What protections do directors of a target company have against a hostile approach?
Mergers & Acquisitions
Certain Brazilian corporations have included poison pills in their bylaws (which are locally described as provisions that target at forcing a buyer to acquire 100% of the capital stock of the company - including non-voting shares and/or forcing the buyer to appraise the shares of the company in accordance with certain methods which tend to make the pricing higher. When examining unsolicited bids, the members of the board of a Brazilian company ideally should act as it is expected for professionals at their level. This means that financial and legal assistance should be sought in the form of legal and fairness opinions as well as in the form of appraisal reports. Truth to be said, however, this is a very incipient market for the time being in Brazil.
The bye-laws of a Bermuda company can provide directors with the power to protect against hostile approaches. One such approach is to dispose of a company's unissued shares, so long as they are empowered to do so by the target company’s bye-laws and that these actions are supported by Bermuda common law. The bye-laws of a Bermuda company may provide that the unissued shares will be at the disposal of the board, which may dispose of them to such persons and upon such terms and conditions as the board may determine.
An example of a protection which illustrates the director’s ability to protect the company against a hostile approach is the poison pill strategy. Such a strategy permits the directors to issue shares to all shareholders, except for the acquirer, at a discounted purchase price. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.
A company’s bye-laws may be drafted to include such defensive measures in such form as the shareholders decide are appropriate or necessary. The directors’ use and application of such provisions are subject to the following considerations.
Common Law and Directors’ Duties
Under Bermuda common law, directors have wide discretion in the conduct of a company's affairs as long as they act both in what they believe to be the company's interest and within their powers. Although the interests of the company as a separate body corporate, distinct from its shareholders, have to be advanced, the interests of current shareholders will normally be the principal factor in the directors' decisions. Directors may also take into account the long term interest of the company, future shareholders, employees and the creditors in deciding what actions to take.
Section 97 of the Companies Act sets out the duty of care of the officers and directors of a company. Directors must act honestly and in good faith with a view to the best interests of the company, and maintain a standard of care which is that of the reasonably prudent person in comparable circumstances. This is often a subjective test. Although directors may rely on the advice of professionals, they retain a residual duty to make certain basic assessments of any given factual situation. They have a duty of loyalty, and must not put themselves in conflict with the company.
Under Bermuda law, as under the laws of other jurisdictions, “advance defensive preparations” are more easily upheld than are measures taken as a result of a takeover bid. The Bermuda courts will carefully scrutinize actions taken in response to a proposed change of control transaction, on the grounds that a company has no legitimate concern of its own with the exercise by a shareholder of the rights to sell his shares. This does not mean that directors may not resist a bid in the absence of advance preparation although it does mean that there are relatively narrow limits to the methods by which they do so. Thus, the directors may present their views on the wisdom of accepting an offer, provided that the advice is based on full information, fairly presented and is not influenced by the personal interest of management.
While directors must fulfill the requirements of the Companies Act by acting honestly and in good faith with a view to the best interests of the company, however, as a practical matter, directors must also act with a view towards value maximization of shareholdings. Actions taken primarily for the collateral purpose of entrenching management or of maintaining the proportional interest of the shareholders via shareholders rights plans, or for any other improper purpose, may be an abuse of the directors’ power and may not stand up in court. However, actions taken in the best interests of the company and the current shareholders will not be so sanctioned.
In general, the Bermuda courts will not interfere in directors' decision making unless it has been proved by an aggrieved party that the directors have breached their fiduciary duty. There is no statutory provision regarding enhanced duties with respect to takeovers, and so any enhancement of duty arises out of the more conscious and cautious application by the directors of their ordinary duty.
