metadata: authors: 0: author: Nenova,Tatiana
count: World
docna: 0: docna: Takeover laws and financial development
docty: Policy Research Working Paper
subtopic: Social Policy,Legal Products,Judicial System Reform,Private Sector Economics,Social Funds and Pensions,Capital Markets and Capital Flows,Non Bank Financial Institutions,Capital Flows,Private Sector Development Law,Legal Reform,Marketing,Legislation,Regulatory Regimes,Energy Demand,Energy and Environment,Energy and Mining
teratopic: Macroeconomics and Economic Growth,Law and Development,Industry
abstracts: cdata!: The issue of "an appropriate"
            legal framework, especially in the case of the takeover
            market, has been poorly studied in the case of emerging
            markets, yet it is of immediate relevance and practical
            policymaker interest. The study makes a first attempt to
            analyze takeover regulations in a comparative context across
            50 countries. It proposes a methodology to create a detailed
            index on the most salient features of capital market laws,
            and illustrates the approach on the case of takeover
            legislation. The methodology allows better understanding of
            the impact of laws on markets and development, allows a
            detailed quantification of a given regulation, in this case
            takeover market rules, and helps determine relevant policy
            implications. Specifically, the framework permits the
            exploration of the effects of individual regulations, their
            substitutability and interplay, as well as the overall
            extent of friendliness of the laws to investors, or
            particular groups thereof (such as minority shareholders),
            and the links of specialized regulation with the overall
            legal system. Finally, the study explores the effect of the
            investor-friendliness of takeover laws on stock market development.
repnme: repnme: Takeover laws and financial development
display_title: Takeover laws and financial development
listing_relative_url: /research/2006/10/7112008/takeover-laws-financial-development
topicv3: Private Sector Development m1326060 1921,Pension Funds m1326066 611,Energy and Extractives m1326595 507,Capital Markets m1326967 332,Civil Law m1327064 1044
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,Law and Development,Industry
no_of_pages: 52
author_keys: 0: author_key: 437001
model_extractions: WPS4029

# **_Takeover Laws and Financial Development_**

## Tatiana Nenova<sup>1</sup>

**_Abstract:_** _The issue of “an appropriate” legal framework, especially in the case of the takeover market, has been poorly studied in the case of emerging markets, yet it is of immediate relevance and practical policymaker interest. The study makes a first attempt to analyze takeover regulations in a comparative context across 50 countries. It proposes a methodology to create a detailed index on the most salient features of capital market laws, and illustrates the approach on the case of takeover legislation.  The methodology allows better understanding of the impact of laws on markets and development, allows a detailed quantification of a given regulation, in this case takeover market rules, and helps determine relevant policy implications. Specifically, the framework permits the exploration of the effects of individual regulations, their substitutability and interplay, as well as the overall extent of friendliness of the laws to investors, or particular groups thereof (such as minority shareholders), and the links of specialized regulation with the overall legal system. Finally, the study explores the effect of the investorfriendliness of takeover laws on stock market development._

## World Bank Policy Research Working Paper 4029, October 2006

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._

> 1 The author would like to thank Simeon Djankov, Alex Berg, Mierta Capaul, Catherine Hickey, Teresa Barger, Mike Lubrano, Stijn Claessens, Vidhi Chhaochharia, Richard Symonds, Claire Grose, and Inessa Love for their comments. Toni Naneva provided excellent research assistance.  Tatiana Nenova is a Senior Economist in SASFP, and can be reached at tnenova@worldbank.org.
Capital markets are essential to the growth and development of a country’s economy.<sup>1</sup> First, they channel available funds towards growing businesses (funds may be available from corporate shareholders, domestic and foreign investors, pension funds, banks, insurance companies, or other institutional investors). Second, such markets fill in the gaps left by bank financing, which may not be offered at long maturities and often requires costly and scarce collateral. Equity financing, better than banks, can assume the risk of young fast-growing innovative businesses (such as the challenger airline in Brazil, GOL), which are in need of significant funds, and have grown beyond the self-financing pocket of their owner / entrepreneur, but are too risky for a single bank to finance, and too large for a venture capital firm to engage in. Third, capital markets provide a diversification strategy and growth outlet for key players in a nation’s economy, such as pension funds, which can develop only in the presence of a set of markets that would permit their portfolio to reduce risk and reap returns for the beneficiaries.

Capital markets therefore have been a priority focus of national development strategies in the past 15 years. However, past experience shows that promoting a well-functioning and stable capital market that is effective in raising external financing has been an elusive goal for many countries. Policymakers have emphasized the importance of an appropriate regulatory framework to the successful pursuit of a capital markets development strategy. Two studies in the late 1990s first demonstrated convincingly in a cross-country context that laws and financial markets regulation have a tangible and important impact on markets and financial development (La Porta et al 1997, 1998). A veritable flood of research on the impact of laws and regulations on capital markets followed, further deepening our understanding of the area. In addition to cross-country studies, single-country research has been abundant, often focused on the US or UK, and other OECD countries, and recently complemented by research on Brazil, India, and Russia, on a wide range of capital markets topics including corporate control and takeover issues.<sup>2</sup> Studies confirmed the importance of regulation for development. To name but one example, efficiently functioning legal frameworks were found to encourage firms to use external financing and grow. The literature also uncovered that markets do not react to the promulgated laws, but instead to the first signs of effective enforcement.<sup>3</sup> Securities and corporate regulations present an entangled body of law which has been hard for academics to quantify in sufficient detail in order to study its impact on development and growth.<sup>4</sup> As a result, though we know of the overall importance of laws for financial development, it has been difficult for policymakers and researchers alike to draw specific conclusions on the impact of particular legal provisions. One reason for the paucity of crosscountry studies of specific regulations is the sheer complexity of gathering and systematizing the data. The standard approach has been to identify legal provisions and codify them into quantifiable variables, such as the LLSV six-component anti-director index on investor protection.<sup>5</sup> On acquisition regulation, the sole cross-country index in existence is the Nenova (2001) three-component takeover rules index. The measures of regulations and laws used in such studies are too aggregated, however, and show a general level of legal protection. The measures do not reflect the regulations in detail; rather, they are useful in providing a proxy for the overall quality of capital markets rules. As such, the measures help in showing the importance of regulation and institutions; however, they are less informative on the pros and cons of specific legal mechanisms. Pioneering efforts in delving deeper into the body of law have been provided by World Bank’s Doing Business Report, which codifies specific regulations in cooperation with 2
legal experts around the world. Topics of focus include company regulations on starting a business, labor laws, contract enforcement, creditor rights and information, bankruptcy, and investor protection, among others.<sup>6</sup> La Porta, Lopez-de-Silanes, and Shleifer (2006) is perhaps the work using the closest approach to this paper, in that it codifies the securities laws in 49 countries along several dimensions, and uses the newly formed variables to examine the effect of securities laws on stock market development.

This study takes a first step in the above direction by offering a methodology that would fully characterize the set of rules and regulations concerned with changes of corporate control, takeovers, tender offers, and general acquisition activity. Should the methodology prove successful, it is replicable for other facets of capital markets regulation. The framework, allowing a detailed quantification of a given regulation, in this case takeover market rules, permits the exploration of policy implications of the securities laws as they relate to share acquisitions. Specifically, one can explore the effects of individual regulations, their substitutability and interplay, as well as the overall extent of friendliness of the laws to investors, or particular groups thereof (such as minority shareholders), and the links of specialized regulation with the overall legal system. Finally, and most importantly, the methodology permits the study and demonstration of the impact of particular regulations on market development, in particular market breath and depth. This paper does not explore those issues in detail, and focuses instead on presenting the methodology and general uses of the new data; detailed exploration on specific regulations is relegated to further research. The issue of “an appropriate” legal framework, especially in the case of the takeover market, has been poorly studied in the case of emerging markets, yet it is of immediate relevance and practical interest, in particular in Latin America, East and South Asia, and Central Europe.

The literature exploring takeovers issues is extensive, and recent overviews are presented in Burkart and Panunzi (2006), Andrade, Mitchell and Stafford (2001), Bhagat, Shleifer and Vishny (1990), among others. Relevant literature is cited further along in the paper, as specific topics are discussed, e.g. mandatory offers or going private deals.

# **1. The market for corporate control**

Corporate control transactions occur for several reasons. First, in the natural growth cycle of a company, the original entrepreneur may find his brainchild grown beyond the proportions of a small one-owner firm. Due to the need for additional financing, professional management, organizational complexity, costs of running the business, diversification motives, or any other idiosyncratic cause, the main owner may want to sell control of the company. Second, and related, the descendants of the original founder may wish to sever their ties with the family company, because there are succession issues, or the family is distanced from effective company management and does not feel comfortable with the risk exposure without commensurate control, so as to prefer to diversify their financial holdings into investments that would lower their overall risk of value loss. Control may also be sold to a multinational company, which brings in the know-how, marketing, and distribution channels that are inaccessible to a standalone firm. In countries with less concentrated ownership, control can be claimed in a hostile 3
attempt, by a bidder who believes that company value can be enhanced. Friendly or hostile deals can also be executed for reasons of expected synergies between the acquirer and target.

Takeover laws are concerned with the orderly process of changes in control, their transparent conduct, equal opportunities for all investors, and “fair” treatment of all existing shareholders. Control is defined here conventionally as influence over corporate decision-making via a given number of votes in a general assembly.<sup>2</sup> Typical takeover laws require that any sizeable purchases of stock in a corporation be made via a tender offer (as opposed to open-market operations), on equal terms to all tendering shareholders, with any excess shares offered being pro-rated, so that every tendering investor has the same proportional chance of selling their shares to the bidder. Other elements of a takeover law would include fairness provisions on taking the company private, rules on equitable treatment of shareholders, as well as disclosure regulations. The law would also have a set of fairly intricate procedural steps and deadlines for the carrying-out of the tender offer itself. The use of anti-takeover tactics could also be limited in takeover regulations (a detailed example of a takeover law on the case of Chile is presented in Section 3). Specific characteristics of takeover laws are discussed in the Section 4.

