholder ownership occurred much later. Chandler⁴¹ for example places this emergence in the UK at the beginning of the 1970s. Scott and Griffe⁴² on the other hand, while agreeing that the move to a dispersed ownership system was occurring in the early 1970s, would place the point at which family ownership of shares gives way to dispersed shareholders in the late 1970s. Prior to that, families, banks, and the state were central to the ownership and control system.⁴³ Indeed, it was tensions between the families and the dispersed shareholders in the late 1960s and early 1970s that led to the need for a Takeovers panel in the UK. In Australia however the presence of a dispersed ownership base in listed companies is still questionable. Over the past decade there have been a growing body of evidence which reveals concentrated ownership patterns in most Australian listed companies. O'Lincoln in 1996,⁴⁴ Stapledon⁴⁵ in 1998, La Porta et al. in 1999 all found significant non-institutional investor shareholdings in Australian listed companies. The most recent study by Lamba and Stapledon in 2001⁴⁶ examined the shareholding concentrations of a sample of 240 Australian listed companies. They found that 72 per cent had a 10 per cent or larger non-institutional investor blockholder, 52 per cent had a 20 per cent or larger non-institutional investor blockholder and 16 per cent had an absolute controlling shareholder holding more than 50 per cent of the shares. These are significantly higher concentrations of ownership that are present in the UK or US but have strong similarities with countries such as Austria, Belgium, Germany, Netherlands, France, Spain, Sweden and Italy.⁴⁷ In terms of its third similarity with these jurisdictions — labour protection — Australia until 1996 operated a highly protective employment regime consisting of a wide range of central wage bargaining, statutory employment terms, union recognition and consultation rights.⁴⁸ Since the election of the Liberal Government in 1996, there has been a roll back of some of these employment protections but what remains is still more extensive than what exists in the UK or US.⁴⁹ On this basis one would predict that because of these differences it would be significantly more difficult to take over an Australian company as compared with a UK company. As such the operation of the Australian Takeover panel based on the UK model in such a very different market should provide some insight as to how the full EU directive complete with Article 9 shareholder orientation would operate in social market jurisdictions.

THE MARKET FOR CORPORATE CONTROL IN AUSTRALIA: THE EMPIRICAL EVIDENCE

Despite the fact that one of the roles of the Australian Takeovers Panel is to promote an efficient market in the takeover of listed companies, little empirical work has been done by corporate lawyers on the efficiency of the market for corporate control in Australian listed companies.⁵⁰ Global surveys of takeovers, which have included Australia in their data, have suggested that takeovers in Australian listed companies are generally at a much lower level than the UK and the US but are comparable with countries such as Belgium, France and Germany. Unfortunately, the global data does not provide any hostile takeover data for Australian listed companies.⁵¹

To get a clearer picture of the market for corporate control in Australian listed companies for the analysis in this paper, a data set was constructed where the target was an Australian listed company over the period 1992–2004. This period was chosen for a number of reasons. First, there was a complete data set for this period both on Thompson Financial's database and for the target company public filings. Secondly, for comparative purposes the study needed to overlap at least in part with the major UK and US studies. Thirdly, it needed to cover the changes in employment protection brought about by the Workplace Relations Act 1996 (Cth), and fourthly it needed to also cover the introduction of the new Panel.

For comparative purposes, the same definition of 'hostile' as the major studies by Schwert in the US⁵² and Cosh and Guest in the UK⁵³ was used. That is, the target board's attitude to the bid based on their formal recommendation to shareholders. Success was determined by the bidder achieving more than 50 per cent of the company's shares.⁵⁴ The data came from Thompson Financial's database as a starting point in identifying hostile transactions by board attitude over the period 1992–2004. Those results were then cross referenced with the target companies public filings and press reports of the transaction (where available) in order to confirm the initial classification or where the classification was incomplete to complete it. In total, the cross referencing process enabled five full classifications to be made where information was missing and 15 misclassifications to be remedied. It also added three transactions to the overall total.