British Virgin Islands
Under the Act there are no applicable stakebuilding rules, however, as any transfer of shares in any BVI company is subject to the consent of the directors, the target company will be able to resist a hostile approach provided they are complying with their duties to act in the best interests of the Company. To the extent that the target’s constitutional documents do not include anti-takeover provisions or “poison pill” type provisions, such as staggered boards or limited director removal rights, the directors of the target will be limited in their ability to resist a change of control by complying with their fiduciary duties to the company. The directors will be obliged to consider the terms of the acquisition in good faith and act bona fide in the best interests of the company as a whole in relation to any acquisition proposal.
There are no stakebuilding rules applicable under Cayman Islands law. However, transfers of equity securities in an unlisted company are usually subject to the consent of the Board.
To the extent that the target’s constitutional documents do not include anti-takeover provisions, the directors of the target will be limited in their ability to resist a change of control by their fiduciary duties to the company – the directors will be obliged to consider the terms of the acquisition in good faith and act bona fide in the best interests of the company as a whole in relation to any acquisition proposal. As noted in question 22, depending on the scope of the fiduciary duties imposed on the manager(s)/managing member(s) of an LLC, they may also be obligated to consider any bona fide offer.
In addition, if the target is listed on the CSX, the Code provides that at no time after a bona fide offer has been communicated to the board of the offeree company, or after the board of the offeree company has reason to believe that such an offer might be imminent, may any action be taken by the board of the offeree company, without the approval of the shareholders in general meeting, which could effectively result in any bona fide offer being frustrated or in the shareholders being denied an opportunity to decide on its merits.
Measures for the Administration of the Takeover of Listed Companies (revision in 2014), in principle, restricts the power of the directors to take improper protecting measures against a hostile approach. In practice, however, the directors still have some protections against a hostile approach.
First, the directors can take the protecting measure of White Knight to invite a strategic partner to make a higher bidder to increase the value of shares, achieving the goal of deterring the hostile bidder.
Second, the measure of Staggered Board of Directors is also often used by the directors. It refers that groups of directors are elected at different times for multiyear terms according to Articles of Association of the company, which can challenge the prospective hostile bidder, since the hostile bidder will have to win multiple proxy fights over time and deal with successive shareholder meetings in order to successfully take over the company.
Third, on behalf of the target company, the directors can initiate court proceedings against the hostile bidder provided its takeover behaviours violate certain laws or regulations. The claims brought are mainly as followings: 1) violation of anti-trust laws; 2) insufficient information disclosure to the public; 3) criminal acts, such as fraud. Court proceedings, to some extent, can force the hostile bidder to increase the share price or slower the speed of the hostile acquisition.
In a hostile context (i.e. where the offeror is not seeking the recommendation of the target company’s Board of Directors), the process typically involves a significant public angle and may accordingly involve defensive actions by the Board of Directors that relate to public communications. The target company may for example also assess the advantages and disadvantages of an early announcement of the offer or, in the case of a bear-hug approach, assess the possibility of invoking the 'put up or shut up rule', i.e. cause that the FSSA impose on the offeror a deadline for making an offer or announcing that an offer will not be made.
The protection of directors of a target company (stock corporation) against the hostile approach is rather limited under German law. A bidder may after a successful hostile takeover adopt a shareholders’ resolution stating the lack confidence in the directors. The requirements for such a resolution are relatively low and in particular, do not require a special cause. However, a resolution may constitute a misuse of its rights and in such case may be challenged in court. After the adoption of such a resolution the supervisory board can remove a director from its office. Economically, the director remains protected under his service agreement. This contract cannot be terminated simply by the fact that a hostile takeover has taken place or because the new majority shareholder has no confidence in the directors. Therefore, in principal the managing director’s service agreement has to be fulfilled or paid out. However, a managing director’s service agreement may contain change of control clauses in case of a hostile approach. The ability to provide for golden parachutes in service agreements of board members is restricted.
With respect to limited liability companies, the removal of managing directors from their office is even easier and can be done by simple shareholders’ resolution. With respect to the service agreement, similar restrictions apply.