Takeover regulation stands to resolve several major objectives, and different countries have in practice selected various solutions to these issues:

**_Objective 1: Allow companies to defend themselves._** The optimal extent to which policymakers believe companies should be allowed to protect themselves against takeovers varies considerably.  Defenders of a _laissez-faire_ approach have adopted minimal takeover protection, in the belief that a company whose value may be improved by an outsider should become subject to such an improvement.  The opposing view is that short-term value improvements may be detrimental to both the long-term stability of the company as well as other social goals important to policymakers, such as employee welfare, and therefore companies are allowed a considerable set of anti-takeover mechanisms in the law.  The resolution of this issue in the legislative field is intimately related to the frequency of corporate control transactions in the capital markets.

**_Objective 2:  Perform a “sentinel” corporate governance function_** .  When a company is found undervalued, or “cheap” relative to what it could potentially be worth if it was run better, a corporate raider should find it profitable to purchase it, turn it around, and re-sell it at profit. Evidence is plentiful that takeovers address governance problems.<sup>7</sup> On the other hand, changes in corporate control have been criticized as an effective governance mechanism due to the freerider problem, the danger of overpaying for the target company, and the exorbitant takeover cost which makes acquisitions useful only in correcting more serious governance problems.<sup>8</sup>

**_Objective 3: Ensure the fair division of value between controlling parties and minority investors._** What is the appropriate definition of “fair” in this case? Fairness does not necessarily imply equal price. For one, controlling parties face costs of maintaining control that minority

> 2 Control can be embodied in a high level of ownership, veto rights, golden shares, board control, etc.  The EU Directive on Takeover Binds, for example, leaves the definition of control to the member states. The most standard legalistic definition, also used for research purposes, is in fact possession or use of over 20% to 50% of the voting rights.  This paper uses the specific percentage of votes as legislated in each country to form a variable and explore the effects of this provision on financial market development.

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investors do not face. They have most of their wealth concentrated in their large stake in the firm stock, whereas other shareholders (such as pension funds) are well diversified. Further, controllers face fiduciary duties, the threat of lawsuits, etc. On the other hand, they may obtain benefits not available to the common investor, as well.

In discussing the fair division of corporate value among all takeover participants, it is useful to gain an idea of the magnitude of value available for distribution. Research shows that the value to be redistributed in takeovers, referred to as “control premium”, can be considerable. The control premium can reach 29% in Italy, and 20% in Switzerland. In contrast, it is less than 10% in Japan, Germany, UK and US, to name but a few countries. The control premium is potentially higher in emerging economies, where markets are less complete. It is 58% in the Czech Republic, 27% in Argentina, Colombia, and Venezuela, 48% in Korea, and 36% in Mexico.<sup>9</sup> The issue of fair treatment of market participants involved in the takeover has been defined and resolved in a widely divergent manner in different countries. In France, the corporate owner and the minority shareholders receive the same price. In Brazil, before 1999 the sale price of control was not publicly disclosed, and minority shareholders did not share any takeover gains (estimated at around 25% of company value).<sup>10</sup> Sharing value with minority investors makes takeovers expensive, so they occur more rarely. The lower takeover threat could cause negligent managers to “relax” and fail to maximize company value. On the other hand, not sharing any value with minority shareholders may rob them from one of the few opportunities to receive a return on their investment, especially in less dynamic markets where dividends and capital gains are not abundant.

# **2. Investor protection during takeovers and market development**

National legislations resolve in various ways the three objectives of takeover laws, and these policy choices affect the depth and breath of capital markets, and the willingness of minority investors to participate in the market. In addition to the effect of the laws, poor law enforcement further discourages stock market activity and development.<sup>11</sup> Appendix A presents a simple theoretical example that helps appreciate the validity of this argument.

The argument is not specific to takeover rules, and can equally well be applied to other securities laws. The appendix posits the following hypothesis: _Breadth and depth of stock markets decrease with poorer investor protection, in particular with poorer protection of investor returns during takeovers._ This hypothesis has been tested and confirmed in the case of several investor protection variables, as well as some acquisition-related variables. One example is Rossi and Volpin (2004) who find that countries with better investor protection have more takeovers, and more hostile deals, the latter explained by the fact that control is also less contestable in countries with low investor protection.<sup>12</sup> They also find that countries with lower investor protection experience more cross-border takeovers, and the volume of cross-border takeover activity increases with the difference in investor protection quality between countries.

5
# **<u>3. The useful minority protections of a typical takeover law – the case of Chile</u>**<sup>**13**</sup>

During the 1990s, a wave of changes of control occurred in Chile through private transactions at prices that were 70% higher on average. Minority shareholders did not participate in this upside. Shareholder dissatisfaction peaked during the takeover of Enersis S.A, Chile’s largest private energy conglomerate, by Endesa España (Spain) in 1997. The deal became a landmark case in minority shareholder rights and equitable treatment and prompted the overhaul of Chilean takeover legislation. The case also allows a simple illustration of the rules which would prevent minority rights abuse, as well as a practical view on the exact functioning of different protection mechanisms.

Enersis was controlled by a group of five investment companies, known as the Chispas, via 29.04%. All Chispas companies had the same political structure: class A shares had 99.94% of the ownership and elected 4 out of 9 directors (held by pension funds); and Class B shares that represented 0.06% of the ownership but elected 5 out of 9 members of the board (held by Enersis management). Had the country been under a one-share-one vote listing rule, the expropriation of non-voting shareholders (in this case the pension funds and ultimately their retired beneficiaries) would not have occurred.

Even with barely 30%, the Chispas controlled Enersis due to its diluted ownership structure. The takeover was preceded by secret negotiations between Endesa Spain and key executives of Enersis S.A, who were promised a handsome price premium in exchange for cooperation on the takeover. Endesa España offered USD 253.34 for each B share and only USD 0.30 for the A shares. A takeover legislation with an equal-pricing rule would have made the deal impossible. The Spanish company also offered Class B shareholders the option of purchasing up to 5% of Endesa shares at discounted prices, and guaranteed the Enersis managers their positions for at least five years. Strict adherence to good disclosure practices would have revealed this information prior to the tender offer and publicized it, likely increasing the chances for a public outcry prior to the deal. Moreover, Enersis executives would be considered as acting in concert with Endesa España, and therefore the notice would require that they state their intentions to collaborate in a change in control, as well as the sweeteners used by Endesa España to lure their cooperation.

Enersis executives applied pressure and influence to encourage employees to sell their shares. In October of that year, details of the acquisition strategy were made public by the press, because Endesa España, which was publicly traded in both the US and Spain, had filed several documents with the U.S. SEC and the Spanish CNMV, explaining the terms of an agreement between Endesa Spain and the Enersis executives. It was only at this point that the Chilean minority shareholders, the pension funds, became aware of the details and decried the planned deal. Had that not happened in time, the pension funds would have been left with non-voting shares and no control over Enersis, which would have gone under the complete control of Endesa España. Had the latter considered taking Enersis private, the pension funds would have lost virtually all value of their shares, an expropriation which will be fully avoided with the new Chilean takeover law, which does not allow squeeze-outs and gives dissenting shareholders appraisal rights in this case.

6
The new law<sup>14</sup> established that share transactions that result in a person’s or group’s acquisition of control of a corporation must be conducted through a tender offer. Additionally, when the target company has several classes of shares with different voting rights, the tender must be extended to all classes in proportion. Partial offers must be pro-rated.<sup>15</sup> The law also contains a mandatory offer provision, so that a shareholder who reaches the ownership level of 2/3<sup>rds</sup> of a corporation must tender for all outstanding shares and classes. An optional transitory rule shielded companies for a further three years from the new law, to allow learning, and most firms took advantage of that rule. The details of the law are presented in Appendix C. The securities regulator (Conasev) can enforce takeover law by issuing additional rules, imposing fines for noncompliance, demanding complete information about the transaction, and suspending tender offers procedures, even before they have started, in response to incomplete disclosure or a legal obligation default.

<!-- Start of picture text --> 14<br>12<br>10<br>8<br>6<br>4<br>2<br>0<br>1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006<br><!-- End of picture text --> Following the implementation and enforcement of the new law, in 2000 and thereafter, one can note a new wave of IPOs on the Chilean stock market, and a healthy trend of takeover activity after the reform. The average number of takeovers has increased after year 2000 (see figure 1). The control premium paid over market prices, 23%, is now shared more equally between controlling shareholders and minorities.

**Figure 1. Annual takeovers in Chile**

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# **4. Review of the components of takeover laws**

The UK City Code on Takeovers and Mergers is an example of a best practice takeover regulation. Its main features are a mandatory takeover bid at 30%, at the highest price of the past 12 months. All classes, including non-voting shares, must be included in the mandatory offer. The bid must be extended to any willing shareholders post factum, at the same terms. Cash must be offered as an option in certain cases. Disclosure rules pre- and during the offer are strict; ownership is reported upon acquiring 3% of any class; intentions to take control at 15%, and to take the company private at 30%. Sell-out rules are available at 90%, at a fair market price, and there is an oppressed minority protection mechanism through the court. The takeover rules apply to all public companies, not only those that are listed. Finally, anti-takeover actions are only allowed with shareholder approval (General Principle 7, Rule 21, City Code). The European Commission Directive on takeovers makes an attempt to unify European legislation (see Appendix B). Following the review of the law components and the index we form, we present the US example, which stands in contrast to the UK and EU approaches. At the other end of the spectrum, we have the emerging markets where no detailed takeover regulations exist, such as Azerbaijan, Ecuador, and Uruguay. One could count upward of 20 countries with stock markets where no basic tender offer regulations exist. This section overviews the main elements of takeover laws illustrating them with examples from various national legislations.

# _4.1. Early warning_

One early signal available to investors about potential parties interested in control is to look at significant existing owners of the corporation. Typical disclosure rules provide for ownership thresholds which, when crossed, trigger an obligation to disclose certain information and possibly, their intentions to gain control. In most countries, the lowest threshold for ownership disclosure is 5%, and lower (or continuous) ones may be provided for board and management. Such disclosure is typically “in real time”, i.e. within days of crossing the threshold, e.g. 7 days in Nigeria. The disclosure is usually to the securities regulator and the stock exchange, which in turn make it public. The onus of disclosure could fall on the company, or on the shareholder. In France, in addition to ownership disclosure triggered by crossing of certain thresholds (5%, 10%, 20%, 33.3%, 50% or 66.7%), the company can call for the disclosure of all holdings of at least 0.5% of the capital by making such provisions in its articles of incorporation.

