What protections do directors of a target company have against a hostile approach?
Mergers & Acquisitions (3rd edition)
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.
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/her 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.
There is no special protection to directors of a target company in a hostile takeover. Our tender offers regulation includes a duty of neutrality and passivity similar to the one set forth by the EU Takeover Directive. Directors in Colombian listed companies do not hold the right to block a takeover transaction, and as a general rule do not play any active role in a given transaction. Therefore, defensive measures taken by directors are almost non-existent. The best and probably only defensive measure used in public markets is a competing offer.
Since Croatia hardly has any hostile takeovers, the common tactic against them, such as directors’ golden parachute arrangements, have not been commonly activated in practice. As a common rule, the acquirer is in a position to remove the directors provided that certain requirements are met, the main protection of the directors is their management / service agreement, which continues to be in effect until directors’ revocation and has to be fulfilled or compensated by the company.
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 majority (e.g., 75%), making it more difficult to change the supervisory board members.
The executive bodies are obliged to act with due professional care; therefore, they shall inform the shareholders about the hostile approach.
Along with the members of the supervisory board, the members of the board of directors have to maintain loyalty when a bid in relation to hostile takeover appears. They are in principle not allowed to voluntarily adopt any decisions which may affect the shareholders’ opportunity in deciding on the bid or to voluntarily take any action which may lead to rejection of the bid.
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.
Other than for companies listed on the CSX, 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 23 above, 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.
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 target, or after the board of the target has reason to believe that such an offer might be imminent, may any action be taken by the board of the target 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.
The target company can take any defensive measures that could jeopardize the offer without the prior approval of the shareholders’ meeting (unless otherwise provided by the target’s by-laws), provided that it does not infringe on shareholders’ powers and does not act contrary to the target’s corporate interest.
Such measures can include for instance disposal of assets, capital increase, launching a tender offer and issuance of warrants.
The target company may use anti-takeover defences to thwart a transaction, but more generally will use such defences to negotiate a higher price or to postpone an acquisition attempt until competing bidders are involved.
Defense mechanisms prior to the submission of a public bid are legally possible and 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. 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.
Many listed companies have adopted pre-warning types of anti-hostile takeover plans. These companies have adopted and disclosed rules that potential acquirers need to follow when they desire to acquire shares of such company in excess of a certain percentage, and that warn that if the acquirers do not comply with such rules, the company will take defensive measures. The intention of these rules is to secure the time and an opportunity for its shareholders to obtain sufficient information from the potential acquirer and to carefully consider its proposal. In addition, in many cases, pre-warning types of anti-hostile takeover plans allow the target company to take defensive measures against acquisitions that are determined by it to have the potential to cause clear harm to its corporate values even if the acquirer complies with the rules. Notwithstanding the above, it is not necessarily clear under what situations a target company will be allowed to take defensive measures under a pre-warning type of anti-hostile takeover plan.
Regardless of whether a target company has adopted such an anti-hostile takeover plan, in the tender offer process, the target company has the right to submit questions in its position statements to the potential acquirer, and the potential acquirer must respond (or explain its reason for not responding) within 5 business days. Also, there are other defensive measures available, for example, the acquisition of shares by a white knight. But, directors should be cautious in implementing such measures to avoid breaching their duties to the company.
There are no specific provisions under Jersey law for the protection of directors of a target company against a hostile approach.
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.
As noted in question 5, hostile acquisitions are not possible in practice in Myanmar.
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.
For the reasons mentioned above, anti-takeover mechanisms are unusual in Peru and there is no case law that addresses the legality or validity of them. However, the board has to remain neutral to all offers and protect always the interest of the shareholders.
The general rule is that directors of a target company can seek injunctive judicial remedies in an intra-corporate case. They can also petition the enforcement of a mandatory tender offer rule and nullify share purchases made in violation of black letter law. They can likewise employ the defense strategies such as the crown jewel defense, the white knight defense, the golden parachute, and the pac-man defense.
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.
Protections set out in the law are aimed at benefiting shareholders, not the directors. Regardless, in practical terms, when facing a PTO, directors resort to preexisting defensive measures or benefit from new defensive measures enacted after the PTO is issued.
Preexisting defensive measures include voting caps and other limitations in the by-laws, contractual arrangements preventing the transfer of shares and others. However, under the legal “breakthrough rule” all of these may be discarded (“broken through”) if there is a specific provision for that purpose in the target’s by-laws and if, as a result of the PTO, the bidder acquires shares representing at least 75% of the company’s voting rights. This provision will not apply if there is no reciprocity, i.e., if the bidder (or the entity controlling the bidder) is not subject to the same rules.
As for protection post-launching of the PTO, while the board is subject to a “no frustration rule” (see 9 above), shareholders may approve any defensive measures which the board will then have to respect. The board, by itself, may only take initiative to seek competing bidders.
Finally, even if frowned upon under good governance standards, “golden parachutes” are not in general forbidden and may also serve as an indirect means of protection of the directors.
Directors may use poison pills (although very rare and difficult to implement in practice).
