Active or Passive?---Rethinking Directors’ Roles in an Anti-takeover Process

Hanyu Zhang, American University Washington College of Law

Abstract

In this article, “takeovers” refer to activities of acquiring shares to obtain the actual control of a listed corporation (the target corporation) by the bidder. And “anti-takeovers” refer to activities of employing defensive tactics to prevent the controlling power of the target corporation being taken away from the original controller.

In many jurisdictions, scholars generally regard the existence of the takeover markets to be good because it could, at least, assist maintaining good corporate governance and generating economic welfare. So it is important, in this article, to ask why the target corporation should sometimes fight against takeovers, and who should decide whether to resist it or not. In other words, during the takeover process, should the directors be in an active position to make the defensive decision and to defend the takeover or should they be in a passive position and let the shareholders decide the merit of the bid on their own?

Instead of adopting the traditional comparative law method and examining the practice of the major countries carefully, I will present the worldwide debate on whether the directors should play an active role or a passive role in the anti-takeover process by briefly introducing several countries’ practices. Then I will explore the best practice from a purposive perspective, which is to consider the directors’ roles in light of the purpose of the defensive tactics. And also I will try to defend my conclusion against the potential counter-arguments. Finally, I will look at China’s practice and examine whether the best practice is suitable for China at present.