The index component we form is defined as follows:<sup>16</sup>

- _Range where intention to control is known_ – the range where the intention of a shareholder to gain control of the company is publicly known.  It varies between 0.50 in countries where prior disclosure of control intentions is not mandated (e.g. Egypt), to 0.95 in Brazil and Philippines, for example, where the intention to gain control must be disclosed at 5% of ownership and thereafter.

# _4.2. Mandatory offers_

Mandatory offer rules oblige a large shareholder to bid for the company shares after reaching a certain level of ownership. Tenders must be for all outstanding shares – the bidder cannot limit the shares s/he stands ready to buy. Also in contrast to general tender offers, mandatory offers generally cannot be conditional upon a certain percentage of shareholders accepting the offer.

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Mandatory offer rules serve to protect minority shareholders from inefficient control transfers, as repeatedly shown in the academic literature, but also decrease the chance that efficient control transfers occur.<sup>17</sup> Beyond the positive effect of the mandatory offer rule on minority rights, there have been no studies on the optimal ownership threshold at which an offer becomes mandatory. To the extent that a lower mandatory offer threshold increases the incidence of sharing the control premium with minority shareholders, we expect a negative relationship between the mandatory offer threshold and better minority shareholders rights. A more conservative approach would limit itself to assuming that the presence of a mandatory offer rule improves minority rights, and shy away from any assumptions on the effect of the threshold level. We repeat all tests using this alternative approach which captures the mandatory offer component as an indicator dummy instead of a continuous threshold variable.

Mandatory offer thresholds can vary widely, from 15% for India and 25% for Ghana, to 67% for Finland. In this approach, general tender offer rules are left quite liberal, at the choice of the bidder structuring the offer. More than half the sample (27 countries) complies with this pattern. Some countries could be added to this list, who have no mandatory offer rules, but whose tender offer regulations nevertheless provide a mechanism to extend the terms of a general tender offer to all shareholders who would be wiling to sell but couldn’t during the offer (be that because they were pro-rated, or because they decided to tender only after seeing the offer results).

In Latin America (Colombia, Peru) and the Middle East –North Africa (Egypt, Jordan), the law frequently provides for partial mandatory tender offers (e.g. a mandatory offer at 25% of ownership, for at least 5% of the shares), thus effectively excluding from the process some shareholders that may be willing to tender their shares.<sup>18</sup> These cases are coded as not having an effective mandatory offer rule. To that list, one could also add the countries where no tender offer regulations have been adopted yet.

Most countries allow block trading of securities off-exchange, by private negotiation. In Argentina, for example, there is no disclosure on off-market deals. As a result, minority shareholders cannot share any of the value from control changes, as there is simply no information on the control change premium from deals arranged behind closed doors. In Brazil, in contrast, both on- and off-exchange transactions with listed securities must be disclosed to the securities regulator, including the price. In Lithuania, off-exchange trading of listed securities is banned altogether.

In certain, mainly developed, countries, tender offer and going private rules apply to non-listed companies as well as listed ones. This provision extends minority protection beyond stock exchange investors, to small shareholders in general. Due to the challenges of effective enforcement of this provision, few emerging markets can afford to implement it.

The index component we form are defined as follows:

- _Mandatory offer range_ – the range of ownership where the shareholder is mandated to tender to all shareholders (mandatory offer), even if s/he does not want to acquire additional shares.  In the absence of mandatory offer rules in the country, we look at the tender offer regulations.  If the latter mandate a tender offer to all existing shareholders upon crossing a certain ownership level, and if non-tendering

9
shareholders can sell their shares at the same price after the offer has ended, we consider such rules equivalent for the purposes of minority protection, to a mandatory offer regulation in the given range. For example, there is a mandatory offer rule in India at 15% of ownership, so the variable takes the value of 0.85. As another example, consider the case of Canada (Ontario laws), where no mandatory offer rule exists, but acquisitions of 20% or more must be made via a tender offer. Following such an offer, all shareholders who want their shares purchased have the right to sell them subsequently, at the tender offer price. In this case, the variable takes the value of 0.80. In general, the mandatory offer range variable takes values from 0 in countries such as Armenia, where no mandatory offer rules exist, to 0.95 in Korea, where tender offers must be made if the bidder purchases from more than 10 shareholders, and if the intended ownership level acquired would exceed 5%.

- _Off-exchange price disclosed_ – The variable takes the value of 1 if the price at which off-market deals are concluded is publicly disclosed or if off-market trading is forbidden for listed securities, 0 otherwise. More than half of the countries have this provision.

- _Rules apply to non-listed firms_ – The variable takes the value of 1 if any public offer rules (rules for mandatory or partial offers, or taking private rules) apply to non-listed firms, 0 otherwise. Less than one third of the countries have such provisions.

# _4.3. Pricing of tender offers_

Most mandatory offer rules prescribe a minimum price that the bidder must offer. This is typically some average of past market prices, and serves as a protection against bidders underpaying for securities relative to their fair market value. The concept of “fair” is defined in the national law and would vary across countries. For example, the law provides for the minimum tender offer price in Bulgaria to be the higher of (1) the average weighted market price for the past 3 months, and (2) the fair value as assessed in the prospectus documents. In some countries, the law recognizes that due to market illiquidity, the market price may not reflect the underlying company value, and therefore prescribes that the fair price for the purpose of the tender offer should be determined as the higher of the book value and past market prices. Some countries may restrict the offer consideration to cash only, but generally, an offer is allowed in exchange for cash or other (usually easy to value) securities.<sup>19</sup> A step further is to extend investor protection to shareholders holding shares with limited or no voting rights, and mandate that they be included in the tender offer, or even at some measure of a “fair” price that the law may provide. For example, in South Africa the mandatory offer is to the holders of any class of equity capital (voting or non-voting) and to the holders of any class of voting non-equity capital to acquire their securities for the same or comparable consideration.<sup>20</sup> Pakistan, by dint of having a single class of shares, achieves the same effect of minority protection without the need for a specific rule in its takeover regulations. Fair pricing between classes is a very costly provision for bidders, and is likely to reduce, if not stifle, the takeover market; as a result, only countries with very active stock markets have instituted such a provision.

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The variables we form are defined as follows:

- _Fair price for minority_ – The variable equals 1 if the mandatory offer (or tender offer, in the absence of mandatory offer rules by law) is restricted by law to specify a price at least above some measure of past market prices, 0 otherwise.

- _Fair price for all classes_ – The variable equals 1 if the mandatory offer (or tender offer, in the absence of mandatory offer rules by law) is restricted by law to include all classes (including non-voting shares) at a comparable (“fair”) price by any legal definition that the country laws provide, or if by law companies are constrained to have only one class of shares listed; 0 otherwise.

# _4.4. Tender offer notice_

Disclosure during a tender offer is one of the vitally necessary conditions for takeover laws to function properly and be effectively enforced. There is a dearth of empirical evidence on the effect of tender offer disclosure; however the literature abounds with data showing the positive effect of disclosure and transparency in general on listed companies.<sup>21</sup> Tender offer disclosure mainly consists of the public notice announcing the tender offer terms and conditions, any disclosure during the offer on changes of terms or competing offers, as well as an announcement of the offer results. The tender offer notice is usually published in the business or official press as well as filed with the regulator, together with the offer documentation (the prospectus).<sup>22</sup> Two further elements of disclosure are important for the smooth functioning of the tender offer. First, the bidder needs to be able to obtain a full and up-to-date list of the target’s shareholders, promptly after announcing intentions to make a tender offer. Second, the board of directors of the target company may be mandated to express a public opinion on the desirability of the offer for the target shareholders.

Table 1 Disclosure in tender offer prospectus

|Very incomplete<br>or nonexistent|Armenia, Azerbaijan, China,<br>Colombia, Ecuador, Egypt,<br>Jordan,Peru, Uruguay|
|---|---|
|Incomplete|Argentina, Czech Republic,<br>Ghana, India, Indonesia, Nigeria,<br>Pakistan,Turkey|
|Average|Austria, Belgium, Bulgaria, Chile,<br>Finland. Korea, Lithuania.<br>Malaysia, Mexico, Philippines,<br>Poland, Sri Lanka|
|Detailed|Brazil, France, Germany, Greece,<br>Israel, Italy, Kenya, South Africa,<br>Switzerland|
||Australia, Canada, Hong Kong,<br>Japan, Netherlands, Singapore,|
|Very detailed|Spain, Sweden,Thailand, UK, US|

Nearly all countries with tender offer rules Israel, Italy, Kenya, South Africa, provide basic prospectus information such Detailed <u>Switzerland</u> as the identity of the bidder (that also Australia, Canada, Hong Kong, depends on the quality of ownership Japan, Netherlands, Singapore, disclosure) and bidder financial information. <u>Very detailed Spain, Sweden, Thailand, UK,</u> Of course, all laws mandate the mention of the offer terms and conditions, such as the number of shares and the price, whether the offer is conditional or partial, date of start and end of offer, and the broker managing the process. There is wide divergence, however, among countries when one focuses attention on further disclosure beyond basics. Table 1 divides countries in disclosure categories, according to four disclosure criteria that go beyond basic prospectus information (see the index definition below).

The variable we form, _the mandatory offer disclosure index_ , is a simple average of four 0/1 indicators of whether the following disclosures are required in the tender offer prospectus for 11
a mandatory offer or not. In the absence of mandatory offer rules, the variable refers to any tender offer rules provided by law, and takes the value of 0 if no such rules exist. The components are:

- past contracts, transactions and agreements between acquirer and target;

- estimated consequences to bidder's shareholders (if a corporation);

- target board opinion;

- proof of sources of financing for the offer.