Hostile take-overs are neither explicitly regulated under Greek legislation, nor are they a common occurrence. Despite that fact, however as mentioned above under 22, hostile take-over bids may take place in case of a takeover bid offer in a listed company. In terms of process, the Board of Directors of the target listed company is obliged to draw up and publicise a document setting out its justified opinion of the take-over bid. This document serves as a detailed report of the actions which the Board of Directors of the target company has taken or intends to take in regard to the takeover bid, report any agreement existing between the Board of Directors of the company or its members and the offeror, explicate the opinions of the board of the target company concerning the takeover bid and allege the reasons which led to these opinions, and also to the offeror’s strategic plans concerning the company, as set out in the offer document, and finally to the possible consequences/ repercussions on the employment at the locations of the offeree company’s places of business. This document is filed with the Hellenic Capital Market Commission and the offeror within a 10-day time period from the disclosure of the offer document and is made public by the board of the target company without any delay. Nonetheless, it must be noted that such an action on behalf of the Board of Directors does not have the effect of permanently averting the hostile takeover procedure.
In practice, there are measures that may be used to deflect the hostile approach, such as seeking alternative bids or issuing new shares under specific conditions, thus obstructing the hostile bidder’s attempt to acquire control of the target company.
There are no specific protections provided by Guernsey law, however there are various methods available to the target to defend itself against a hostile bid, including seeking a third party to make an alternative offer for the target company.
The Takeover Code (where applicable) contains certain restrictions on defensive actions which the target may take.
There are restrictions on the target board taking defensive actions that might frustrate the willingness or otherwise of a buyer to make a bid or complete a bid that has already been made.
Prior to a prospective target being informed that a bid will be made or the offer is issued, there are few restrictions on the implementation of defensive measures against a possible future hostile approach. Nevertheless, the board of directors must always act in compliance with their fiduciary duty towards the company and its shareholders, as further described under question 9. Still, a prospective target’s board may, seek to introduce various pre-bid defences, e.g. seeking to amend the target’s articles of association by including special voting rules, lower mandatory bid levels and set out special criteria that shareholders must fulfil in order to own shares in the company, introducing different classes of shares, for example non-voting preference shares. In addition, change of control provisions in the company's commercial contracts can provide protection from hostile takeovers. More advanced US-style shareholders’ rights plans or other poison pills are currently not common in the Norwegian market. Also note that Oslo Stock Exchange will monitor and may restrict such resolutions/measures if found not consistent with the criteria for listing.
For Norwegian companies listed on a regulate market, the STA substantially reduces the possibility of the target's board to adopt active measures to defend against a takeover bid after the target has been informed that a voluntary or mandatory offer will be made. Under such circumstances, and until the offer period is expired, the board may not resolve on issuance of shares or other financial instruments, merger of the target or subsidiaries, sale or purchase of substantial business areas or other disposals of material significance to the nature and scope of the target’s operations; or purchase or sale of the target’s own shares. With that being said, the restrictions do not apply to disposals that are a part of the target company's normal business operations, or where a shareholders' meeting authorises the board to take such actions with takeover situations in mind. As a result, a fairly large number of Norwegian listed companies have adopted defensive measures aimed at preventing a successful hostile bid. Further, the board still have the possibility to try to persuade the shareholders to reject the bid or making dividend payments. The board will further, be entitled to seek white knights or white squires, exploring other alternatives, communicate the target’s potential by announcing financial forecasts not previously disclosed, initiating PAC-Man defences and resisting due diligence access. The board could also question the value of any consideration offered by the bidder, and as part of this question the bidder’s operational performance or financial position.
The restrictions in the STA on the board's actions in a post-bid situation is not applicable for companies not listed on a regulated market.
Finally note that situations where a target’s board seeks to frustrate a takeover process through such measures have rarely been tested by Norwegian courts.
From the corporate standpoint, certain protections can be provided by foundation documents of an entity. In certain cases it is possible to provide for the maximum member’s share in the company in question or provide that any sale of shares to a third party requires other members’ consent. These options, however, are working mostly for non-public companies.
