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Center for Law and Economic Studies


Economic policy debate in the United States during the 1980s focused on the dynamics of bidder and target tactics in hostile takeovers. Confronted with the largest transactions in business history, financial economists took advantage of developments in econometric techniques to conduct virtually real time studies of the impact on firm value of each new bidder tactic and target defense.1 For courts and lawyers, hostile takeovers subjected standard features of corporate law to the equivalent of a stress x-ray, revealing previously undetected doctrinal cracks. Congress held seemingly endless hearings on the subject, although managing to enact only relatively innocuous tax penalties on particular defensive tactics the public found especially offensive.2 State legislatures, closer to the political action, acted more substantively, if less wisely. Whether or not takeovers created new wealth they did result in its transfer, and at least one of the parties from whom wealth was transferred- target management-had remarkable influence in state legislatures. 3 When labor also came actively to oppose hostile takeovers, the coalition was virtually unstoppable. The decade saw some thirty-four states pass more than sixty-five major laws restricting corporate takeovers, including states discouraging partial offers and front-end loaded offers.4

The 1980s have now closed transactionally as well as chronologically. The first quarter of 1991 marked the lowest level of merger and acquisition activity since the first quarter of 1980.5 The passing of this remarkable decade invites a broader perspective, which can be helpfully thought of as the political ecology of takeovers. An ecological perspective builds on the proposition that phenomena are embedded in interactive systems- a rich web of mutually dependent relationships. Thus, a seemingly independent event cannot be fully evaluated without understanding how it relates to the environmental forces to which it was a response and which, in turn, respond to it.6What the narrow focus of the 1980s debate missed was an appreciation of the complex economic corporate governance and political environments in which hostile takeovers are embedded. Corporate acquisitions are a response to real conditions in the economic environment. The choice among acquisition techniques, most importantly between friendly and hostile transactions, depends both upon the economic motivation for the transaction and upon conditions in the corporate governance environment. Finally, conditions in the corporate governance environment are directly influenced by politics; both what is allowed and prohibited is defined, in the first instance, by legislation.

My goal in this article is two-fold. I begin by sketching the political ecology of takeovers in the United States-the interaction of economics, corporate governance and politics that shaped the experience of the 1980s. I then make a tentative effort at applying the insights gained from an ecological perspective to the current endeavor to change dramatically the European corporate governance environment through the harmonization of takeover and company law in the European Community. Sheltered by the cloak of political naivete commonly allowed those attempting comparative analysis from a distance, I will argue that an ecological understanding of takeovers suggests a different approach than that reflected so far in the debate over the terms of harmonization. This approach is based on what I term the "mutability principle."