# _4.5. Tender offer procedure, rules applicable following the offer, and aggrieved shareholder recourse_

In order to prevent formation of a fake market for the target shares and to protect the interests of the minority shareholders of the target company, once the offer has been publicly announced, the law prescribes short time limits prior to the start of the offer, such as deadlines for filing the offer document with and inspection from the authorities, publications and notifications.<sup>23</sup> It is important for the smooth functioning and stability of the control market that the bid be firm and not subject to change.<sup>24</sup> Typically, tendered shares need to be deposited with the broker or the central depository institution, in which case it becomes important that the law clearly determines the date when the tender transaction becomes final.<sup>25</sup> Typically, bidders are prohibited from purchasing shares on the stock exchange during the tender offer acceptance period.<sup>26</sup> Following the conclusion of the offer, the bidder discloses the number of shares tendered, the number of shares acquired, the pro rata factor if applicable, and the ownership share achieved as a result of the offer, within a certain time prescribed by the law. The law may limit further post-offer acquisitions, tender offers, or even open market purchases by the bidder, in order to assure equal treatment to all shareholders.<sup>27</sup> A popular minority protection is the right to sell one’s shares at the tender offer price, even after the end of the tender offer period. A little less than a third of all countries offer this right to investors. Such a protection, effectively playing the role of an “appraisal right” in the limited case of tender offers, permits shareholders to wait and see the final offer result before they decide whether to withdraw from the corporation.<sup>28</sup> More generally, the appraisal right rule is an important investor protection mechanism that most national legislatures provide for, following major corporate decisions. It allows aggrieved/ dissenting shareholders to sell their shares back to the corporation after fundamental changes in the company, such as the change in control, a merger, a going private decision, change in the nature of the business or the company deeds, etc. Appraisal rights specifically following a merger are mandated in about half of the countries studied. It is important to provide for a “fair” price at which appraisal rights are exercised, usually based on an average of past market prices.<sup>29</sup> About one-third of the countries legislate fair pricing. An even more powerful mechanism which addresses aggrieved shareholder issues is the oppressed minority recourse.<sup>30</sup> Since tender offer procedure rules are fairly uniform across countries, we do not code any variables on procedure. The variables we form are defined as follows: 12
- _Fair price for non-tendering investors_ – The variable equals 1 if shareholders who did not tender during the term of the offer have the right for a given period after the offer to be bought out at the same terms, 0 otherwise.

- _Appraisal rights after a merger_ – The variable equals 1 if appraisal rights are available, at market or otherwise “fair” price, to shareholders who abstained or dissented from a merger at the annual shareholder meeting where the merger was approved; 0 if appraisal rights are available at book value, or the law does not specify the price, or if appraisal rights are altogether unavailable by law, even if an oppressed minority redress mechanism is available in the country.<sup>31</sup>

# _4.6. Rules for taking the company private_

Taking private regulations typically involve a certain threshold of approval by the general shareholder meeting (e.g. 75% as in Nigeria). Not infrequently, the market for company shares is weak at this level of ownership concentration, and there is a supermajority owner. The 25% minority shareholders have very little effect on corporate decisions, if any. In order to assure their fair treatment, the law makes elaborate provisions for taking the company private. In certain cases, such a procedure needs to be carried out via a public tender offer, where all national tender offer regulations fully apply (e.g. in Malaysia). Related rules provide for the right of shareholders to require the super-majority owner to buy their shares – “a sell-out right”, usually at a level of ownership around 90%. The price of such sell-out rights may be determined by the law, and may be based on some definition of fair valuation.<sup>32</sup> Sell-out rights are found to have a positive effect on efficiency and minority interests.<sup>33</sup> The variables we form are defined as follows:

- _Range where intention to take private is known_ – the range where the intention of a shareholder to take the company private is publicly known. It varies between 0 in countries with no such disclosure (e.g. Jordan and Ecuador), to 95% in countries such as the USA, where at 5% ownership disclosure shareholders must state their intentions (if any) to acquire control or take the company private.

- _Sell-out provisions_ – the variable takes the value of 1 if minority shareholders can require the majority owner to buy them out at a certain level of ownership (usually 90% or more), and the law provides for some measure of a market (“fair”) price for the sell-out; 0 if sell-out rights exist at book value or no price is specified in the law, or such rights are not regulated by law at all.

# _4.7. Allowable anti-takeover mechanisms_

Perhaps the most notorious tactic has become the poison pill, though it is by far not the most commonly used one around the world.<sup>34</sup> Some of the more exotic tactics include greenmail, litigation, Pac man defense, scorched-earth, safe harbor, and golden parachutes. One of the 13
most benign tactics allowed by law in virtually all countries around the world is a negotiation with an alternative friendly acquirer – white knight or white squire.<sup>35</sup> Poison pills and other sophisticated defenses are popular almost nowhere outside of the US, and are especially rare in emerging and in less active markets. In some countries, they are simply not needed, as less sophisticated defenses to takeover exist, e.g. Argentina and Switzerland. In others, general liability provisions, equal treatment rules, and duties to act in the interest of the company may render poison pills unacceptable, even if they are not outlawed, e.g. Austria and Brazil.<sup>36</sup> For example, in Turkey, the average listed company is family-controlled at the 80% level.<sup>37</sup> In such cases, concentrated ownership replaces effectively any and all other anti-takeover defenses. In cases where companies still feel vulnerable to a hostile attack, other simple anti-takeover tactics have been used, such as limitations in outsider governance powers or defensive corporate control structures.

A company could undertake many fully legal actions that would reduce its attractiveness. In this case, shareholders lose the opportunity to consider the tender offer and perhaps benefit from it. To the extent that hostile bids can offer a higher value to minority shareholders, as a vast body of literature shows,<sup>38</sup> they are beneficial for investors, and should not be fended off by a defensive management or a large shareholder. For that reason, takeover codes may ban all actions that frustrate a takeover offer (a blanket prohibition), or enumerate specific bans on corporate defense actions, allowing them only with general shareholder approval. Such rules may nevertheless fail to stall anti-takeover defenses adopted well in advance of an actual takeover threat, since the law does not subject preventive defenses to the clearance of current shareholders at the time of takeover.<sup>39</sup> That could hurt minority interests by lowering the incidence of control changes, as the case of France illustrates.<sup>40</sup> There are several approaches to limiting anti-takeover efforts. The most fool-proof legal limitations stem from director liability, equal treatment, and minority oppression rules. A classic example is the UK City Code.<sup>41</sup> The filter is so strict that in practice only “white knight” tactics are allowed as a defense against hostile takeovers (Canada and Singapore are examples here).<sup>42</sup> Fiduciary provisions may be less effective in countries with a weak judiciary. The alternative approach of clear-cut legislative bans on specific defensive actions may be more effectively enforceable in countries where courts are slow and lack specialization.<sup>43</sup> In part, the difficulty of limiting anti-takeover tactics in practice is the multiplicity of mechanisms that can be used, as well as the constant creativity of companies in fashioning new ones. We review below some common tactics that have proven to be most frequently encountered in a mix of vibrant and underdeveloped capital markets and legal environments.

# _4.7.1. Defensive recapitalizations and changes of the asset structure_

One way for a company to avoid a takeover is to make a major change in its capital structure. For example, the company can issue large volumes of debt, buy back shares,<sup>44</sup> or go private through a leveraged buy out. Alternatively, the target company can issue more stock, making it more expensive for the acquirer to gain control, as this requires the purchase of more shares as compared to before the share issue. Typically, defensive share issues during a 14
takeover are only allowed with shareholder approval, as in Singapore, and India.<sup>45</sup> Some countries outright forbid such issues, as Bulgaria.<sup>46</sup> Finally, the target company can sell off assets and render itself less attractive to the acquirer. Typically, the law prescribes prior shareholder approval of material asset sales. Such approval rule exists at all times (e.g., shareholders approve all sales of at least 20% or 50% of assets). In the presence of a takeover threat, the threshold may be lower.<sup>47</sup> A little less than half of the sample countries either forbid share issues and asset sales during a takeover, or require shareholder approval.

# _4.7.2. Defensive limitations in governance powers_

A potential acquirer can be discouraged by “crippling” his/her ability to govern the company even after a majority of the shares have been acquired. One example of such tactics is voting rights, or limitations on the amount of votes a given shareholder can cast (irrespective of their level of share ownership). Those are present in 56% of the sample countries.<sup>48</sup> A further technique which is frequently used is golden shares, or special decision-making or veto rights granted to certain shareholders, usually the state.<sup>49</sup> Yet another mechanism used to curb the power of the acquirer to govern are various limitations on modifying the board structure. Thresholds for director removal can be increased to make board changes more difficult.<sup>50</sup> Staggered boards could delay the acquirer’s ability to change the board of directors after control acquisition.<sup>51</sup> A particularly powerful defense is a restriction on the free transferability of shares, such as allowing the target board the right to refuse ownership to a purchaser of shares. In 16% of the sample countries the law allows share transfers to be restricted. A company using such share transfer restrictions may only be successfully taken over if the bidder has registered sufficient votes both to amend the relevant provisions of the articles of incorporation and to replace the board of directors refusing registration. Share transfer restrictions and voting caps can be further entrenched by imposing special majority requirements for their removal from the company articles of incorporation.<sup>52</sup>

# _4.7.3. Defensive ownership and control structures_

Shareholder agreements bind several owners to common decision-making, voting unanimously, and acting in concert, as well as limiting share trading without, for example, the consent of all other contractual parties. Multiple classes of shares enable the controlling shareholder to keep a majority of the votes with a lower level of capital commitment than the requisite 50%. In Argentina, companies can introduce a divergence between ownership and control by issuing negotiable obligations, participation bonds, non-voting shares or multiple vote shares. Pyramid ownership structures function in a very similar way to deviations from one share one vote, by permitting an owner to control a company with a small amount of capital.<sup>53</sup> In South Africa, the pyramid ownership structures had led to such ownership concentration that the JSE Listings Requirements forbade the listing of pyramid companies and their subsidiaries. Cross-shareholdings also permit a corporation to be controlled with less than 50% of capital. Cross shareholdings are especially popular in East Asia, e.g.

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Japan.<sup>54</sup> About a quarter of the sample countries do not use ownership structures that separate ownership from control.

The index component we form is defined as the average of:

- 1 if it is forbidden by law to issue shares during a tender offer or if it requires shareholder approval, 0 otherwise;

- 1 if it is forbidden by law to sell major assets during a tender offer or if it requires shareholder approval, 0 otherwise;

- 1 if it is forbidden by law to use voting caps, 0 otherwise;

- 1 if it is forbidden by law to restrict share transferability, 0 otherwise;

- 1 if it is forbidden by law to use golden shares, 0 otherwise;

- 1 if shareholder agreements are not frequently used, 0 otherwise;

- 1 if at least two of the following three mechanisms are not frequently used among listed companies: multiple classes of shares, pyramid ownership structures, cross-shareholding ownership structures, 0 otherwise;

# _4.8. Coding the index – the special case of the US_

As an example of the coding of the takeover index, take the case of the US. The US is also noteworthy since its takeover rules and especially anti-takeover defenses are atypical as compared to an international selection of countries.