Under Russian labour law, unilateral termination of employment of the sole executive body (CEO) (as well as its deputies and the chief accountant) at the initiative of the target company triggers the right of the sole executive body (its deputies and the chief accountant) to receive compensation (a certain equivalent of ‘golden parachute’) in the amount of at least 3 (three) monthly salaries.
The above provision, while establishing the minimum compensation, does not restrict the maximum amount of the compensation.
Despite the above, and given the fact that the practice of payment of ‘golden parachutes’ to management has been strongly criticised (e.g. the case of Ashurkov, Savchenko vs OAO ‘Rostelekom’ (case No. A56-31942/2013)), the Supreme Court of the Russian Federation has established that there should be a balance between the interests of the management and the interests of the shareholders, and the amount of ‘golden parachute’ should not infringe the rights and lawful interests of the shareholders and of the company itself.
The above position, among other things, has resulted in imposition of limit of 3 (three) monthly salaries on compensation payable to sole executive bodies (their deputies and the chief accountant) of state corporations, state companies or companies at least 50% of which is owned by the Russian Federation or municipal entities.
Under the M&A Regulations, the target's board are prevented, except pursuant to a pre-existing contract, from taking frustrating actions without prior shareholder approval during the course of an offer, or prior to the date of an offer if such offer is deemed imminent. Frustrating actions include the issue of new shares, the issue of grants or options in respect of unissued shares, the creation or issue of securities carrying rights of conversion into shares, the sale, disposal or acquisition of any material assets and the entry into new contracts outside the ordinary course of business. The greatest protection against hostile offers is the cultural attitude; shareholders are unlikely to accept offers without the recommendation of the target board, though a particularly large offer could always challenge this theory.
Isle of Man
There are no specific provisions contained in Manx law for the protection of directors of a target company against a hostile approach.
There several advanced protections that companies can introduce in ordinary times in order to ward off any potential hostile takeover. The most common of these are called “prior-warning” defence measures, which have been introduced by hundreds of listed companies in Japan. When a company introduces a prior-warning measure, it sets and publicly announces the rules that must be followed by a buyer to acquire more than a certain percentage of the target company's shares, and the concrete defence measures that will be triggered by a future hostile bid, such as shareholder rights plans that entitle all shareholders, except for the hostile acquirer, to acquire additional shares, effectively diluting the ownership of the buyer.
There are many other protection measures used after a fight for control of the company has commenced, including: (i) white knight defence, (ii) issuance of shares/share options to a third party who is friendly to the company, (iii) so-called “crown jewel” defence, (iv) increase of dividends, and so on.
There is generally no specific protection afforded to the directors when there is a hostile takeover.
On the contrary, directors are restricted from undertaking certain activities during a takeover, as outlined above.
Nonetheless, the directors are obligated to give an opinion to the shareholders on each of the tender offer documents of each acquirer together with the opinion of an independent financial adviser.
Complementing the principles set out in the CA requiring directors to act in good faith in the best interests of the company for the benefit of the shareholders, the Listing Rules contain provisions which restrict directors from exercising defensive tactics in the context of a takeover or potential takeover bid of a listed company. Directors are prohibited from taking or permitting any action that could result in the frustration of an offer or the holders of securities in the target company being denied an opportunity to decide on the merits of an offer.
Defensive tactics are however permitted when such have be approved by the company’s shareholders or permitted pursuant to a contractual obligation entered into by the company or in the implementation of proposals approved by the board of directors of the company and such obligations and proposals were approved prior to the company receiving a takeover notice or becoming aware that an offer was imminent. In certain instances, defensive action could be adopted for reasons unrelated to the offer with the prior sanctioning of the Listing Authority.
In a non-listed company scenario, the board has the means of blocking an undesirable share transfer if the company’s articles of association grant the board the discretion to refuse the registration of the share transfer. This restriction may also be applied in relation to public companies, although not in respect of shares which are admitted to listing.
