V. Explanations of Divergence: The Path Dependence
In the previous chapter, we looked back on the history of the formation of the takeover laws in the U.S., the U.K, and the E.U. During this process, the legislative needs, economic demands, political gambles and power clashes shaped three different hostile takeover regulatory frameworks. The history retrospect has explained the inevitability of the formation of three different hostile takeover regulatory modes, yet it did not fully reveal the path dependence nature of the takeover regulations. How did the regulatory systems entrench themselves? What accounts the most for the systemic inertia of the three regimes? Professor John Armour and David A. Skeel Jr. attributed the differences to the different roles of the institutional investors played in the formation of the law. 316 Enlightened by their theory, this research attributes the discrepancies and formation of the path dependence features of the U.S., the U.K. and the E.U. hostile takeover regime to the different roles of different interest groups in history and the contests between them. These interest groups include: the institutional investors, industry associations, labor unions, large conglomerates and so on.
causing great property damages to many New York citizens. Under this context, 24 stockbrokers and merchants signed the so-called Buttonwood Agreement under the tallest buttonwood tree in the Wall Street area on May 17th, 1792, setting the parameters for securities trading in the first incarnation of the New York Stock Exchange.317 They made the promise and pledge to each other that they would “[n]ot buy or sell from this day for any person whatsoever, any kind of Public Stock, at a less rate than one quarter per cent Commission on the Specie value”.318
On March 8th, 1917, based on the rough Buttonwood Agreement, the subscribers and brokers almost indiscriminately imitated the constitution of the Philadelphia Stock Exchange and drafted the Constitution of the New York &
Stock Exchange Board. In 1863, the name “New York Stock & Exchange Board”
was shortened to its nowadays form - the “New York Stock Exchange”.319 Until the enactment of the Securities Act of 1933, the self-regulatory rules of the New York Stock Exchange were the most important legal resource of the federal securities law. Essentially, the New York Stock Exchange was a private independent legal entity; all the listed companies were its member and were bound by the constitution and listing rules of the NYSE. Therefore, the Stock Exchange itself was the most prominent self-regulatory entity at that time. At first, all the listed companies in the New York Stock Exchange were requested to provide their shareholders with annual balance sheet and income statement.320 Since 1920, all the listed companies had to disclosure significant
317 See Hart, Michael A. "Decimal stock pricing: dragging the securities industry into the twenty-first century." Loy. LAL Rev. 26 (1992): 843.
318 See Olivia B. Waxman. How a Financial Panic Helped Launch the New York Stock Exchange [EB/OL],(2017-05-17), [2017-06-06]. http://time.com/4777959/buttonwood-agreement-stock-exchange/.
319 B See anner, Stuart. "The origin of the New York stock exchange, 1791–1860." The Journal of Legal Studies 27.1 (1998): 113-140.
320 See Michie, Ranald C. "The London and New York stock exchanges, 1850–1914." The Journal of Economic History 46.1 (1986): 171-187.
information quarterly. Since 1928, all the financial statements published by the listed companies must be examined by an independent auditor. 321
However, as we mentioned in the previous chapter, the financial crisis of the 1929 led to a populist Congress federalizing the regulation and oversight of the securities market. During the federalization process, the institutional investors (mainly from Wall Street) were considered as the major villain in the financial crisis. The general public blamed the “greedy Wall Street” for their wealth destruction. The populist government immediately took advantage of the situation and promulgated the paradigm of mandatory federal oversight.322 The rise of the SEC as the main regulator marked the fall of the self-regulatory tradition. Since then, self-regulation was no longer a choice for the U.S.
securities market. Although some customary laws were still active in the 1930s, they were all coded into the federal securities law afterwards. In the 1960s, there were very few self-regulatory rules, for example, the
“Gentleman’s Code”, which forbade White Shoe Investment Banks to take part in hostile takeovers, but they all did not last long before they vanished forever.323
An interesting phenomenon in the U.S. is that, whenever the economic depression happens, the Wall Street is usually the first to be blamed. When hostile takeovers first emerged in the U.S. history in the 1950s, the general public, politicians and regulators were all outraged by the hostile attempt. The “Saturday Special Tender Offer” from 1960 onward promoted the outbreak of hostile takeovers. The Wall Street, again, was to be blamed. In promoting the Williams Act, Senator Williams Harrison spoke candidly that he wanted to ensure the management of the company to have
321 See Sobel, Robert. The Big Board: a history of the New York stock market. Beard Books, 2000.
322 See Sorkin, Andrew Ross. Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves. Penguin, 2010.
323 See Keller, Elisabeth, and Gregory A. Gehlmann. "Introductory comment: a historical introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934." Ohio St. LJ 49 (1988): 329.
enough “gunpowder” to fight back the Wall Street “corporate raiders” and “white collar pirates”. 324 Indeed, the Wall Street investors were at the same time shareholders and acquirers of the listed companies. Those institutional investors were regarded as either filthy insiders or barbarians to the companies “with good traditions”.
Because of this, it was rational to always put them under the scrutiny of the federal laws. With reputation this notorious, institutional investors, such as the pension funds, insurance funds or hedge funds, were impossible (and of no use) to oppose federal oversight of the securities and banking industry. When the follow-up laws came into being subsequently, the status of the SEC was trenched and there was no room at all for the institutional investors to overturn the game rule and restore self-oversight.325 Historically, the SEC had never sought greater substantial power, for example, the power to review the merit of the tender offer; as a result, the judicial authority of takeover disputes naturally decentralized to State courts.326 The directors of the board were the “repeated player” in those trials and they had greater resources to deal with the suits. Therefore, the acquirers were less likely to win in litigations. No wonder the accumulated legal precedents formed a legal regime more pro management than pro shareholders.
In summary, the shutdown of the self-regulations in the 1930s, continuous notorious reputation of the Wall Street institutional investors, and the court-based fiduciary duty review system together shaped the current U.S. hostile takeover regulatory framework: it is a pro-management system with no room for institutional investors’ self-regulation.
324 See Brown, Meredith M. "The Scope of the Williams Act and Its 1970 Amendments." Bus. Law. 26 (1970): 1637.
325 Armour, John, and David A. Skeel Jr. "Who writes the rules for hostile takeovers, and why-the peculiar divergence of US and U.K. takeover regulation." Geo. LJ 95 (2006): 1739-1757.
326 See Mitchell, Mark L., and Jeffry M. Netter. "The role of financial economics in securities fraud cases: Applications at the Securities and Exchange Commission." The Business Lawyer (1994):
545-590.