US takeover provisions are relegated to the states (some provisions are imposed by dint of the federal level securities law). There is no mandatory offer at any level of ownership (coded as 0). Ownership disclosure is at 5% of any class, where also intention to control or to take private is disclosed, so the range where this information is available is 100%5%=95%.<sup>55</sup> If the investor intends to vie for control or owns up to 20% of a class of equity securities, the price of all deals needs to be disclosed including off-exchange deals (coded as 1).<sup>56</sup> Takeover rules apply to registered and unregistered securities (including securities issued by a private company), irrespective of whether the target company is a public company (coded as 1). Fair price provisions, mandating that an acquirer pay the same price to minority as the highest price he has paid for

|the shares in the recent past, are available by<br>statute (in 27 states), or by charter (40% of|Mandatory offer range<br>Range where intention to control is known|0<br>0.95|
|---|---|---|
|the Fortune 500 companies have such a|Range where intention to take private is known|0.95|
|provision in their charter) (coded as 0.5 due<br>|Off-exchange price disclosed|1|
|to the lack of universal application).<sup>57</sup>There|Rules apply to non-listed firms|1|
|is no law to mandate the same price be|Fair price for minority|0.5|
|extended to share classes with lower voting|Fair price for all classes|0|
|rights (coded as 0).|||
|Disclosure mandated during tender offers in|Mandatory offer disclosure index|1|

Disclosure mandated during tender offers in the US is strict. A bidder must file a tender offer registration statement with the SEC and all stock exchanges, and deliver a copy to the target company and any other bidders, as well as to all target shareholders. The bidder is provided relatively easy access to the shareholder list of the target company (via the courts).

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The target management gives an opinion to shareholders within 10 days of publication. The bidder’s disclosure must contain all material information related to the offer, including interest of the bidder in the target; the bidder identity and ownership; future plans regarding the target company; past contracts, transactions and agreements between acquirer and target; the estimated consequences to the bidder's shareholders; and the source and amount of funds involved. The latter three items of information, together with the requirement for target board opinion, lead us to code the US disclosure variable as 1. The information should be available to target shareholders within 3 days of the announcement of the tender offer, at the bidder’s expense.<sup>58</sup>

|If an acquirer tenders publicly for the shares,|Fair price for non-tendering investors|1|
|---|---|---|
|he must offer the same terms to any wiling|Appraisal rights after a merger|1|
|shareholders within 20 days of the end of|Sell-out provisions|1|
|<br>the offer (coded as 1).<sup>59</sup>All state laws|||

provide appraisal rights to shareholders after a merger, giving them the option to dissent and sell their shares at a fair market price (coded as 1). Sell-out provisions mandate the provision of detailed information from the company addressing whether the filing persons believe the transaction is fair to unaffiliated security holders and why (coded as 1).<sup>60</sup> On anti-takeover provisions, the US Anti-takeover tactics 0.71 averages 71% out of 100 (the average is computed on 1, 1, 0, 0, 1, 1, 1, as follows). Share issues and asset sales are not forbidden during a tender offer, but do require shareholder approval (each coded as 1), voting caps and golden shares are allowed (each coded as 0), shares are freely transferable (coded as 1), shareholders agreements are not frequently used among listed companies (coded as 1), listed companies are mostly one-vote-one-share, and pyramids and cross-shareholdings are not frequent (coded as 1). The anti-takeover variable is particularly deficient at capturing the true extent of anti-takeover provision popularity in the US, since the tactics used in the country are fairly less typical (such as poison pills, which are endorsed in 25 US states, and staggered boards, both a virtually unknown phenomenon in emerging markets) across the sample of less developed capital markets.<sup>61</sup> In the majority of the countries around the world, however, anti-takeover tactics are still as simple as maintaining concentrated ownership or using voting caps and transferability restrictions. Keeping in mind the bias (which leads us to exclude the US from regressions as a robustness check), we nevertheless have chosen this methodology since the alternative would understate the extent of anti-takeover defenses in a significant part of the sample countries.

The overall takeovers index is obtained by a simple <u>average of the above 12 characteristics,</u> rendering a value of 0.76. **Takeover index**

|**Takeover index**<br>**0.76**|
|---|

# **5. Data and Empirical results**

The takeover laws questionnaire (see Appendix D) was constructed in cooperation with experts in takeover issues in nine pilot countries, Bulgaria, Chile, France, Germany, Japan, 17
Lithuania, Nigeria, Switzerland, and the USA. The pilot countries were chosen to represent a diverse regional and income-level mix, in order to capture a wide range of potential takeover issues. Based on the pilot questionnaire, the concepts and information involving rules on minority protection and regulations affecting the frequency, ease and cost of control changes, were isolated. The legal provisions were grouped in 12 clusters of variables (see the definition of all variables in Table 2). Data for each selected legal provision was then collected for 50 countries (the list of countries together with essential market characteristics is listed in Table 3, and legal data sources are presented in Appendix E). The methodology covers the possible approaches for both friendly and hostile takeovers of a company.

The 12 index components characterizing takeover laws around the world are presented in Table 4. The takeover laws index is a simple average of these 12 characteristics (last column of Table 3). As collected, the data can answer such questions as “Do securities laws matter for development?”, “Which regulations are “good” for investors, or for private sector growth?”, and “Are different rules substitutable in their ability to achieve particular policy goals?”. The exploration of the effect of specific takeover regulations on corporate value and markets is relegated to further research; this section limits itself to illustrating the overall importance of takeover laws to capital market breath and depth, over and above the effect of the general quality of the legal environment, and the prevailing level of investor protection.

Panel A of Table 5 shows the correlations among the 12 components of the takeover laws index. Overall, takeover rules seem highly correlated, indicating that national takeover laws that provide stricter investor protection would do so across the board on all takeover rules. An exception from this tendency concerns the choice of national legislations on extending takeover provisions to non-listed firms, which is not as strongly correlated to the strictness of overall takeover provisions. This pattern underlies the typical national legal structural separation between a capital markets law and a corporations law. Reformers of the former may not necessarily amend the latter law, thus limiting legal protections to capital markets investors, to the exclusion of private company shareholders, with a resulting lack of correlation of indicators. The same is true for appraisal rights and sell-out provisions, which are also typically legislated in the corporations law, not in capital markets regulations.

Note that some rules can exhibit a low correlation due to their high degree of substitutability. For example the correlation between appraisal rights after a merger and sell-out provisions is 17%. Typically, appraisal rights are provided to minority shareholders in general, not specifically after a merger, and serve to permit the shareholder to sell his/her shares back to the corporation in case of dissent. This includes the right to sell shares to the corporation following a decision to go private. The purpose of sell-out provisions is largely the same, and for the specific case of going private, these two rights are substitutes. The choice of the legislator to adopt one or the other is largely a function of whether the country uses a common law approach (where appraisal rights are a standard feature), or a civil law framework.

Figures 1-3 provide an initial glimpse into the variation of takeover law quality across countries. Richer countries are associated with more elaborate pro-minority rules during changes in control. Countries with more listed companies and bigger capital markets are also 18
those with stricter investor protection during takeovers. Finally, tougher takeover laws do decrease control values, but do not appear to dampen takeover activity.

Panel B of Table 5 confirms these initial impressions. It shows correlations of the takeover law index with various indicators of market development, efficacy of takeover activity, and general quality of the legal environment. The takeover law index is associated with capital market breath and depth, particularly with a high market valuation and active trading, and less strongly with the number of listed firms on the market. This is not a statistical test of causality or a measure of comparable effect of takeover law on various market characteristics; however, it seems to suggest the plausible hypothesis that takeover laws improve the overall corporate value and attractiveness of listed shares, and that effect comes from making each company more valuable, not just increasing the number of listed companies. Further testing can determine the validity of such a hypothesis. Another interesting hypothesis concerns the effect of stricter takeover regulations on the companies’ decision to list.

This study confirms the negative relation between the takeover premium and the quality of takeover laws. The takeover law index is negatively correlated with measures of the value of corporate control or takeover premium, such as those of Dyck and Zingales (2004), Nenova (2003), and Rossi and Volpin (2004).<sup>62</sup> The strong correlation shows that the value of control to the dominant owner (not to dispersed investors) is lower where takeover laws are stricter in their protection of minority investors. This conclusion is reassuring in demonstrating that minority takeover protections are indeed effective in national legislations.<sup>63</sup> The takeover index is significantly and positively correlated with the level of takeover activity, as measured by the volume of takeovers, as well as the share of hostile deals (Rossi and Volpin 2004). Finally, takeover law as captured by the index is highly positively correlated with both rule of law (66%) and investor protection as measured by La Porta et al (1998) (52%).

Table 6 tests the effect of takeover regulations on market development in a regression framework. The table presents regressions of capital markets depth and breath measures on the takeovers law index controlling for general level of development, with or without controlling for the overall quality of the legal system and for general investor protection quality. The regressions in columns 1 and 4 of the upper panel and column 1 of the lower panels demonstrate a significant positive effect of takeover laws on the number of listed companies, market capitalization, and value traded on the stock exchange. Regressions using equity markets turnover (not presented) deliver similar results. The table also shows that good takeover laws positively impact the volume of control change deals, as well as the incidence of hostile deals and cross-border transactions (columns 4-6 of the lower panel). To illustrate the economic meaning of the regressions, column 4 of the upper panel shows that an introduction of one of the 12 takeover rules (mandating disclosure of prices on offexchange trades, or regulating appraisal rights after a merger, for example) will change that component value from 0 to 1 and increase the index by 1/12<sup>th</sup> , or 0.083, thus contributing to an increase in stock market capitalization of 13% of GDP. In the case of Mexico, this means a jump in stock market value by 50%!

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We control for the general quality of the legal framework using the variable “Rule of Law” from the International Country Risk Guide (columns 2 and 5 of the upper panel and column 2 of the lower panel). Takeover laws may not have a specific causal effect on stock markets on their own, but only proxy for the overall level of legal development in the country. Countries with well-functioning courts and a high general level of law and order will perforce have better developed markets. Failing to control for the general rule of law will permit the entire effect of good laws to be attributed to takeover laws alone, overstating their significance. Using alternative measures of the quality of laws renders similar results. Controlling for the overall quality of laws actually increases the effect of takeover provisions on capital market development, while leaving the significance of the takeover law coefficients undisturbed.

