218 Decoupling transfer of shares from transfer of control.

The approach of the perspectives in Dutch corporate legal theory towards the market for corporate control echoes the earlier discussed approach to shareholder stewardship.1 While the partnership perspective has strong arguments for the maintenance of the free transferability of shares, the institutional and ecosystem perspectives mainly provide boundary conditions for the accompanying transfer of corporate control. By focusing on the contractual nature of the corporation, the partnership perspective emphasises the freedom of partners to join and exit the corporate partnership based on the terms they negotiate with the board.2 For shareholders, such a freedom to exit the corporate partnership involves the notion of the transferability of shares to other investors of financial capital. In contrast to contractual partners who can explicitly negotiate the costs and benefits of their relationship with the corporation, the ownership of shares involves a commitment to the corporation based on open-ended undetermined benefits.3 Due to this open-ended nature of the benefits expected by shareholders from the corporation, their negotiation about the terms of their engagement relies on their capacity to voice their interests through the corporate legal rights allocated to them. If they fail to voice their interests, then shareholders should have the ultimate remedy to exit the corporation through the transferability of their shares (and the associated governance rights) to other shareholders. The free transferability of shares is therefore constituted in the contractual freedom of partners to join and exit the corporate partnership.4 Similar to the freedom of other contractual partners to decide to join or exit the corporation based on their own interests, shareholders should equally be considered free to transfer their shares based on their own interests in joining or exiting the corporation. As a result, the partnership perspective provides strong arguments for maintaining the freedom for shareholders to transfer their shares in accordance with their own interests. For listed corporations, this implies the freedom of shareholders to trade shares publicly in the global market for corporate control and hence inevitably invites the threat of a hostile takeover bid by other investors to buy a controlling stake in the general meeting of shareholders.5

Meanwhile, I would argue that the partnership perspective distinguishes between such freedom of transferability of shares and the responsibility of shareholders in relation to the durable success of the corporation and all stakeholder interests involved. Building on the earlier discussion regarding the responsibilities of shareholder stewardship, the partnership perspective provides grounds for requiring the alignment of the responsibilities of shareholders with the duty of the board to encourage durable success for all of its stakeholders.6 In my view, the partnership perspective does not suggest that shareholders who acquire a controlling interest in the corporation should be free to change the board and alter the corporate strategy in accordance with their own interests. In other words, the free transfer of shares should be distinguished from the transfer of corporate control in pursuit of partial shareholder interests. While shareholders remain free to transfer their shares and the accompanying governance rights, the exercise of those rights by other shareholders should remain bound by the proposed responsibilities of shareholder stewardship.7 The threat of a hostile takeover in the global market for corporate control should therefore be decoupled from the threat of controlling stakeholders altering the strategy of the corporation. In my understanding of the partnership perspective, shareholders who have bought a controlling number of shares in the corporation should remain bound by the suggested stewardship responsibility of encouraging the durable success of the corporation for all of its stakeholders, in alignment with the duty of the board. Although a new controlling shareholder may have a different vision from the board for achieving such durable success, its newly acquired governance rights should be exercised towards the shared aim of achieving durable success rather than being exercised in accordance with its own partial interests.

In contrast to the focus on shareholders, the institutional perspective focuses on the board as the autonomous decision-maker in corporate governance.8 As a result, the solution to hostile takeovers threatening the strategy of the board is more likely to be found in providing protective measures for the board. In my understanding of the institutional perspective, the exercise of such protective measures should be guided by the duty of the board towards durable success and hence to prevent shareholders from exercising their governance rights in accordance with their own interests at the expense of durable success. The downside of providing protective measures for the board is the risk of inhibiting the freedom of share transferability for shareholders. In my view, the institutional perspective does not provide a principled objection against the freedom of share transferability itself, as long as a transfer of corporate control does not digress from the strategy of the board by moving in the direction of fulfilling partial shareholder interests at the expense of other stakeholder interests or public interests.9 I therefore do not expect that the institutional perspective would allow the exercise of protective measures by the board to inhibit the free transferability of shares. This tension between extensive protective measures for the board and freedom of share transferability for shareholders begs the question whether another approach is possible to overcome the threat of hostile takeovers to a social and ecological strategy.

In order to prevent the risk of extensive protective measures inhibiting the free transferability of shares, I argue that the adoption of a regime of shareholder stewardship may be a better approach to overcome the threat of hostile takeovers to a social and ecological strategy. Such an approach would equally fit the institutional perspective, as the governance rights of shareholders would be aligned with the interest of the corporation as a whole. In a regime of shareholder stewardship, shareholders are required to exercise their governance rights in accordance with the shared aim of achieving durable success which includes the need for profitability for shareholders.10 As such, the adoption of stewardship responsibilities for shareholders eradicates their power to alter the strategy of the board in accordance with their own partial interests at the expense of other interests.

Meanwhile, shareholders may have sound reasons for disagreeing with the board about the best strategy to achieve durable success for the corporation as a whole. By allowing shareholders to voice their view regarding the durable strategy of the board through selling shares or buying a controlling interest, the market for corporate control maintains its function as a disciplining mechanism for board autonomy.11 The transformation towards shareholder stewardship would then involve an equal transformation of takeovers in the partial interest of shareholders towards takeovers in the interest of durable success for the corporation as a whole. Such a transformation resulting from the adoption of shareholder stewardship would overcome the threat posed by hostile takeovers to a social and ecological strategy and hence mitigate the need for allocating more extensive protective measures to the board.12 While protective measures against hostile takeovers may remain necessary in some circumstances, the general aim of the board should be to pursue a convincing strategy oriented towards a clear evidence-based purpose aligned with the need for profitability and the needs of its environment.13 By having such a clear strategy for durable success, boards invite shareholders who agree with this approach to join the corporation without the need for extensive protective measures inhibiting the transferability of shares. Meanwhile, shareholders maintain their capacity to discipline the board with regard to the best strategy for achieving durable success for the corporation as a whole.

In my assessment, the ecosystem perspective equally does not provide any principled objection against the transferability of shares by shareholders. The only concern of the ecosystem perspective I see is that a potential splitting or merging of parts of the corporation may negatively impact the resilience of the corporate ecosystem and in turn the resilience of larger ecosystems in which the corporation is embedded.14 Meanwhile, the practice of splitting and merging may equally improve the resilience of the corporation and its environment. If takeovers are oriented towards such splitting or merging of corporations, then the ecosystem perspective therefore suggests that shareholders should prevent disproportionate harm to the integrity of the corporate ecosystem and to the needs and limits of its environment.15 Apart from that additional concern, the ecosystem perspective follows the same approach as the institutional perspective. As long as the exercise of governance rights by shareholders is aligned with the board responsibility for ecosystem stewardship, then a transfer of shares need not be inhibited.16 As discussed above, such an alignment of shareholder responsibilities with the ecosystem stewardship of the board can be achieved through the adoption of stewardship responsibilities for shareholders towards the needs and limits of the environment of the corporation.17 In sum, the ecosystem perspective equally maintains the capacity for shareholders to transfer their shares in a global market for corporate control, including their capacity to discipline the autonomy of the board.