The results

From 1992 to 2004 there have been 538 completed M&A transactions involving Australian listed companies as targets. Hostile bids made up 101 or 19 per cent of those transactions while friendly transactions made up 437 or 81 per cent. Only 39 or 7 per cent of those total M&A transactions were successful hostile bids. Successful hostile bids in the UK listed market in the years from 1988 to 1998 made up 20 per cent of M&A transactions.⁵⁵ Similarly in the US listed market from 1980 to 1996 successful hostile bids ran at 21 per cent of total M&A transactions (Figure 1).⁵⁶

Figure 1.

Australian M&A 1992–2004

Full figure and legend (123K)

Additionally, for the same period the study found the boards of Australian listed companies effectively defended 62 or 61 per cent of hostile bids. There is, however, the possibility that a successful defence may occur in the context of an auction. In which case it may not necessarily indicate that there is a distortion of the market for corporate control as the board may have defeated a hostile bid by recommending a second higher bid. Examining the 62 successful defences, the study found 34 cases or 54 per cent where no auction occurred and so could be classified as outright successful defences where the company did not change ownership. In another 27 cases or 44 per cent the board could be said to have conducted an auction resulting in a change of ownership. In the one remaining case even though there were a number of bidders and so one could classify it as an auction, the board successfully fought off all bidders and so no change of ownership occurred (Figure 2).

Figure 2.

Successful defence 1992–2004

Full figure and legend (45K)

From this evidence the majority of these successful defences are successful with no resulting change of control; however, a significant minority result in an auction and a change of ownership. If one assumes that the board is neutral in the auctioning cases then this indicates that the market for corporate control is operating efficiently as the directors are auctioning the company to the highest bidder. If, however, one does not assume a neutral management but rather that the directors have an interest in the outcome⁵⁷ a change of ownership is not an indication that the market for corporate control is operating efficiently even though an auction has occurred and the apparent highest price achieved. Suspicions are often raised about directors' motivation in such auctions as invariably the second bidder is friendly and successful.⁵⁸ Indeed, the study above found only two instances of an auction where the second bidder was hostile and in only one of those cases was the hostile second bidder successful. In all the other cases, that is 92 per cent of auctions, the second bid was friendly and successful, which would raise suspicion of management self interest.

The key indicator of a neutral or self-interested management is of course whether the highest bid has been recommended. This can be a difficult task as many bids are for non-cash consideration or combinations of cash and equity. There have been, however, two major Australian studies of director's motivation in takeover bids, which have looked in detail at the value of bids. The first by Eddey and Casey⁵⁹ covered takeover bids for listed companies over the course of the 1980s and concluded that while they did find some evidence of self-interest, target directors did act in the interests of shareholders as they generally recommended the highest bid. Henry, however, in a 2005 study covering takeover bids for listed companies in the 1990s found the opposite to be true.⁶⁰ While he found some evidence of maximisation of shareholder value, in general he concluded that his findings: 'do not support this proposition and are indicative of an ulterior or self-interest motive explaining the pattern of directors' recommendations to shareholders in takeovers... . The paper finds no evidence suggesting that directors are more likely to support takeovers that offer higher bid premiums to target shareholders, and also concludes that target directors have an overwhelming tendency to support takeover bids offering share-exchange consideration, which have consistently been identified in the literature as providing lower post-acquisition shareholder returns.'⁶¹

Given the differences between the outcomes of the two studies on managerial motivation, we cannot necessarily assume a passive board of directors and therefore that an auction indicates the market for corporate control is operating efficiently (Figure 3). The Eddey and Casey study and the Henry study do agree on one aspect of management behaviour and that is in both studies the board's attitude to the bid is crucial.

Figure 3.

Suspicious auctions

Full figure and legend (52K)

In total from the above study of Australian M&A activity from 1992 to 2004, we can draw a number of conclusions. First, the study indicates a low level of successful hostile takeovers in listed Australian companies. Secondly, a hostile bid is much more likely to be defeated than succeed. This is the case even where an auction is conducted by the board of directors. This evidence compared to the two listed markets generally regarded as having efficient markets for corporate control (the UK and US) suggests Australia has a weak market for corporate control as was predicted from the differences present in Australia identified above. However, given these distortions, has the introduction of takeover regulation based on the UK system had any effect? Hostile transactions in the years 1992–1999 before the introduction of the new takeover regime in 2000 averaged 7.5 per year. In the five years following the introduction of the new takeover regime (2000–2004), the average number of hostile transactions moved to 8.2. Successful hostile transaction in the period before the new regime averaged 2.8 and in the years afterwards averaged 3.2. From this if there has been an effect it is a weak one and it should be viewed in the context of a very weak market for corporate control generally.