Columns 3 and 6 of the upper panel and 3 of the lower panel explore further the question of which specific laws matter. For that purpose, the regressions introduce the La Porta et al (1998) variable, anti-director rights, which measures the extent of overall minority investor protection in a country, across 49 countries around the world.<sup>64</sup> The close relationship between some of the components of the anti-director rights and the takeover law indices creates collinearity problems which biases the coefficients and impairs their interpretation. More complex analyses are needed to carefully avoid this problem (such as ridge regression), which falls beyond the scope of this paper. Here, we will limit ourselves to noting that investor protection has a positive and largely significant effect on market development. When the general investor protection measure is included, the takeover index remains significant.

All regressions control for the level of country development, since it is a well-established fact that more developed countries boast more active and well-functioning capital markets. Including the level of country development in the regression avoids attributing to takeover laws the beneficial effect of high national income on capital markets. The control variable is the natural logarithm of income per capita (Atlas method). The regressions show that it has a positive and significant effect on market development (PPP income measures deliver identical results). These and all further tests have been repeated without the US, as well as with the variation of measuring the mandatory offer component of the takeover index as an indicator dummy. The results are not materially affected by those alternative specifications.

In sum, Table 6 shows that takeover laws have a considerable and economically important effect on market development, and are beneficial for minority investors by helping them share some of the value released during acquisitions. This effect is robust to the general level of national economic development, as well as the overall quality of the legal system. Moreover, the effect is specific to takeover laws, and cannot be attributed to the investor protection provided in other legislations relevant to corporations and capital markets.

Table 7 relates takeover laws to measures of the value of corporate control and the takeover premium. Stricter takeover laws are found to have a significant negative effect on the private benefits of the controlling corporate owner (columns 1-4), showing that indeed takeover laws do help share some of the corporate value with minority shareholders. This is especially important in emerging markets, where other mechanisms of transmitting value to minority 20
investors may be limited (e.g. limited payment of dividends or inhibited capital gains due to liquidity constraints). Controlling for the overall quality of the legal framework and for the level of country development leaves the significance of this relationship unaltered.

Column 5 relates the takeover law index to the Rossi and Volpin (2004) takeover premium measure. The negative relationship found for the other measures of control value is maintained in the case of the R-V04 takeover premium, but lacks significance. As a caution, the R-V04 measure, as constructed, is interpreted to capture takeover gains for all shareholders, not only for the controlling owner. Since takeover laws have been coded in this study with an eye to minority protection, they would be expected to correlate positively with minority gains and negatively with control owner gains. The direction of the relationship with total gains is thus not clearly defined. Rossi and Volpin (2004) do find a negative relationship between their takeover premium measure and a variable proxying takeover law (specifically, an indicator variable for the presence of a mandatory offer rule).

Rossi and Volpin (2004) also find that takeovers tend to be paid for entirely by cash in countries with lower investor protection. This is supported by Table 7 as well, where we see a negative relationship between stricter takeover laws and the chance of a cash-financed offer (column 6). The coefficient is marginally insignificant. R-V04 interpret this finding as indicating that stocks are less popular as means of payment in countries with lower investor protection because stocks entail a higher risk of expropriation.

Table 8 illustrates an alternative use of the takeover laws variable, in answering policy questions on binding constraints for control market functioning. Control changes have been frequently noted to suffer from rigid labor laws, especially costly employee dismissals. This would especially hold if takeover gains are expected from restructuring a poorly governed or inefficiently-run company. Relating takeover volume and other indicators of control change activity to labor market laws as well as takeover laws shows that the preeminence of the latter as a determining factor.

# **6. Conclusion**

Although acquisitions may differ across countries in their frequency and nature, corporate control transactions occur in all markets, in the natural growth cycle of a company, or for reasons of improving company value and benefiting from synergies between the acquirer and target. Takeover laws have been instituted to ensure an orderly process of changes in control, their transparent conduct, and equal opportunities for all investors, and in so doing, laws redistribute corporate value between the parties vying for control and the minority investors. The value involved is in practice considerable. The paper overviews takeover regulations in 50 developed and emerging markets around the world. The study uncovers the tradeoffs in selecting an appropriate set of takeover laws and regulations, determining the frequency and ease (cost) of acquisitions, their corporate governance (sentinel) functions, and the division of gains among controlling owners and minority investors.

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Even a simplistic view of regulations in a specific area, such as takeovers, presents an entangled body of law which is difficult to quantify. This paper presents a methodology for quantifying the takeover laws in a functional and detailed manner that permits analyses of the impact of the law on market development, as well as the exploration of the interplay among its component rules and their effect on corporations and markets. The study is also the first to analyze takeover laws cross-country, complementing the existing literature of single-country studies. This work relates the takeover law measure to existing cross-country measures of takeover market outcomes. As an illustration of the possible applications of the new legal index, some simple regressions are presented. Clearly more analysis is needed in this respect.

Takeover laws affect the depth and breath of capital markets and direct corporate value to investors. This effect is robust to the general level of national economic development, and the overall quality of the legal system, and is specific to takeover laws (as opposed to the general level of investor protection). The subject of securities regulation is vast, and further research is needed to explore the linkages among stock market regulations, investor protection, and market development.

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# **Figure 2**

<!-- Start of picture text --> Richer countries protect minorities more during takeovers<br><!-- End of picture text --> <!-- Start of picture text --> 45,000<br>40,000<br>35,000<br>30,000<br>25,000<br>20,000<br>15,000<br>10,000<br>5,000<br>0<br>0 0.2 0.4 0.6 0.8 1 1.2<br>Takeover index<br>Income per capita<br><!-- End of picture text -->

# **Figure 3**

<!-- Start of picture text --> Better protection of minorities during takeovers occurs in coutnries<br>with more listed companies...<br>10.00<br>9.00<br>8.00<br>7.00<br>6.00<br>5.00<br>4.00<br>3.00<br>2.00<br>1.00<br>0.00<br>0 0.2 0.4 0.6 0.8 1 1.2<br>Takeover index<br>...and larger stock makrets<br>600<br>500<br>400<br>300<br>200<br>100<br>0<br>0 0.2 0.4 0.6 0.8 1 1.2<br>-100<br>Takeover index<br>Number of listed companies, ln<br>Stock market capitalization (% of GDP)<br><!-- End of picture text --> 29
# **Figure 4**

## **Control is not as valuabvle in countries with better protection of minorities during takeovers...**

<!-- Start of picture text --> 0.7<br>0.6<br>0.5<br>0.4<br>0.3<br>0.2<br>0.1<br>0<br>0 0.2 0.4 0.6 0.8 1 1.2<br>-0.1<br>Takeover index<br>... but does not dampen the volume of takeover activity<br>70.00<br>60.00<br>50.00<br>40.00<br>30.00<br>20.00<br>10.00<br>0.00<br>0 0.2 0.4 0.6 0.8 1 1.2<br>Takeover index<br>Control value (Dyck-Zingales)<br>Control value (Dyck-Zingales)<br><!-- End of picture text --> 30
**Table 2**

# **<u>Definitions of variables</u>**

|_Variable_|_Definition_|
|---|---|
|Mandatory offer range|The range where the owner can only acquire shares via a tender offer, e.g. if any<br>owner above 30% must make a mandatory offer, the variable will take the value of<br>70%. As another example, if any owner above 30% can only increase his/her<br>stake by declaring a partial tender offer, the variable will take the value of 70%.|
|Range where intention to control is<br>known|The range where the owner must disclose his intentions to acquire control, e.g. if<br>any owner above 15% must declare whether it is his/her intention to attempt to<br>acquire control, the range is from 15% to 100%, or 0.85.|
|Range where intention to take private<br>is known|The range where the owner must disclose his intentions to take the company<br>private, e.g. if any owner above 30% must declare whether it is his/her intention to<br>take the company private, the range is from 30% to 100%, or 0.70.|
|Off-exchange price disclosed|The variable takes the value of 1 if the price at which off-market deals are<br>concluded is publicly disclosed or if off-market purchases are banned, 0 otherwise.|
|Rules apply to non-listed firms|1 if any public offer rules (rules for mandatory or partial offers, or taking private<br>rules) apply to private firms, 0 otherwise.|
|Fair price for minority|1 if the mandatory offer is restricted by law to offer some measure of a market<br>price (usually an average of the past several months of trading), 0 otherwise.|
|Fair price for all classes|1 if the mandatory offer (or tender offer, in the absence of mandatory offer rules<br>by law) must be for all classes (including non-voting classes) at a comparable<br>(“fair”) price by any legal definition that the country laws provide, or if by law<br>companies are constrained to have only one class of shares listed; 0 otherwise.|
|Offer disclosure index|The average of: (1) 1 for disclosure of past contracts, transactions and agreements<br>between acquirer and target, 0 otherwise; (2) 1 for disclosure of the estimated<br>consequences to bidder's shareholders (if a corporation), 0 otherwise; (3) 1 for<br>disclosure of the target board opinion, 0 otherwise; (4) 1 for disclosure of the proof<br>of sources to finance the offer, 0 otherwise. This refers to disclosure in the public<br>offer prospectus of a mandatory offer (in the absence of mandatory offer rules, it<br>refers to any tender offer rules; 0 if no such rules exist.|
|Fair price for non-tendering investors|1 if shareholders that did not tender during the term of the offer have the right for a<br>given period after the offer to be bought out at the same terms, 0 otherwise.|
|Appraisal rights after a merger|1 if withdrawal rights are available to shareholders who abstained or dissented<br>from the merger at the annual shareholder meeting where the merger was<br>approved, if withdrawal rights are available at a market price; 0.5 if the same<br>withdrawal rights are available, but at book value (or the law does not specify the<br>price), 0 if the law does not provide for withdrawal rights.|
|Sell-out provisions|1 if minority shareholders can require the majority owner to buy them out at a<br>certain level of ownership (usually 90% or more), and the law provides for some<br>measure of a market (“fair”) price for the sell-out; 0.5 if sell-out rights exist, but at<br>any price (usually book value); 0 otherwise.|
|Anti-takeover tactics|The average of: (1) 1 if it is forbidden by law to issue shares during a tender offer<br>or if shareholder approval is needed, 0 otherwise; (2) 1 if it is forbidden by law to<br>sell major assets during a tender offer or if shareholder approval is needed, 0<br>otherwise; (3) 1 if it is forbidden by law to use voting caps, 0 otherwise; (4) 1 if it<br>is forbidden by law to restrict share transferability, 0 otherwise; (5) 1 if it is<br>forbidden by law to use golden shares, 0 otherwise; (6) 1 if shareholder<br>agreements are not frequently used, 0 otherwise; (7) 1 if at least two of the<br>following three mechanisms are not frequently used among listed companies:<br>multiple classes of shares, pyramid ownership structures, cross-shareholding<br>ownership structures, 0 otherwise.|

