217 Protection against hostile takeovers.

The global market for corporate control provides a key mechanism for disciplining corporate boards, which creates tension with the autonomy of the board to pursue a social and ecological strategy.1 Since the shares of listed corporations are traded publicly, any (global) investor has the opportunity to purchase sufficient shares to hold a controlling interest in the corporation. Once an investor has obtained a controlling interest, it may exercise its governance rights, for example to appoint new (supervisory) board members and to put pressure on the board to change the strategy of the corporation.2 Boards may respond to a potential takeover in roughly two ways. In some instances, the board may be in favour of being taken over, for example because the buyer can achieve economic or even social and ecological synergies that a stand-alone strategy does not offer. In such a situation, boards will often negotiate with the buyer about the terms of the takeover, serving the interest of the corporation and all its stakeholders (including shareholders).3 An alternative to such a friendly takeover is the situation in which boards object to the takeover and view it as hostile to their (social and ecological) strategy. In the situation of such a hostile takeover, the board will often not want to negotiate with the buyer, leaving the buyer to take the route of offering a public bid to all shareholders without the intermediation of the board.4 In this scenario, the board is sidestepped and the protection of its social and ecological strategy is left to the decision of individual shareholders who may be bound to serve other interests, such as short-term financial returns for their own beneficiaries. This leaves social and sustainability strategies vulnerable to the financially-oriented market for corporate control.

Management research remains ambivalent about whether hostile takeovers actually achieve more shareholder value, both in the short and the long term.5 In any case, the competitive dynamic of the global market for corporate control poses a threat to the continuation of the social and ecological strategy pursued by the board. Recent management research suggests that corporations which pursue a corporate social responsibility strategy run a higher risk of a hostile takeover by a hedge fund.6 In turn, other management research suggests that corporations decrease their investment in corporate social responsibility after a takeover by a hedge fund.7 In response to this, the question arises whether boards should have the explicit instruments to protect their social and ecological strategy against hostile takeovers in the market for corporate control.

Dutch corporate law provides boards with multiple instruments to protect their strategy against a hostile takeover.8 The most straightforward instrument for boards is to pursue a coherent long-term strategy, with a clear and widely supported vision that operates well and gives convincing signals to shareholders about what to expect from their investment in the corporation.9 Another instrument for boards is to find and engage with core shareholders that have a strong and long-term commitment to the strategy of the corporation.10 A final instrument is the possibility for corporations to include statutory protective measures in their articles of association, for example the option of priority share emissions to an external legal entity in the situation of a hostile takeover threat.11 If none of these instruments suffice, boards may regress to what Van Ginneken calls Pandora measures, such as quickly selling a key part of the corporation (crown jewel defence) or finding a befriended investor to rescue the corporation (white knight).12 When a protective measure is proportional and time-bound, the board is free to use it, without the necessary consent being obtained from its shareholders.13 In order to explicitly assist boards in protecting their social and ecological strategies, the Dutch government has recently adopted a law to provide more time for boards to consider the interests involved in a potential takeover through a legal “cooling-off” period.14 All in all, boards are provided with a strong legal basis to protect their social and ecological strategy against a hostile takeover.

Meanwhile, the threat of a hostile takeover remains and may put boards under additional pressure to prioritize shareholder interests over social and ecological interests in their strategy-making. For example in the hostile attempt by Kraft Heinz to buy Unilever in 2017, there seemed to be a strong perception that a takeover by shareholder-driven Kraft Heinz would threaten the continuation of the Unilever Sustainable Living Plan.15 Even though the attempt failed, Unilever still had to take financial measures to serve the interests of its shareholders at the expense of its sustainability strategy.16 In light of these considerations, I will further consider to what extent boards should be explicitly enabled to protect their social and ecological strategies against hostile takeover attempts in the global market for corporate control.17