AUSTRALIA'S MARKET FOR CORPORATE CONTROL

The key question that arises therefore is why this might be? There may well be a myriad of factors⁶² influencing the efficient operation of Australia's listed market for corporate control but three major factors stand out. The first is as was suggested above that there are significant concentrations of ownership in Australia's listed companies, the second which only emerged as the data set was constructed is the operation of capital controls in Australia and the third is Labour law.

Concentrated ownership and its effects

So why might this affect the market for corporate control of listed companies? On a simple level it will be more difficult to take over a company with a large shareholder opposed to the takeover.⁶³ This would of course distort the hostile takeover levels comparative to the UK and US where concentration levels are much lower. This may not however be the full story. In the UK Weir and Lang⁶⁴ found in a 2003 study that not only did dispersed shareholding play a role in the likelihood of a successful takeover but good corporate governance practices such as a high proportion of non-executives on the board and a separation of the Chairperson and Chief executive also increased the likelihood of a successful takeover. O'Sullivan and Wong⁶⁵ in a similar earlier study covering UK takeovers from 1989 to 1993 found conclusively that 'in hostile takeovers the larger external shareholders are likely to side with the incumbent management in defeating the takeover bid.' Similarly North⁶⁶ in a study covering US takeovers in the 1990s suggests dispersed shareholding to be a significant factor in takeover outcomes. More specifically, in the US, Shivdasani⁶⁷ has suggested that the relationship between a significant shareholder and management is a crucial determinate of takeover outcomes in companies with such shareholder concentrations. Given the low levels of hostile takeovers in Australian listed companies, this would suggest that relations between those holding significant blocks of shares and management are strong. This is of course consistent with the findings of Eddey and Casey and Henry above that the board's view is crucial to the outcome of a bid. This does not of course mean that management are necessarily seeking the best outcome for shareholders generally but rather that they are capable of looking after the interests of their largest shareholders when it matters. The interests of those shareholders may differ significantly from those of dispersed shareholders, which creates a problem for the Takeovers Panel.

An efficient, competitive and informed market for corporate control operates as was noted above as a discipline on inefficient management. High concentrated ownership levels can operate to distort that marketplace and shelter inefficient management because all shareholder preferences within a company may not be the same. There often exists a divergence between shareholders holding large blocks of shares and dispersed shareholders. For example, founder shareholders and their successors are more conservative than dispersed shareholders in terms of their risk outlook because legacy considerations are important.⁶⁸ Major competitors, suppliers or customers may hold blocks of shares for business policy reasons rather than for strict financial considerations, creditors may hold blocks of shares in order to protect their lending. Other large shareholders may simply wish to have access to control of the listed company in order to engage in rent extraction activities.⁶⁹

If a company's management is underperforming and a major shareholder is either supporting them or is part of the management team then the market for corporate control is unlikely to operate and inefficiency becomes embedded within the system. A takeover bid may be attractive based on straight income or growth multiples but not for a major shareholder factoring in wider business policy, rent extraction or simple legacy concerns. When making decisions about the takeover of a listed company with a significant non-institutional⁷⁰ large shareholder, the Panel may well be aware that there is a significant divergence of interest between the large shareholder and the dispersed shareholding body. The Panel, however, cannot override the proprietory interests of the large shareholder in order to ensure the overall efficiency of the market for corporate control.⁷¹

Capital controls in Australia and its effects

Although not part of the original intention of the takeover survey it became apparent as the data set emerged that there was another significant difference between the operation of the market for corporate control in Australia compared to the UK and US. Foreign firms did not seem to be particularly active in the Australian market for corporate control. In the course of the above study of hostile transactions in Australian listed companies from 1992 to 2004, it became clear that the large majority of hostile activity was undertaken by Australian companies against other listed Australian companies. In the period from 1992 to 2004 there have only been 23 hostile bids by foreign companies for Australian listed companies and only nine of those attempts were successful. For the same period, Australian companies made 78 hostile bids and were successful in 30 cases. In a nutshell, hostile activity in Australia is largely an Australian activity (Figure 4).

Figure 4.