31
# **Table 3**

# **Basic economic indicators and the takeover law index**

|Country|Income per<br>capita 2004<br>(USD$)|Number of listed<br>companies, 2004|Market capitalization of<br>listed companies (% of<br>GDP) 2004|Stocks traded,<br>total value (% of<br>GDP) 2004|Takeover<br>index|
|---|---|---|---|---|---|
|ARGENTINA|12,723|129|30.65|5.04|0.33|
|ARMENIA|4,222|213|0.51|0.05|0.16|
|AZERBAIJAN|4,175|234|.|0.02|0.06|
|AUSTRALIA|30,116|1,649|122.99|81.46|0.95|
|AUSTRIA|32,176|129|29.58|8.21|0.51|
|BELGIUM|31,009|106|219.64|20.09|0.60|
|BRAZIL|8,297|367|54.62|15.47|0.51|
|BULGARIA|8,007|342|11.62|2.12|0.31|
|CANADA|31,129|3,756|120.18|66.74|0.97|
|CHILE|<br>11,487|<br>240|124.40|12.32|0.57|
|CHINA|5,495|1,296|38.79|45.37|0.53|
|COLOMBIA|7,121|120|25.90|1.50|0.04|
|CZECH R|19,381|63|28.83|16.50|0.71|
|ECUADOR|3,885|30|8.52|0.33|0.06|
|EGYPT|4,103|824|51.25|7.46|0.07|
|FINLAND|29,816|147|98.48|117.93|0.72|
|FRANCE|29,077|772|92.74|65.50|0.65|
|GERMANY|28,147|715|44.01|51.80|0.45|
|GHANA|2,316|25|30.67|0.76|0.29|
|GREECE|21,954|341|61.57|21.38|0.44|
|HONG KONG|30,779|968|528.49|269.30|0.92|
|INDIA|3,115|5,644|56.06|54.79|0.51|
|INDONESIA|3,583|333|28.43|10.70|0.32|
|ISRAEL|24,082|576|81.25|39.33|0.50|
|ITALY|28,162|295|47.21|48.10|0.47|
|JAPAN|29,539|3,058|79.56|74.20|0.72|
|JORDAN|4,571|191|164.20|47.59|0.05|
|KENYA|1,063|51|24.94|2.07|0.36|
|KOREA|20,371|1,563|63.07|94.00|0.59|
|LITHUANIA|13,021|48|29.03|2.08|0.55|
|MALAYSIA|9,760|897|161.33|50.84|0.66|
|MEXICO|9,774|159|25.42|6.33|0.39|
|NETHERLANDS|32,056|180|107.80|104.67|0.47|
|NIGERIA|1,113|200|20.06|2.31|0.36|
|PAKISTAN|2,210|663|30.17|76.86|0.31|
|PERU|5,641|197|29.41|1.65|0.16|
|PHILIPPINES|4,558|234|33.49|4.24|0.39|
|POLAND|12,881|203|29.40|6.85|0.58|
|ROMANIA|8,342|4,484|16.11|1.29|0.42|
|SINGAPORE|27,273|434|160.60|76.12|0.89|
|SOUTH AFRICA|11,190|426|214.09|76.53|0.76|
|SPAIN|<br>25,341|2,986|94.88|120.50|0.60|
|SRI LANKA|4,173|244|18.23|2.90|0.37|
|SWEDEN|<br>29,499|278|108.77|119.06|0.62|
|SWITZERLAND|33,541|258|229.74|202.28|0.59|
|THAILAND<br>|8,179<br>|405<br>|70.58<br>|66.74<br>|0.55<br>|
|TURKEY|7,710|294|32.55|48.82|0.25|
|UK|30,843|1,701|131.53|173.16|0.94|
|URUGUAY|9,465|11|2.51|0.00|0.04|
|USA|39,618|5,685|139.91|165.89|0.76|

32
# **Table 4.**

# **Components of the takeover law index**

|Country|Mandatory<br>offer range|Range where<br>intention to<br>control is<br>known|Range where<br>intention to<br>take private<br>is known|Off-<br>exchange<br>price<br>disclosed|Rules<br>apply to<br>non-listed<br>firms|Fair price<br>for<br>minority|Fair price<br>for all<br>classes|Offer<br>disclosure<br>index|Fair price<br>for non-<br>tendering<br>investors|Appraisal<br>rights after<br>a merger|Sell-out<br>provisions|Anti-<br>takeover<br>tactics|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Argentina|0.49|0.50|0.25|0|0|1|0|0.25|0|0|1|0.43|
|Armenia|0|0.50|0.25|0|0|0|0|0|0|1|0|0.14|
|Azerbaijan|0|0.50|0|0|0|0|0|0|0|0|0|0.17|
|Australia|0.80|0.80|0.80|1|1|1|1|1.00|1|1|1|1.00|
|Austria|0.70|0.70|0.70|n.a.|0|1|1|0.50|1|0|0|0.00|
|Belgium|0.50|0.80|0.80|n.a.|1|1|1|0.50|1|0|0|0.00|
|Brazil|0.67|0.95|0.67|1|0|0|1|0.67|1|0|0|0.14|
|Bulgaria|0.50|0.90|0.10|0|0|1|0|0.50|0|n.a.|0|0.43|
|Canada|0.80|0.90|0.90|1|1|1|1|1.00|1|1|1|1.00|
|Chile|0.50|0.50|0.50|n.a.|1|1|0|0.50|1|1|0|0.30|
|China|0.70|0.70|0.25|n.a.|0|1|1|0|1|1|0|0.17|
|Colombia|0|0.50|0|0|0|0|0|0|0|0|0|0.00|
|Czech R|0.60|0.60|0.10|n.a.|1|1|1|0.25|1|n.a.|1|0.57|
|Ecuador|0|0.50|0|0|0|0|0|0|0|0|0|0.17|
|Egypt|0|0.50|0|0|0|0|0|0|0|0|0|0.29|
|Finland|0.33|0.50|0.10|n.a.|1|1|1|0.50|1|1|1|0.50|
|France|0.67|0.90|0.90|1|0|1|0|0.75|1|0|1|0.57|
|Germany|0.70|0.70|0.70|1|0|1|0|0.75|0|0|0|0.57|
|Ghana|0.75|0.75|0.25|0|0|1|0|0.25|0|0|0|0.43|
|Greece|0.50|0.50|0.50|n.a.|0|1|1|0.75|0|0|0|0.57|
|Hong Kong|0.70|0.90|0.70|1|1|1|1|1|1|1|1|0.71|
|India|0.85|0.85|0.10|n.a.|0|1|0|0.25|1|1|0|0.57|
|Indonesia|0.75|0.75|0.75|n.a.|0|1|0|0.25|0|0|0|0.00|
|Israel|0.75|0.75|0.75|n.a.|0|1|0|0.67|1|0|0|0.57|

33
|Italy|0.70|0.70|0.70|n.a.|1|1|0|0.67|0|0|0|0.43|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Japan|0.67|0.95|0.67|1|1|1|1|1.00|0|1|0|0.29|
|Jordan|0|0.50|0|0|0|0|0|0|0|0|0|0.14|
|Kenya|0.75|0.50|0.50|0|0|0|0|0.75|1|0|0|0.80|
|Korea|0.95|0.95|0.95|1|0|0|1|0.50|0|1|0|0.71|
|Lithuania|0.60|0.60|0.60|1|0|1|0|0.50|0|n.a.|1|0.71|
|Malaysia|0.67|0.67|0.67|n.a.|1|1|1|0.50|0|0|1|0.71|
|Mexico|0.50|0.50|0|0|0|1|1|0.50|0|0|1|0.20|
|Netherlands|0.50|0.50|0.05|n.a.|1|0|1|1.00|1|0|0|0.17|
|Nigeria|0.50|0.50|0.25|n.a.|0|0|0|0.25|1|0|1|0.43|
|Pakistan|0.49|0.50|0.50|n.a.|0|0|1|0.25|0|0|0|0.71|
|Peru|0|0.50|0.33|0|0|1|0|0|0|0|0|0.14|
|Philippines|0.50|0.95|0.05|n.a.|0|1|0|0.50|0|1|0|0.29|
|Poland|0.75|0.90|0.75|1|0|1|1|0.50|0|n.a.|0|0.50|
|Romania|0.67|0.67|0.67|n.a.|0|1|0|n.a.|0|0|1|0.14|
|Singapore|0.70|0.70|0.70|1|1|1|1|1.00|1|1|1|0.57|
|South Africa|0.65|0.65|0.65|n.a.|1|1|1|0.75|1|0|1|0.71|
|Spain|0.75|0.50|0.50|1|1|0|0|1.00|1|1|0|0.43|
|Sri Lanka|0.70|0.70|0.25|0|0|1|0|0.50|1|0|0|0.29|
|Sweden|0.60|0.60|0.10|n.a.|1|1|0|1.00|1|0|1|0.57|
|Switzerland|0.67|0.67|0.67|1|1|1|0|0.75|1|0|0|0.29|
|Thailand|0.75|0.75|0.75|1|0|1|0|1.00|0|1|0|0.29|
|Turkey|0.75|0.75|0|n.a.|0|1|0|0.25|0|0|0|0.00|
|UK|0.85|0.85|0.70|1|1|1|1|1.00|1|1|1|0.86|
|Uruguay|0|0.50|0|0|0|0|0|0|0|0|0|0.00|
|USA|0|0.95|0.95|1|1|0.5|0|1.00|1|1|1|0.71|

