Whose Company Is It Anyway: Recent Developments in Canadian Takeover Law
![handle is hein.journals/utflr46 and id is 528 raw text is: Notes & Comment
Whose Company Is it, Anyway?: Recent Developments
in Canadian Takeover Law*
The recent international explosion in mergers and acquisitions' has coincided
with a burst of legal and academic activity focusing attention on the fiduciary
*relationship linking corporate directors with corporate owners. A lively theo-
retical debate encompassing economics2 and law,3 coupled with advances in
* The author is indebted to Professor Jeffrey Maclntosh of the University of Toronto Faculty of
Law, whose courses on business organizations and securities law employ many of the sources
and perspectives invoked in this comment. Any faults are, of course, the author's complete
responsibility.
1. The number of completed transactions in North America, including mergers and acquisitions
and leveraged buyouts, rose from 1526 in 1975 to 3165 in 1985 and by an additional 12 per
cent in 1986. Takeover activity remained intense until the stock market's worst one-day crash
on 19 October 1987 and had begun to pick up again by early 1988. The U.S. dollar value of
transactions increased from $122 billion in 1984 to $180 billion in 1985 and $276 billion in
1986-up from $34 billion in 1975. See W.T. Grimm, Mergerstat Review (1985, 1986) and
(May/June 1986) 20 Mergers and Acquisitions 45; and M. Johnston, Takeover The New Wall
Street Warriors (Penguin, 1987) at 387.
2. Much of this has been sparked by the efficient capital markets hypothesis, which in its most
widely accepted form holds that financial markets are semi-strong efficient because inves-
tors rapidly and without bias incorporate all information that is publicly available into the
prices of securities. The theory draws on the capital asset pricing model for testing and verifi-
cation. See E.F. Fama, Efficient Capital Markets: A Review of Theory and Empirical Work
[May 1970] J. of Finance 383 and E.F. Fama, L. Fisher, M.C. Jensen, and R. Roll, The
Adjustment of Stock Prices to New Information [February 1969] Int'l Economic Rev. 1. See
generally R. Brealey and S. Myers, Principles of Corporate Finance (McGraw Hill, 1986). For a
prominent attack, see RJ. Shiller, Do Stock Prices Move too Much To Be Justified by Subse-
quent Changes in Dividends? (1981) 71 Amer. Econ. Rev. 421 and, more recently, Fashions,
Fads and Bubbles in Financial Markets, paper prepared for 1985 Columbia Law School Con-
ference on Takeovers (forthcoming in book form). For succinct summaries of the debate as
well as comprehensive references, see D. Pearce, Challenges to the Concept of Stock Market
Efficiency [Sept./Oct. 1987] Federal Reserve Bank of Kansas City Econ. Rev. 16, and W.
Beaver, Market Efficiency, chapter 6 in Financial Reporting: An Accounting Revolution
(1981) at 142. One of the implications of the theory is that investors on average cannot beat
the market simply by analyzing publicly available information. Many empirical studies have
borne this out, showing that institutions such as mutual funds staffed with professional invest-
ment advisers do not beat the market net of transaction costs. For an attempt to challenge
these studies, see J.N. Gordon and L.A. Kornhauser, Efficient Markets, Costly Information
and Securities Research (1985) 60 N.Y.U. L. Rev. 761.
3. Drawing on the efficient markets hypothesis, as well as economic analysis of the firm, legal
academics have engaged in debate over the appropriateness of regulatory intervention given
the existence of market controls. The basis for the argument is the development of agency
theory, discussed infra. Classic sources in the economic literature include H.G. Manne,
Mergers and the Market for Corporate Control (1965) 73 J. Pol. Econ. 110; A.A. Alchian
and H. Demsetz, Production, Information Costs and Economic Organization (1972) 62
Amer. Econ. Rev. 777; E.F. Fama, Agency Problems and the Theory of the Firm
University of Toronto Faculty of Law Review / Volume 46, Number 2, Spring 1988](ViewImageLocal?handle=hein.journals/utflr46&div=26&collection=journals&method=preview&ext=.png&size=3)
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Whose Company Is It Anyway: Recent Developments in Canadian Takeover Law
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