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 his/her deputies and the chief accountant) at the initiative of the target company triggers the right of the sole executive body (his/her 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.
As a result of the restrictions of frustrating actions, detailed in question 9 above, there are limited avenues open to a target board to defend a hostile bid. Such bids can, however, be defended on technical grounds – that is, non-compliance with legal requirements or by using a delaying tactic in objecting to the competition authorities or industry regulators (for example, in the banking, mining and communications industries). That said, hostile bids are rare in a South African context and only a handful have been successful in recent years.
In general, it should be noted that the target company may not without the approval of the general meeting take any measures that are intended to impair the preconditions for the submission or implementation of a takeover offer. However, the target company is always permitted to look for a “white knight”. 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 actions by the Board of Directors that relate to public communications and may be of a defensive nature. Furthermore, if the target Board of directors ensures that the stock market is well informed of e.g. the company’s business, financial conditions, results of operations and prospects, on a continuous basis, it somewhat reduces the likelihood of a hostile approach.
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.
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 in paragraph [question] 9.
Nonetheless, the directors are obligated to give opinion to the shareholders on each of the tender offer documents of each acquirer together with the opinion of an independent financial adviser.
If a target company were subject to a hostile takeover, it could approach the regulatory authorities with a view to blocking the takeover or requiring the bidder to increase its offer price. However, as indicated above, there is currently no historic practice of hostile takeovers to provide a practice as to the actions required of directors.
At the outset, the directors must comply with their fiduciary duties even if faced with a hostile acquirer. They must act in good faith and in the best interests of the company, its shareholders and others as stated above.
However, if the directors of the target company are of the informed opinion that any takeover offer is not in the best interest of the company and its shareholders, it may attempt to gain the vote of the majority of the shareholders (by way of a special resolution i.e. votes cast in favour must be not less than three times the number of the votes cast against, if any, of the resolution) to alienate any material assets whether by way of sale, lease, encumbrance or otherwise or enter into any agreement therefor outside the ordinary course of business; or effect any material borrowings outside the ordinary course of business; or issue or allot any authorized but unissued securities entitling the holder to voting rights: implement any buy-back of shares or effect any other change to the capital structure of the target company; enter into, amend or terminate any material contracts to which the target company or any of its subsidiaries is a party, outside the ordinary course of business, accelerate any contingent vesting of a right of any person to whom the target company or any of its subsidiaries may have an obligation, whether such obligation is to acquire shares of the target company by way of employee stock options or otherwise.
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”:
(i) 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 (ii) 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.
U.S. law does not have a general prohibition on “defensive measures” or “frustrating actions”, and the board of directors of a target company has several lines of defense against an attempted hostile takeover. First, the organizational documents of the target corporation may provide various structural defenses. 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 defenses 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 organizational 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 defenses 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 alternative 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.
The directors can typically invite a competing bidder to compete against the hostile acquiror. As directors are required to conduct independent investigations on the qualifications, credibility and intention of a hostile acquirer and analyze the tender offer terms, they may also issue a negative opinion on the offer to facilitate its rejection by shareholders.
During a period of fifteen (15) business days from the date of disclosure made to EGX of the material information and terms set forth in the application for a tender offer (i.e. the MTO notice)_, the Publicly Traded Company is obliged to issue a statement expressing the opinion of its directors that are not related to the potential acquirer in relation to the viability of the offer, its consequences and importance for the Publicly Traded Company, its shareholders and employees.
The FRA may also require that the Publicly Traded Company’s directors that are not related to the potential acquirer appoint an independent financial advisor to evaluate the tender offer in the following circumstances:
- the offeror and its related parties already own 20% of the share capital of the Publicly Traded Company;
- the offeror is a board member or in the top management of the Publicly Traded Company;
- the acquisition is to be made by means of a share swap or a mixed tender offer; and
- such other cases in which FRA deems that such report is necessary for the protection of the Publicly Traded Company’s shareholders, the interests of the market and its stability.
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. These include the so called ‘white knight’ defence whereby a preferred third party makes an alternative offer for the target company.
The Takeover Code (where applicable) contains certain restrictions on defensive actions which the target may take. These are contained at rule 21.1 of the Takeover Code and mainly prevent the target from taking frustrating action unless consented to by the shareholders in general meeting. These actions may include:
- Issuing shares or granting options;
- Selling treasury shares;
- Selling or acquiring assets of a material amount;
- Entering into contracts other than in the ordinary course of business; or
- Creating defences that make the target unattractive.
In addition to the Takeover Code's provisions, the following must be considered:
- Directors' duties. Directors' fiduciary duties in Guernsey law are based on common law principles and have not been codified in statute. Directors must act in the best interests of the company at all times and must use their powers for a proper purpose.
- Market abuse. The offence of market abuse may be committed if the board does any of the following (section 41A to 41G, The Protection of Investors (Bailiwick of Guernsey) Law, 1987):
a. acts on information that is not generally available to the market and which may affect the price of the target's shares;
b. behaves in a manner likely to create a false impression of the supply or demand for, or the price or value of, the target's shares; or
c. behaves in a manner generally regarded as distorting, or likely to distort the market in the company's shares.