_Note: see definitions in text and Table 2._ 34
|**Table 5 a**|||**Correlatio**|**ns**||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
||**Mandatory**<br>**offer range**|**Range**<br>**where**<br>**intention to**<br>**control is**<br>**known**|<br>**Range where**<br>**intention to**<br>**take private**<br>**is known**|<br>**Off-**<br>**exchange**<br>**price**<br>**disclosed**|**Rules apply**<br>**to non-listed**<br>**firms**<br>**Fai**<br>**mi**|**r price for**<br>**nority**|<br>**Fair price**<br>**for all**<br>**classes**|<br>**Offer**<br>**disclosure**<br>**index**|**Fair price fo**<br>**non-**<br>**tendering**<br>**investors**|**r**<br>**Appraisal**<br>**rights after a**<br>**merger**|<br>**Sell-out**<br>**provisions**|
|Range – control|52%<sup>a</sup>|||||||||||
|Range –<br>take private|53%<sup>a</sup>|56%<sup>a</sup>||||||||||
|Off-exchange<br>||||||||||||
|price discl.|64%<sup>b</sup>|69%<sup>a</sup>|91%<sup>a</sup>|||||||||
|Rules apply to<br>||||||||||||
|non-listed|20%|13%|31%|61%<sup>b</sup>||||||||
|Fair price for||||||||||||
|minority<br>Fair price for all|52%<sup>a</sup>|40%|32%|37%|25%|||||||
|classes|33%|24%|30%|52%|41%|16%||||||
|Mand. offer||||||||||||
|disclosure<br>Fair price for|57%<sup>a</sup>|45%<sup>c</sup>|62%<sup>a</sup>|82%<sup>a</sup>|61%<sup>a</sup>|34%|33%|||||
|nontendering<br>Appraisal rights|33%<br> <br>21%|17%<br>42%|26%<br>25%|49%<br>65%<sup>b</sup>|53%<sup>a</sup><br>39%|13%<br>15%|28%<br>26%|48%<sup>b</sup><br>36%|27%|||
|Sell-out||||||||||||
|provisions<br>Anti-takeover|15%|6%|21%|38%|43%|32%|28%|37%|33%|17%||
|tactics|43%|28%|46%<sup>c</sup>|58%<sup>c</sup>|38%|21%|29%|56%<sup>a</sup>|32%|37%|54%<sup>a</sup>|

_Note: Starred correlation coefficients are Bonferroni significant as follows: 1% (a), 5% (b), 10% (c)._

|**Table 5 b**||**C**|**orrelations**||||||||
|---|---|---|---|---|---|---|---|---|---|---|
||**Listed firms**<br>**to million**<br>**population **|**Market cap of**<br>**stock exchange**<br>**to GDP**|**Traded value of**<br>**stock exchange**<br>**to GDP**|**Median**<br>**control value**<br>**(D-Z04)**|**Estmates**<br>**control value**<br>**(N 03)**|**Takeover**<br>**premium**<br>**(R-V 04)**|**Takeover**<br>**volume**<br>**(R-V 04)**|**Hostile**<br>**takeovers**<br>**(R-V 04)**|**Rule of**<br>**law**|**Investor**<br>**Protection**|
|Takeover<br>Index|36%|56%<sup>a</sup>|63%<sup>a</sup>|-35%|-53%|-23%|55%<sup>b</sup>|53%<sup>b</sup>|66%<sup>a</sup>|52%<sup>b</sup>|

_Note: Starred correlation coefficients are Bonferroni significant as follows: 1% (a), 5% (b), 10% (c)._ _Note: Data in Panel B from World Bank World Development Indicators, Dyck and Zingales (2004), Nenova (2003), Rossi and Volpin (2004), La Porta et al (1998)._ 35
# **Table 6.  The impact of takeover laws on capital markets and takeover activity**

||**Listed fi**|**rms to milli**|**on p**|**opulation**||**Marke**|**t cap of stock ex**|**change to GDP**||
|---|---|---|---|---|---|---|---|---|---|
|Numberofobs.|50|41||41||49|41|41||
|Rsquared|0.1369|0.4282||0.4220||0.3311|0.3770|0.3400||
||49.88<sup>~~b~~</sup>|63.74|~~a~~|41.68|~~c~~|159.43|~~b~~<br>163.02|<sup>~~b~~</sup><br>158.63|~~a~~|
|Takeover Law|(24.58)|(24.83)||(22.88)||(75.18)|(77.35)|(61.31)||
|||4.17|~~c~~||||12.09|<sup>~~c~~</sup>||
|Eff.judiciary||(2.44)|||||(6.23)|||
|||||5.79|~~d~~|||4.22||
|Inv.protection||||(3.59)||||(11.88)||
||2.48|-0.06||6.53|~~b~~|10.54|~~c~~<br>-2.74|9.51|~~d~~|
|Ln GNI/cap|(2.99)|(3.35)||(3.09)||(6.10)|(8.75) <br>|(6.51)||
||-16.74|-36.97|~~c~~|-70.09|~~a~~|-88.92|~~b~~<br>-56.59|-84.00||
|Constant|(24.41)|(18.41)||(28.53)||(39.99)|(52.40)|(73.15)||

||**Traded**|**value of stock e**|**xchange to GD**|**P**<br>**T**<br>**Volume**|**akeover Activit**<br>**Hostile dea**|**y( **<br>**ls**|**R-V 04)**<br>**Cross-bor**|**der**|
|---|---|---|---|---|---|---|---|---|
|Numberofobs.|50|41|41|41|41||41||
|Rsquared|0.4544|0.4699|0.5077|0.5414|0.3518||0.4969||
||96.95|<sup>~~a~~</sup><br>105.69|~~a~~<br>47.57|11.20|~~c~~<br>1.86|<sup>~~b~~</sup>|-41.84|~~a~~|
|Takeover Law|(35.10)|(37.67)|(36.05)|(6.54)|(0.88)||(9.93)||
|||3.11|||||||
|Eff.judiciary||(3.51)|||||||
||||13.13|~~b~~|||||
|Inv.protection|||(6.58)||||||
||13.22|<sup>~~a~~</sup><br>9.44|~~b~~<br>19.13|~~a~~<br>7.69|~~a~~<br>0.34|<sup>~~a~~</sup>|-1.07||
|Ln GNI/cap|(5.18)|(6.74)|(5.25)|(1.40)|(0.12)||(1.75)||
||-111.20|<sup>~~a~~</sup><br>-100.98|~~a~~<br>-173.71|~~a~~<br>-50.90|~~b~~<br>-3.11||72.55|~~a~~|
|Constant|(36.45)|(40.94)|(44.81)|(9.90)|(0.92)||(18.81)||

_Note: Data from World Bank World Development Indicators and La Porta et al (1998). GNI is measured by the Atlas method. The measures of takeover activity are based on Rossi and Volpin (2004). Volume refers to the percentage of domestic traded companies targeted in completed deals ion the 1990s. Hostile deals is the share of attempted hostile takeovers as a percentage of domestic traded companies. Cross-border ratio is the number of cross-boarder deals as target as a percentage of all completed deals. Significance levels are as follows: 1% (a), 5% (b), 10% (c), 15% (d). Regressions with robust standards errors._ 36
**Table 7.  The impact of takeover laws on the takeover premium**

||**Mean**<br>**con**|**Dyc**<br>**trol**|**k-Zingales**<br>**value**||**Estmates Nenova**<br>**control value**|**Takeover**<br>**premium**<br>**(R-V 04)**||**All cash offers**<br>**(R-V 04)**|
|---|---|---|---|---|---|---|---|---|
|Numberofobs.|33||31||16|30||30|
|Rsquared|0.1273||0.2365||0.3632|0.1433||0.043|
|Takeover Law|-0.20|<sup>~~d~~</sup>|-0.27|~~b~~|-0.29<br>~~c~~|-9.45||-0.28|
||(0.14)||(0.11)||(0.17)|(24.16)||(0.21)|
|Eff. judiciary|||-0.02||||||
||||(0.02)||||||
|nv. Protection|||||||||
|Ln GNI/capita|-0.01||0.03||-0.04|-7.55|~~c~~|0.00|
||(0.03)||(0.04)||(0.03)|(4.35)||(0.04)|
|Constant|0.38|<sup>~~d~~</sup>|0.20||0.75<br>~~a~~|218.91|~~a~~|0.84<br>~~b~~|
||(0.26)||(0.26)||(0.26)|(42.56)||(0.37)|

_Note: Data from World Bank World Development Indicators, Dyck and Zingales 2004, Nenova 2003, Rossi and Volpin (2004), La Porta et al (1998). GNI is measured by the Atlas method. Takeover premium refers to the bid price as a percentage of the closing price of the target four weeks before the announcement. All cash offers is the share of merges and acquisitions paid for entirely in cash, out of all merger and acquisition deals. Significance levels are as follows: 1% (a), 5% (b), 10% (c), 15% (d). Regressions with robust standards errors._

**Table 8.  Investigating other issues: labor laws or takeover barriers?**

||**Takeover volum**|**e**|**Hostile deals rati**|**o**|**Cross-border ratio**||
|---|---|---|---|---|---|---|
|Numberofobs.|41||41||41||
|Rsquared|0.5501||0.3532||0.4993||
||13.35|<sup>~~c~~</sup>|1.78|~~b~~|-42.86|~~a~~|
|Takeover Law|(6.86)||(0.82)||(10.22)||
||0.08||-0.00||-0.04||
|Labor law|(0.07)||(0.01)||(0.09)||
||8.09|<sup>~~a~~</sup>|0.33|~~a~~|-1.26||
|Ln GNI/cap|(1.48)||(0.13)||(1.87)||
|Constant|-58.29|<sup>~~a~~</sup>|-2.86|~~a~~|76.06|~~a~~|
||(12.39)||(0.97)||(16.67)||

_Note: Data from World Bank World Development Indicators, Doing Business Indicators, and Rossi and Volpin (2004). GNI is measured by the Atlas method. Takeover volume refers to the percentage of domestic traded companies targeted in completed deals ion the 1990s. Hostile deals ratio is the share of attempted hostile takeovers as a percentage of domestic traded companies. Cross-border ratio is the number of cross-boarder deals as target as a percentage of all completed deals. Labor law is proxied by the Doing Business 2006 measure of Difficulty of Firing._ _Significance levels are as follows: 1% (a), 5% (b), 10% (c), 15% (d). Regressions with robust standards errors._ 37