In public M&A transactions, the board of directors and the members of the supervisory board have to maintain neutrality when a public bid has been announced and they are in principle not allowed to take measures to deprive the shareholders of the opportunity to make a free and informed decision on the bid.
However, there are several options of defence against a hostile approach, whereby in particular the target’s organisational structure or capital structure can be organised in line with a defensive strategy. The target also could look for a ‘white knight’ investor to fend off unwanted advances.
Staggered terms of office for the two-tier boards (board of directors and supervisory board) cannot hinder a hostile takeover as such, but nevertheless could delay the establishment of complete control of the acquirer of the target. Regarding the capital structure, the acquisition of own shares is – under detailed restrictions and subject to limited amounts – admissible pursuant to the Joint Stock Corporations Act and also employee stock-ownership plans are possible. A share buyback programme would be possible but since shares that are repurchased cannot exceed 10% such defence measure is only limited.
A further possible defensive measure is lowering the threshold that triggers a mandatory bid obligation from the statutory 30% to a lower percentage, while increasing the majority to remove supervisory board members to a higher (e.g., 75%) majority, making it more difficult to change the supervisory board members.
U.S. law des not have a general prohibition on “defensive measures” or “frustrating actions”, and the board of directors of a target company has several lines of defence against an attempted hostile takeover. First, the organisational documents of the target corporation may provide various structural defences. Most notable among these is a staggered board, in which directors are separated into multiple classes with multi-year terms (normally three classes with three-year terms). Directors on a staggered board typically can only be removed for cause, effectively precluding a hostile bidder from launching a proxy fight to replace the entire board at once, which has the effect of requiring the hostile bidder to win two proxy fights to gain a majority of the target board. Among major U.S. public companies, staggered boards have become significantly less common over time due to institutional investor pressure to eliminate them. Other structural defences include prohibiting action by shareholders by written consent, requiring advance notice for the submission of director nominations and proposals by shareholders, limiting or preventing the ability of shareholders to call special meetings, limiting shareholders’ ability to alter the size of the board, requiring that all shareholders receive the same consideration and requiring a supermajority vote of shareholders to approve changes to organisational documents or to approve a transaction.
Many states also have statutes that provide some protection against hostile bids, although corporations generally have the ability to opt out of their coverage. In states with business combination statutes, such as Delaware’s DGCL § 203, a company cannot merge with a person that holds a certain percentage of its stock for a certain period of time after such shareholder crossed the threshold ownership percentage unless certain criteria, such as approval by the board and a supermajority of shareholders, are met. Control share acquisition statutes prevent shareholders that acquire more than a certain percentage of a target company’s stock from voting those shares unless the other disinterested shareholders approve. Finally, as discussed in Question 10, several states have constituency statutes that allow directors to consider the impact of a transaction on stakeholders other than shareholders.
A target company can also adopt a shareholder rights plan, colloquially known as a “poison pill”. Poison pills are options granted to target company shareholders that allow them to purchase shares of the buyer or additional shares of the target, in either case at a steep discount, upon certain triggering events such as a potential buyer acquiring a certain percentage of the target’s stock (typically 10-20%). A rights plan generally deters potential buyers from exceeding the threshold in order to avoid the severe dilution that would result from the rights being triggered. Since the rights under a rights plan can be redeemed by the target company board, a hostile acquirer would need to either reach agreement with the target company board or obtain control of the target company board in order to redeem the rights by convincing the target shareholders to replace the incumbent directors (most commonly through a proxy fight).
In addition to the structural and statutory defences outlined above, a target’s board may also pursue alternative strategies such as mounting a public relations campaign, affirmatively trying to draw the attention of antitrust or other regulators or pursuing alternate transactions. In all cases, a board attempting to defend against a hostile bid must be mindful of its fiduciary duties, as courts in many jurisdictions subject defensive tactics to enhanced scrutiny.