Foreign hostile takeovers 1992–2004

Full figure and legend (41K)

This observation led to a question about the role of capital controls in Australia in restricting foreign takeovers.

Capital controls were once very common in all jurisdictions. They were introduced by the warring parties during the First World War and reintroduced during the Great Depression.⁷² This continued after the Second World War as the international community put in place the Bretton Woods agreements, which attempted to guarantee a stable macroeconomic environment in which countries could recover from the War.⁷³ The crucial element in that stability were restrictions on capital mobility across borders. As a result nations in the post-war period pursued demand led policies aimed at full employment and welfare state provision.⁷⁴ The system lasted until the 1970s when it was dismantled and capital controls were removed across the developed world by the 1980s. Since then the developing world has faced significant pressures to do the same.⁷⁵ Australia however while it floated its currency in the 1980s has never fully relinquished its capital controls.⁷⁶ As a result a foreign interest cannot hold more than 15 per cent of an Australian listed company without subjecting their bid to the Foreign Investment Review Board (FIRB).⁷⁷

As the threshold for a mandatory bid under Australia Company law is 20 per cent, a foreign entity is at a significant disadvantage while it awaits the recommendation of the FIRB. Even then the final decision is a political one made by the Department of the Treasury, which even if favourable can contain onerous restrictions on the future activities of the target company.⁷⁸ Given this factor in an area where stealth and timing are crucial, one would not expect to see a large number of hostile bids by foreign entities (which given the protective and, anecdotally at least, highly invasive nature of the FIRB mechanism, are unlikely to be seen favourably) who may instead prefer partnership-type investments with Australian companies.⁷⁹ For example over the course of 2006/7 a consortium of global hedge funds have been engaged in a takeover of Qantas the former Australian state airline. While the bid has attracted a huge amount of opposition in Australia, it looks likely to succeed as hedge funds have partnered with one of the large Australian banks (Macquarie Bank) to ensure Government approval.⁸⁰ In allowing the bid to continue, the FIRB has, however, imposed enforceable conditions that the airline will remain majority Australian owned, keep its headquarters in Australia, guarantee certain regional services and maintain its frequent flyer programme.⁸¹

In short, there is not a free market in the shares of listed companies compared to the UK and the US where there are no inward capital controls.⁸² This factor should distort the levels of hostile activity compared to the UK and US. Thus while unlikely to provide a full explanation for the low level of hostile activity in the Australian listed marketplace, there is the possibility that the activities of the FIRB are keeping hostile activity at a low level by placing a significant barrier in the way of foreign bids. Indeed, despite the advent of Global capital the vast majority of capital investment in Australia is by Australian capitalists in Australia.⁸³

Labour law changes

From the data above over the period 1992–2004, the average number of M&A transactions per year was 41. However, if that data are broken down pre and post the Workplace Relations Act 1996 (Cth) a different picture emerges. The pre-1996 average number of M&A transactions a year is 27 whereas post-1996 the average number of M&A transactions a year shoots to 47. In turn, the average pre-1996 number of hostile transactions per year was 5.5 but post-1996 leaps to 8.7 per year. One of the factors in that step change may have been the changes in Labour law that occurred in 1996, which significantly weakened the bargaining power of Australian labour. Prior to 1996 employees had an important voice in any restructuring through Union consultation and state-led arbitration.⁸⁴ After the Workplace Relations Act 1996 (Cth), this role was, however, removed. As O'Donnell et al. conclude commenting on the Act: 'the recent changes to labour law increasingly allow for an approach to delivering shareholder value based on the cutting of overall labour costs and allowing management considerable latitude to restructure business operations relatively unfettered by external controls.'⁸⁵

This may have made it easier to engage in M&A activity or at least reduced the costs of doing so.

