What protections do directors of a target company have against a hostile approach?
Mergers & Acquisitions (2nd edition)
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.
As noted in question 5, hostile acquisitions are not possible in practice in Myanmar.
Defense mechanisms prior to the submission of a public bid are legally possible and certain can rely on the company’s articles. Such defenses would include calling upon callable shares, or converting bonds to shares or preferred shares to common voting shares, or relying on an employee call option program to change shareholders control; or agreeing large bonuses in favor of directors to be received in case of a takeover. This makes the acquisition more expensive, and less appealing to the acquiring company.
However, after a takeover bid has been submitted, the directors are bound by their fiduciary duty and can only take defense measures already approved by the GA. The Law endorses the principles of Directive 2004/25 in accepting the prevalence of the shareholders vis a vis the BoD in cases of takeover bids. To be noted that any share transfer or voting restrictions in the articles and in eventual shareholders agreements are deactivated during the period of acceptance. Apart from that, the BoD shall draft a public document setting out its justified opinion on the bid, which is submitted to the HCMC and distributed to the shareholders along with an underlying financial advisors’ report.
In Germany, the ability of directors to receive a golden parachute arrangement is restricted. As the acquirer may be in a position to remove the directors under certain circumstances the main protection of the directors is their service agreement. A service agreement continues to be in effect upon removal of the director and needs to be fulfilled or compensated by the company.
The board of directors has some options to frustrate a bid, although the possibility to act can be restricted once it has been informed by the FSMA about the public offer. The most common defense measures are:
- proceeding with a share capital increase within the limits of the authorized capital (if authorized to do so);
- proceeding with an acquisition of the target’s own shares;
- selling the target company’s “crown jewels”;
- issuing warrants and convertible bonds.
24.1 Any acquisition of voting shares in any Vietnam-domiciled public company (whether listed or unlisted) resulting in the acquirer (aggregated with its related entities) holding ≥25% of issued and paid-up voting share capital must be implemented by way of a “mandatory public offer”, approved by the State Securities Commission and implemented in accordance with specifically legislated rules and procedures.
24.2 Once any shareholder (aggregated with its related entities) holds ≥25% of issued and paid-up voting share capital, then the following types of further acquisitions must also be implemented by way of a “mandatory public offer”:
- any acquisition by that shareholder (aggregated with its related entities) of between ≥5% and <10% of issued and paid-up voting share capital, implemented within 12 months of any previous MPO transaction; and/or
- any acquisition by that shareholder (aggregated with its related entities) of ≥10% of issued and paid-up voting share capital, implemented at any time.
24.3 Where any offeror proposes to implement any MPO, it must firstly prepare an application dossier containing certain prescribed minimum information and documents, setting out in detail the particulars of the proposed public offer (the MPO Dossier). The offeror must submit the MPO Dossier to the target company, simultaneously with its submission of the MPO dossier to the SSC.
24.4 The MPO cannot be implemented unless and until such time as the SSC issues its approval. Within 10 business days of receiving the MPO Dossier, the Board of Management of the target company must issue to the SSC its written opinion in relation to the proposed public offer. Before deciding whether or not to approve the MPO, the SSC will in practice have regard to the opinion of the Board of Management of the target company.
24.5 The abovementioned requirements for the implementation of an MPO can, however, be exempted, if an exemption is approved by ordinary resolution of the General Meeting of Shareholders of the target company (which normally require the affirmative votes of ≥51% of the issued and fully paid-up voting shares being represented at the relevant AGM or EGM and being eligible to vote on the proposed resolution).
24.6 Aside from the MPO requirements, Board of Management members of public companies would only have informal means available to them in order to resist the implementation of hostile acquisitions.
Directors of the target are not required to enter into negotiations with or grant due diligence access to a potential bidder if they deem the approach not to be in the interest of the company (see question 6). Further, some level of protection is obtained through share transfer and voting rights restrictions in the articles of incorporation. On the other side, Swiss corporate law does not allow for staggered boards as directors must be elected on an annual basis.
Swiss takeover law prevents directors of the target from taking frustrating actions without shareholders' approval after a tender offer has been formally announced. Frustrating actions are defined as those that significantly alter the assets or liabilities of the target company as further specified in the TOO. In particular, the target board is prohibited from acquiring or disposing of treasury shares or respective derivatives, and from issuing any conversion or option rights, unless such transactions are made in the context of pre-existing employee share programs or obligations under pre-existing instruments (such as pre-existing convertible bonds). Further, the TOB has the authority to object to defensive measures that manifestly violate statutory corporate law.
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 a 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.
Directors may use poison pills (although very rare and difficult to implement in practice).
The QFMA requirements make no provision of protections directors have against hostile takeovers. However the QFMA requirements are all based on the fact that a takeover/merger are consent based. For example, the QFMA Mergers & Acquisition Rules contemplate a merger agreement being entered into. Also many requirements (such as the requirement to have a valuation) cannot be carried out if the target company does not co-operate.