Directors of target companies in Vietnam have very little by way of legislative protections against hostile approaches, with the key exception of the mandatory public offer rules referred to in paragraph 23 below.
There are various methods available to the target company to defend itself against a hostile takeover, including seeking a third party to make an offer for the target company. Provided that the target company’s directors act in a way that they believe, in good faith, would be most likely to promote the success of the target company and to preserve the interests of its shareholders and other stakeholders and they are acting within their powers, there should not be any legal objection to the target company defending itself against a hostile takeover.
There are no specific provisions under Jersey law for the protection of directors of a target company against a hostile approach.
The law does not offer a real protection against the revocation of a company’s directors since a mandate agreement (and not an employment contract) is concluded between them and the company. If they are unjustly revoked, they only have the right to claim for damages and cannot appeal in court the GMS Resolution by which they were revoked.
However, certain conventional clauses such as a “golden parachute” can be included for protection in their agreement with the target company.
Subject to some limited exceptions, the Takeovers Code restricts directors from undertaking defensive tactics in relation to a takeover. But, this does not prevent the directors from taking steps to encourage competing bona fide offers from other parties.
The so called put up or shut up ("PUSU") regime in the UK provides the boards of target companies with significant protection against a hostile offer. The PUSU regime requires that once a potential bidder has been named in an announcement, it has a period of 28 days within which it must clarify its intentions and either confirm that it will make an offer for the target, or that it will not be doing so (in which case it may not, generally, make another bid for the same target for a period of six months).
Bearing in mind the various work streams required in order to launch a bid, this 28 day period is very short and, importantly, it can only be extended by application to the Panel with the support of the target board. This gives target boards significant leverage in negotiations with any potential bidder and has made it much harder for a target to be subjected to a lengthy period of siege at the hands of a hostile bidder.
Directors of a target company must, however, be careful in their handling of a hostile offer, as they are under a duty to act in the interests of the target as a whole and must ensure that shareholders are able to themselves decide on the merits of any potential bid. They are, accordingly, not permitted to take any action that might frustrate a potential offer, including through entering into non-ordinary course contracts or arranging for the issuance of shares/options in the target.
Institutional investors in the UK are, generally, relatively conservative in their outlook and, accordingly, tend to favour a consensual approach to mergers.
Royal Decree 1066/2007, on the public takeovers bids regime (Real Decreto sobre el régimen de las ofertas públicas de adquisición de valores), establish that in a takeover bid process (OPA) scenarios, the Board of Directors of the relevant company must draw up a detailed and motivated report about the public takeover offer, which must contain their comments in favor or against the takeover bid, and specifically state there if (i) it does exist any agreement between the relevant company and the offeror, its administrators or partners, or between any of those and the members of the Board of Directors; (ii) the opinion of the members of the Board of Directors on the specific takeover bid; and (ii) the members of the Board of Directors intention to accept or reject the offer of the takeover bid process.
Such Board of Directors report will have publicity and shall also include the possible impact of the offer and the strategic plans of the offeror, on the set of interests of the affected company, the employment of the affected company and on the location were the affected company develops its activity. Likewise, is important to note that the directors of the affected company are obliged to include in their report (i) if any of them have a conflict of interest and (ii) the opinion of the members of the Board of Directors that are not in the same opinion of the majority of the Board.
Finally, and additional measure that the Board of Directors of the offered company may proposed is a competitive takeover bid (OPA) in order to avoid the hostile approach which shall be also controlled by the Spanish Stock Exchange Commission (Comisión Nacional del Mercado de Valores or CNMV). On this regard, the competitive takeover bid shall, at least, (i) be filed before the previous five days to the finalization of the acceptance process of the initial take rove bid, (ii) the shares affected by the competitive takeover bid cannot be less than the shares affected by the initial takeover bid, (iii) to improve the initial takeover bid (wherever by offering a higher prices to the affected shares or by extension to the number of shares affected by the initial takeover bid).