Hostile takeovers happen quite often and as tensions run high between the acquiring company and its takeover target, things can get ugly.
A recent report from GovernanceMetrics International (GMI) indicates that the prevalence of ‘poison pills’ used by S&P 500 companies to discourage hostile takeovers declined to 16 per cent last year – a significant reduction since 2002, when more than half of companies used this technique.
Since there has been a marked increase in the number of hostile takeovers since the beginning of last year, is it good business strategy to toss out the ‘poison pill?’
‘When trying to avoid a hostile takeover, poison pills remain an effective strategy for buying more time,’ says Paul Downs, a partner at Jones Day and a corporate governance and compliance specialist. ‘The poison pills allow current shareholders (but not the hostile acquirer) to be issued more shares at a discount, which would prohibitively increase the cost of an acquisition. The threat of this can help the company buy more time in determining who is willing to pay up, or for finding alternatives.’
Sanjay Shirodkar, of counsel to DLA Piper’s public company and corporate governance practice, raises a similar point: ‘Potential dismantling of a company’s takeover defenses is an issue that can have a serious impact on a company’s long-term success, and such decisions merit thoughtful and thorough analysis of many different issues and are best undertaken with the assistance of competent advisers.’
Considering these thoughts, it’s not too late to start reassessing your company’s takeover defenses.
According to Downs, who has represented a variety of US corporations and investors in their business operations in Europe, there are a few ways a company can tell whether or not it needs a poison pill:
(i) Consult with counsel: The corporate secretary maintains the corporate records, which include the charter and bylaws that hold most of the company’s takeover defenses. ‘The counsel is aware of the strengths and weaknesses of the pill and the first step should be talking it over with this department,’ Downs notes.
(ii) Ask yourself; does the company have a need for such defence? For example, if the firm has long-standing dominant shareholders, there is less risk of a hostile takeover.
(iii) Examine extraneous elements: If a company is in a highly regulated industry, there may be regulatory hurdles. Downs points out that it is necessary to look at the concentration in the industry – if there are only two companies competing in the same industry, then there is no need to have a defence in place to defend against a hostile bid by a competitor, although the company may still become a target for those outside the sector.
(iv) Determine the jurisdiction: Certain states have legislation that can make it difficult for an acquirer to gain effective control of a company headquartered there. In some cases, the state may be motivated to help keep corporate headquarters and operations in the same area so the option for a poison pill and other defenses may be greater under that law.
(v) Geographic profile: Increasingly, cross-border transactions are subjected to national security reviews. ‘A clear example is the Committee on Foreign Investments in the United States, which is responsible for reviewing the national security implications of foreign transactions in US companies,’ confirms Downs. ‘The president can prohibit the transaction and this is a major deterrent to a non US-acquirer, where the deal has national security implications.’
In the final analysis, corporate secretaries are responsible for a lot of issues that arise under corporate takeovers. Downs stresses that it is important to always consult with legal counsel prior to making a move to have a better chance of long-term success.
[Article by Aarti Maharaj, Corporate Secretary]
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