In the UK and the US, post-takeover rationalisation of employees when it occurs, has had a very high profile.⁸⁶ In both the US and the UK, however, there is some controversy in the academic literature as to whether takeovers are good or bad for employees. In the US, Shleiffer and Summers⁸⁷ have championed the cause of takeovers having negative effects on employees as they argue the evidence indicates that takeovers provide opportunities for management to renegotiate labour conditions. On the other hand, Brown and Medoff⁸⁸ found little empirical evidence to support the case that takeovers had a negative effect on wages or employee growth. In the UK there have been similar contrary claims. Conyon et al. using a data sample of takeovers from 1979 to 1991 found that wages increased generally in the post-takeover period but that wages in firms where both the acquirer and the target were in the same industry increased by a greater extent.⁸⁹ Cosh and Guest, in their 11-year study of takeovers from 1985 to 1996, however, found no significant increase in employee costs but did find that employee growth rates in post-takeover companies became negative (-4.6 per cent), in the three years after a takeover.⁹⁰

While the Australian evidence is more limited, what evidence there is seems to suggest that listed companies post-takeover display a very different pattern of post-takeover employment growth than in the UK. Brailsford and Knights⁹¹ in a study of listed company takeovers from 1981 to 1992 (a period that covered Australia's most voracious and aggressive takeovers) found an average of 3–4 per cent employment growth in the three years following a takeover. The difference in the UK and the Australian data suggests that Australian companies in this period were not driving profit improvements through labour cost reductions. This datum is, however, prior to the 1996 Labour law changes, which would make it easier to carry out labour cost reductions. Unfortunately, there is no data available on post-1996 takeover employment growth. The general data on post-takeover performance both in total and in the years after 1996 has, however, either shown no positive effect to the bidder or indicates negative performance effects in the post-takeover period.⁹² This would suggest that the motives for such M&A activities still lie other than in creating value for shareholders and that management may not be under pressure to reduce labour costs or indeed to provide profit improvements generally. While the US data on the general benefits of takeovers is both vast and inconclusive, the UK evidence while much more limited is at least clearer.⁹³ Cosh and Guest in their 2001 study of UK takeovers during the period 1985–1996 found that hostile takeovers result in a significant improvement in profit returns, while friendly takeovers did not.⁹⁴ Given that the vast majority of activity in Australia is friendly, the post-takeover neutral or negative performance of Australian companies may be consistent with the Cosh and Guest results.

CONCLUSION

As was noted at the start of this paper, Australia exhibits similarities in terms of the relative unimportance of its stock exchange to its economy, its concentrated shareholder ownership and its labour law protections with more social market-oriented jurisdictions such as France and Germany than with the UK and the US. As such, the effect of transplanting a form of the UK takeover regime into the Australian market for corporate control could offer some insight as to the effect of introducing the full EU takeovers directive regime into such social market jurisdictions. Having examined the market for corporate control in Australian listed companies, a number of conclusions can be drawn about transplanting legal concepts developed for a very different marketplace. First, differences such as concentrated ownership, capital controls and labour law exert strong effects on the market for corporate control. Secondly, there is no magic pill effect in dropping in an anti-managerial pro-shareholder takeover regime in the face of such impediments to an efficient market for corporate control. If there is an effect, the Australian experience indicates it is a weak one. Thus the adjudicatory role of a shareholder-oriented takeover panel may function well in the limited number of cases that come before it but the market for corporate control is likely to remain distorted.⁹⁵ In other words, if the importation of UK takeover principles is being driven by the wish to stimulate an efficient market for corporate control then that is unlikely to happen simply by having a panel decide on takeovers according to shareholder-oriented principles where such distortions are present. From the empirical evidence above, changes to labour law appear to coincide with a significant change in the market for corporate control. This suggests that direct challenges to a key element of a social market system such as labour law may well exert transforming effects. As such the fear that the adoption of a standardised EU wide takeovers directive along the lines of the UK Panel's shareholder-oriented Principle 7 would have a negative transforming effect on social market systems appear on the Australian evidence to be overblown while other key features of such systems remain in place.

