The board's duties in a takeover
When news of a potential takeover of a listed company
breaks, shareholders and the public would usually look first to the board's
response to the takeover offer.
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LEE KIM SHIN
17 October 2016
When news of a potential takeover of a listed company breaks, shareholders and the public would usually look first to the board's response to the takeover offer.
Directors owe fiduciary duties to act in the best interests of the company, and this often means having proper regard for the collective interest of its shareholders.
This article outlines the obligations and issues that a target company's board should be aware of in three broad areas: communications, recommendation on takeover offer, and dealing with the offeror.
Communications
In a takeover, the target company's board's duty to shareholders includes notifying them, without undue delay, of an offer from a serious source, regardless of its views about the merits of the offer.
A firm offer is, however, different from the situation where a prospective bidder simply expresses, through private channels, an informal interest in the company and indicates it would like to discuss the next steps, including access to due diligence. In such circumstances, publicly announcing the approach from the interested party can be premature and inappropriate.
However, the board must keep a close watch for unusual movements in the company's share price, or a significant increase in the volume of share turnover. It must also ensure that information relating to the prospective bid is kept confidential, and that a list of persons privy to that information is kept.
Now, if there are unusual share price movements or significant increases in trading volume, or there are rumours in the market about a possible offer, the company should be transparent and make a prompt announcement about the potential offer.
In this regard, directors must be careful not to make statements that may mislead shareholders or the market. They should be especially mindful when engaging with the press. It is very difficult, after articles are published, to make corrections or alterations. Particular care must be taken during media briefings, as directors must immediately disclose to shareholders any material new information or significant new opinions.
Recommendation on the offer
When there is a firm offer, the offeree's board must make a recommendation on the takeover offer.
It goes without saying that the board must protect the interests of shareholders, and not their own interests or those derived from personal or family relationships. Once a board receives a takeover offer, it should immediately identify the directors who are independent in relation to the takeover offer. Directors with personal interests should declare them as soon as possible to the board.
Any director with an irreconcilable conflict of interest (for example, if he or she is also a director or officer of the offeror), must ask the Securities Industry Council to be recused from assuming responsibility for any recommendation. However, the conflicted director remains responsible for the accuracy of facts stated in any document that the company issues to its shareholders in relation to the offer.
To assure the shareholders that they have been given competent independent advice on the merits of the takeover offer, the target company's board must appoint an independent financial adviser (IFA) as soon as possible after it has received the offer, or after it has been approached with a view to an offer being made.
The substance of that advice must be made known to shareholders. The written advice from the IFA to the directors who are independent of the takeover forms part of the company's circular to shareholders that it has to prepare.
If the board believes that a bona fide offer is imminent, it must not take any steps that could result in either the offer being frustrated or the shareholders being denied a chance to decide on the merits of the offer. However, this does not mean that the board cannot solicit a competing offer or conduct an auction process. Such an action would normally be regarded as a prudent course of action which is undertaken in the best interests of the company and its shareholders.
The company is also allowed to enter into a break fee arrangement with the offeror or potential offeror. A break fee is a sum to be paid by a target company to the offeror or potential offeror if a specified event occurs and the offer fails. An example is when the board recommends a higher competing offer. A break fee must be minimal - normally no more than one per cent of the value of the company calculated by reference to the offer price. Of course, the board must act in good faith when negotiating a break fee; the Singapore Code on Take-overs and Mergers provides guidelines on the disclosure and terms of break fee arrangements.
Be prepared
A board needs to be well versed in its duties and responsibilities when dealing with a takeover offer. Above all, it must respond promptly to the takeover offer, and always have proper regard to the interests of the shareholders. These responsibilities should not be taken lightly. Any misstep could create a false market, or result in the director incurring personal liability or damaging his reputation. As a practical matter, it should engage competent advisers on legal, financial and investor relations matters to assist with such responsibilities.
The writer [848 WORDS]is a member of the Governing Council of the Singapore Institute of Directors.