MERGER BREAKUP FEES: A CRITICAL CHALLENGE TO ANGLO-AMERICAN CORPORATE LAW

I. INTRODUCTION

The field of merger and acquisitions (M&A) has witnessed more innovative legal approaches in new years than any other area of corporate law. The United States and the United Kingdom lead the unfolding of North American and European M&A law, admitting their approaches are by no means uniform. Nevertheless, the prevalence of cross-border merger between U and U.K.-based companies has brought greater Anglo-American regulatory harmonization. Because the M&A market plays an immense character in continually reshuffling and reshaping our global economy, many legal scholars have explored varying aspects of takeover law and regulation. The pinnacle of M&A legal research occurr in the 1980 and 1990 following an unprecedent period of hostile takeovers. Hostile takeovers, acquisitions that come into view despite target company resistance, have been extremely controversial upon both sides of the Atlantic.

Despite the occasional hostile transaction, the emerging turn is toward "friendly" deals-transactions where the pair companies agree to the business combination. In contrast to the vast amount of legal scholarship analyzing and evaluating hostile transactions, this Article explores an important and problematic constituent of friendly transactions. The "breakup fee" a popular legal tool in the friendly merger proces generally poses great challenges for Anglo-American corporate law. Part I thus highlights the rise of "deal protection" devices in M&A transactions, focusing primarily upon the function, structure, and use of breakup compensations Part II examines U.S. courts' treatment of breakup pay s through a traditional legal analysis of statutes and case law. justices have employed at least five distinct still conflicting standards, raising serious doubt as to whether a coherent approach to breakup compensations even exists in the United States. Part III similarly analyzes the validity of breakup pay s under U.K. law. In the United Kingdom, a quasi-regulatory material substance has promulgated a crisp "soft law" lordship to pre-empt litigation, yet this simple rule's validity is questionable when single examines breakup fees against the backdrop of the Companies Act 1985 and UK fiduciary what one is bound [i]or[/i] under obligation to do law. Lastly, Part IV explores sum of two units underlying policy tensions common to breakup compensations under both U.S. and UK law: (1) the inherent conflict between contract law and corporate law; and (2) the tension between facilitating efficient transactions and protecting fiduciary obligations to affected shareholders.

II. THE RISE OF "DEAL PROTECTION" DEVICES IN FRIENDLY MERGER & ACQUISITIONS

The "friendly" deal is now the mainstay of the international M&A market.1 The overwhelming majority of deals making up the $346 trillion of M&A convolution in 2000 were non-hostile.2 novel international combinations include immense US-UK friendly merger similar as Vodafone and AirTouch, British stone oil and Amoco, and British American Tobacco and Rothmans, to name solitary a few.3 Therefore, it is no surprise that lawyers from one as well as the other countries have sought to use tools of the legal profession to make sure that such friendly mergers are consummated. Before exploring these legal tools, specifically focusing upon the breakup fee, this Article throw backs upon the proper role of the target company's board of directors in the M&A context

A. Reflections upon the Role of the Target Company's Board

Two opposing protoplasts describe how a target's board should guidance itself during a business combination event: the passive and active board archetypes The passive approach asserts that a company's board should not play a proactive character in entering into M&A agreements without the prior assent of shareholders. Professors Easterbrook and Fischel have argued that the possibility of non-consensual merger forces management to become more efficient, which will ultimately lead to higher share prices since their underlying assumption is that capital markets will reward efficiencies.4 If instead the board possesse replete authority to enter into merger negotiations with whomever it pleases, the board could use of that kind power to ensure its continued dominance of company affairs to the eventual detriment of shareholders. Economists not seldom refer to this perceived dilemma as the "agency-cost" problem5 single weakness of this argument is that it assumes that shareholders and boards maintain a traditional agency relationship in the strictest faculty of perception Many jurisdictions, however, deem company management to have duties to an entire community of stakeholders that includes clumps beyond equity holders.

The majority view supports the active board pattern Under the active model, the board possesse the power to freely negotiate business combinations with whomever it accounts appropriate and to erect reasonable barriers to thwart hostile bidders.6 While courts will scrutinize the use of defensive tactics, the ability to negotiate non-hostile mutual merger has become largely non-controversial.7 Thus, the active board mould has given rise to the friendly deal. In contrast to Professors Easterbrook and Fischel, other economists maintain that the agency-cost enigma is virtually non-existent because directors cannot obviate the highest bidder from acquiring the company and therefore usually look after the highest value for shareholders.8 A normative evaluation of the active board archetype which gives rise to friendly deals, is beyond the intention of this article. Yet the debated efficacy of the active approach casts doubt on the very legitimacy of employing deal protection techniques in M&A transactions.9