References

References and Notes

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49. See The Workplace Relations Act 1996 (Cth).
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52. Schwert, W. (2000) 'Hostility in takeovers: In the eyes of the beholder?', Journal of Finance, 55 (December), 2599–2640. | Article |
53. See ref. 27 above, 36.
54. In the large majority of successful hostile takeovers, the bidder achieved either 100 per cent or close to 100 per cent of the shares.
55. See ref. 27 above, 36.
56. Schwert, W. (2000) 'Hostility in takeovers: In the eyes of the beholder?', Journal of Finance, 55 (December), 2599–2640. | Article |
57. For example, in securing their jobs within the new merged entity or securing a lucrative redundancy package.
58. On these suspicions see for example Walkling, R. A. and Long, M. S. (1984) 'Agency theory, managerial welfare, and takeover bid resistance', Rand Journal of Economics, 13, 54–68 and Pastena, V. and Ruland, W. (1986) 'The merger/bankruptcy alternative', The Accounting Review, 61 (2), 288–301.
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70. Institutional investors tend to have a strictly growth or income interest in their shareholding.
71. See Armson, ref. 12 above and on the mandatory bid rule see http://www.acsi.org.au/documents/Newsletter_12.doc.
72. Bakker, A. (1996). The Liberalization of Capital Movements in Europe, Kluwer Academic Publishers, Dordrecht.
73. Neely, C. J. (1999) 'An introduction to capital controls', Federal Reserve Bank St. Louis Review, 81 (6), 13–30.
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75. Martin, R. (1994) 'Stateless monies, global financial integration and national economic autonomy: The end of geography?'in Corbridge, S., Martin, R. and Thrift, N. (eds) Money, Power and Space, Blackwell, Oxford, 253–278, 268.
76. Debelle, G. and Plumb, M. (2006) 'The evolution of exchange rate policy and capital controls in Australia', Asian Economic Papers 5:2, 7–29 One reason it may be able to retain its inward capital controls is that US investors are explicitly treated favourably by the FIRB, see http://www.firb.gov.au/content/US_thresholds.asp.
77. See the Foreign Acquisitions and Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Regulations 1989. On the operation of the FIRB and its policy criteria, see http://www.firb.gov.au/content/default.asp.
78. For example in 2000 the Treasury blocked the takeover of Woodside Petroleum by Royal Dutch Shell on the advice of the FIRB. See Australian Department of Foreign Affairs (2002). Changing Corporate Asia: What Business Needs to Know, Commonwealth of Australia, 211.
79. Additionally some sectors such as Media and Banking are entirely protected from foreign control. See Berns, S. and Baron, P. (1998). Company Law and Governance: An Australian Perspective, Oxford University Press, Oxford, 385–386. There are also many other barriers to foreign entry. For example the Australian Productivity Commission identified 165 barriers to market entry in the Australian financial sector. See McGuire, G. (1998) 'Australia's restrictions on trade in financial services', Productivity Commission Staff Research Paper, AusInfo, Canberra, November, x.
80. See New York Times, 'Qantas Buyout Clears Significant Hurdle' March 7, 2007. http://dealbook.blogs.nytimes.com/2007/03/07/qantas-buyout-clears-significant-hurdle/.
81. Parkinson, G. (2007) 'Australia clears Qantas buyout, see http://www.thedeal.com/servlet/Satellite?pagename=NYT&c=TDDArticle&cid=1171939836876.
82. In the UK and the US, certain industries such as defence and media have foreign ownership restrictions but there is no overall body with a general remit to supervise and restrict foreign ownership of listed companies. That is not to say that such issues are not keenly debated. For example, the UK Takeover Panel director general Mark Warham recently stated 'There is a feeling in UK that we are 'flogging the great firms that defined our industrial history to Johnny Foreigner...It is not the role of the Takeover Panel to become involved. The panel's focus is to protect UK shareholders and leave shareholders to decide the outcome of bids.' See http://www.icaew.co.uk/index.cfm?route=139097.
83. See Bryan, D. and Rafferty, M. (1999). The Global Economy in Australia: Global Integration and National Economic Policy, Allen and Unwin, St Leonards.
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86. Coffee, J. (1986) 'Shareholders versus managers: Strain in the corporate web', Michigan Law Review, 85, 7. While it has a negative effect there seems, however, some doubt as to whether it has a significant negative effect. See Cosh and Guest ref. 27 above, p. 23.