- Insider dealing. If the directors are in the possession of price-sensitive information and seek to block a bid by acquiring shares or encouraging others to do so, the provisions of the Company Securities (Insider Dealing) (Bailiwick of Guernsey) Law, 1996 will be relevant. A director in breach of these obligations will commit the offence of insider dealing.
- Investment fund restrictions. Since most listed companies in Guernsey are regulated investment funds, the constraints arising from regulatory rules or the fund's own investor documents must also be considered.
Please refer to the relevant Offshore Chapter for detail regarding each offshore jurisdiction.
Target directors need to act in compliance with their fiduciary and statutory duties, in particular to act in the best interests of the company for its shareholders as a whole (see question 9 above), while the Code prohibits a target board from taking action to frustrate an offer or which denies the target shareholders the opportunity to decide on the merits of an offer.
Accordingly, the Code restricts the frustrating actions the directors can take without shareholder approval during the course of an offer or prior to an offer if the directors have reason to believe a bona fide offer is imminent which would have the effect of reducing the value of the target company or attractiveness to a potential bidder. Such frustrating actions include issuing shares, granting options in respect of unissued shares, creating or issuing securities carrying rights of conversion or subscription for shares, selling or acquiring assets of a material amount, entering into contracts other than in the ordinary course of business or even (potentially) declaring or paying an interim dividend other than in the normal course of business.
In the event of a hostile approach, the directors can urge target shareholders to reject the offer on the offer undervalues the target company and its prospects. The directors will be able to publish a defence document within 14 days of the publication of the offer document setting out its reasons for rejecting the offer, while it may also disclose new information such as interim results, profit forecasts, asset valuations or details of any material acquisitions or disposals in an attempt to further demonstrate the offer undervalues the target company. However, such additional disclosures must not, save with the consent of the Panel, be announced after the 39th day after the offer document is published in order to allow the bidder sufficient time to take such information into account into its bid and, therefore, not depriving shareholders of having all information available to them to make an informed decision on the merits of the offer. Directors may also seek out a “white knight” and, subject to compliance with the requirements of the Code, may (with the consent of the Panel) offer an inducement fee to such white knight where the hostile bidder has announced a firm intention to make an offer.
One method common in the US is to adopt a “poison pill” in an attempt to make the target company unattractive, for example, by causing a material contract to automatically terminate on a change of control. In the UK, such poison pills are not common place and, where such poison pill arrangements seek to amend share rights, such amendments are likely to require shareholder approval which institutional investors are unlikely to vote in favour of.
The other protection afforded to target boards in a hostile takeover situation is the so called “put up or shut up” regime, whereby they identify the bidder in an announcement which then forces such bidder to, by no later than 5.00 pm on the 28th day following the date of the announcement in which it is first identified, either make an announcement of a firm intention to make an offer or announce that it will not make an offer. If the bidder makes the latter announcement it will be precluded from making an offer within six months of making the announcement (see question 16 above).
In the case of a hostile bid, the bidder will not have access to inside information of the target company by its board of directors nor will it have the possibility of carrying out a due diligence. Similarly, the directors of a target company in a hostile bid may take several defensive measures such as, issue of shares.
Directors of a public target company may apply protection measures subject to the restrictions set out in the Civil Code and the Capital Market Act. Protection measures may include the increase of the company’s registered capital, acquisition of the company’s own stock, so-called poison pill defense (limiting the maximum level of votes that can be acquired in the company, or facilitating the dilution of the acquirer by the other shareholders at a discounted price), financial assistance or other restrictions in the company’s bylaws, or the inclusion of change of control clauses in the company’s business critical contracts.
As for the restrictions on financial assistance, we refer to point 19 above.
Furthermore, the Capital Market Act restricts the possibility for the company’s management board to apply protection measures as follows: if a public target company’s articles of association so provide, the directors of the target company must remain neutral and cannot take measures to prevent or disturb the acquisition (such as a capital increase or the acquisition of the company’s own stock). Notwithstanding this restriction, the directors may (i) encourage that a counter-offer is made in case a compulsory public takeover bid, or (ii) decide to implement a resolution of the supreme body made before the announcement (or information) of the public takeover bid, provided that it constitutes the ordinary course of business of the target company, or (iii) take the measures specified in the resolution of the supreme body made at a meeting convened after the announcement of the public takeover bid.
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.
According to Article 47 of the Takeovers Act (ZPre-1) the company’s management or supervisory bodies must be passive from the date of receipt of the notice of the intended takeover. The management of the target company requires a resolution of the general meeting of shareholders for most of the protective measures. Therefore the management in the case of hostile approach usually starts to spread the news about the inadequacy of the offer (e.g. low offering price, job loss especially when shareholders work in the target company, suggestions to wait for a better offer). Management could also try to find a “White Knight”, start litigation proceeding against the buyer, or try a “Pac-Man” defense. However, the most used protective approach in Slovenia by the management of the target company is to try to convince regulators (i.e. Slovenian Competition Protection Agency (AVK) and the Securities Market Agency (ATVP)) that the potential acquisition is bad for the market.