87. Shleiffer, A. and Summers, L. (1988) 'Breach of trust in hostile takeovers', in Auerbach, A. (ed) Corporate Take-overs: Causes and consequences, University of Chicago Press, London and Chicago. There is a large amount of further supporting literature see for example: Krueger, A. B. and Summers, L. H. (1988) 'Efficiency wages and inter-industry wage structure.'Econometrica, 56(2), 259–294. Akerlof, G. A. (1982) 'Labour contracts as partial gift exchange.'Quarterly Journal of Economics, 97(4), 543–569. Lazear, E. P. (1979) 'Why is there mandatory employment', Journal of Political Economy, 87(6), 1261–1284. Horn, H. and Wolinsky, A. (1988) 'Bilateral monopolies and incentives for merger', Rand Journal of Economics, 19, 408–419 and Gokhale, J., Groshen, E. L. and Neumark, D. (1995) 'Do hostile take-overs reduce extra-marginal wage payments?', The Review of Economics and Statistics, 77(4), 470–485.
88. Brown, C. and Medoff, J. L. (1988) 'The impact of firm acquisition on Labor', in Auerbach, A. J. (ed) Corporate Take-overs: Causes and consequences, University of Chicago Press, London and Chicago, 9–25. There is a similarly large literature supporting the no-negative effect hypothesis see: Peoples, J. (1990) 'Airline deregulation and industry wage levels', Eastern Economic Journal, 16, 49–58, Rossett, J. (1990) 'Do union wealth concessions explain takeover premiums? The evidence on contract, wages', Journal of Financial Economics, 27(1), 263–282, Fallick, B. C. and Hassett, K. A. (1996) 'Unionization and acquisitions', Journal of Business, 69(1), 51–73 and Neumark, D. and Sharpe, S. A. (1996) 'Rents and quasi rents in the wage structure: Evidence from hostile take-overs', Industrial Relations, 35(2), 145–179.
89. Conyon, M., Girma, S., Thompson, S. and Wright, P. (2002) 'The impact of mergers and acquisitions on company employment in the United Kingdom', European Economic Review, 46, 31–49. | Article |
90. See ref. 27 above, 36.
91. Brailsford, T. J. and Knights, S. (1998) 'The financial and non-financial effects of corporate takeovers', Melbourne Institute of Applied Economic and Social Research Working Paper 23/98, 17.
92. See Walter, T. (1984) 'Australian takeovers: Capital market efficiency and shareholder risk and return', Australian Journal of Management, 9 (1), 63–118. Bishop, S., Dodd, P. and Officer, R. R. (1986) 'Australian Takeovers: The Evidence', The Centre for Independent Studies, St Leonards, NSW, Bellamy, D. E. and Lewin, W. L. (1992) 'Corporate takeovers, method of payment, and bidding firms' shareholder returns: Australian evidence', Asia Pacific Journal of Management, 9(2), 137–149. Brown, P. and da Silva Rosa, R. (1998) 'Research method and the long-run performance of acquiring firms', Australian Journal of Management, 23(1), 23–38. Brailsford, T. J. and Knights, S. (1998) 'The financial and non-financial effects of corporate takeovers', Melbourne Institute of Applied Economic and Social Research Working Paper 23/98, 17. da Silva Rosa, R., Izan, H. Y., Steinbeck, A. and Walter, T. (2000) 'The method of payment decision in Australian takeovers: An investigation of causes and effects', Australian Journal of Management, 25(1), 67–94 and Sharma, D. S., Ho, J. (2002) 'The impact of acquisitions on operating performance: Some Australian evidence', Journal of Business Finance & Accounting, 29(1 and 2), 155–200.
93. On the US material and on takeover studies generally see Brailsford, T. J. and Knights, S. (1998) 'The financial and non-financial effects of corporate takeovers', Melbourne Institute of Applied Economic and Social Research Working Paper 23/98, 1–11.
94. This contradicts a US study by Healy, P. M. Palepu, K. and Ruback, R. S. Does corporate performance improve after mergers? Harvard Business School NBER Working Paper No. W3348. However, the Harvard study was of a much smaller sample of 50 transactions over the five years from 1979 to 1983. The Cambridge study covered an 11-year period from 1985 to 1996 and examined 64 hostile transactions and 139 friendly transactions. Differences in accounting practices may also have played a part in the different results. See ref. 27, 33.
95. Indeed the adjudicatory role of the Australian Panel is viewed as having been a success. See Griffiths, E. (2003) 'The takeovers panel: A more effective regulator of acquisitions?'Company Lawyer, 24 (6), 188–192.

Acknowledgements

This work could not have been completed without the assistance of Brian Cheffins from the University of Cambridge, Dr David Tomkin from Dublin City University, William Wilson, Janet Dine and Jennifer Sloszar from Queen Mary, University of London.