Responding to Unsolicited Takeover Offers

In an article entitled “Responding to Unsolicited Takeover Offers,” my partner Frederick H. Alexander provides an overview of the issues a board may consider in evaluating a company’s governance profile given the potential increase in unsolicited offers in the current market environment. The article explains that despite the downturn in M&A activity during the past two years, current market conditions make some companies vulnerable to unsolicited bids. Indeed, hostile bids accounted for 47% of the M&A transactions in the first two months of 2009, compared with 24% in 2008 and 7% in 2004. Against this backdrop, the article discusses forms that unsolicited acquisition offers may take as well as the considerations and constraints relevant to directors in determining their responses.

The article also provides the following checklist of critical issues that directors should consider to avoid becoming the target of a harmful takeover offer attempt and determine the most appropriate course of action should the company be approached by an unsolicited bidder.

Assemble a solid team of experts. Operating in the M&A market has traditionally required a wide range of expertise that the board may not have internally. The need for skills and preparedness is only accentuated by the challenges of the current economic and financial environment. In particular, directors should ensure they have ready access to in-house and outside legal and financial advice as well as experts in investor relations and proxy solicitation.

Understand shareholder base and intentions. Board members and senior executives should have a full understanding of shareholders’ intentions, as they may be critical both from a preventive standpoint and in determining the right defensive strategy. Stock surveillance firms and proxy solicitors may help the corporation actively monitor the larger investors as well as those who engage in large accumulations of stock or extraordinary trading patterns. The company should also consider investigating groups of investors or other possible (undisclosed) voting arrangements to determine whether a bidder is acting alone or has the support of others.

Maintain proactive external relations. Credibility with institutions, analysts and proxy advisors may be crucial in responding to unsolicited bids, so it is important to maintain good lines of communication. Investor relations teams, in particular, can help corporate leaders identify key shareholder allies and nurture those relationships, for example, by regularly informing them—in compliance with Regulation FD and insider trading rules—on new business decisions affecting strategy and long-term shareholder value as well as the financial metrics and valuations on which those decisions were based. Similarly, a proactive outreach to governance analysts and proxy advisors is essential to communicate and persuade on the rationale for adopting defensive devices that could otherwise become the subject of public criticism.

Review certificate of incorporation and bylaws. A board should review charter and bylaw provisions for the purpose of assessing the strength of the corporation’s general defensive profile. Structural and procedural defenses should be updated so that they reflect legal developments and, when possible, best practices. In doing so, directors should be mindful of the following considerations.

Some defensive actions (e.g., classified board structures or disabling action by written consent) can only be adopted bilaterally through a board resolution and subsequent shareholder approval. Others, such as bylaw provisions and poison pills, may be adopted unilaterally by the directors, but may be helpful only if already in place when the company receives the unsolicited bid.

• If the decision is to depart from governance standards that are widely supported by proxy advisory firms and influential shareholder groups, the reasons why directors believe doing so is in the shareholders’ best interests should be clearly articulated.

• Many legal advisors recommend that the company should consider addressing instances of undisclosed derivative/hedging positions (such as cash-settled swaps) and the vulnerability resulting from depressed stock valuations. A bylaw requiring that the advance notice of shareholder proposals or nominations be accompanied by more detailed disclosure of all equity (including synthetic and temporary) holdings as well as a poison pill of limited duration may help to achieve these goals.

Develop coherent procedures and a unified response. The board of directors should be comfortable that the company has ad hoc internal communication and reporting procedures to deal effectively with the threats of a hostile takeover. Most important, any evidence of a potential bidder should be promptly escalated to the top (at a minimum, the chairman of the board, the governance committee chair, and the CEO should be informed) so that it receives the appropriate level of attention. For the purpose of developing an actionable response plan, board members should seek the close collaboration of senior management, albeit while remaining mindful of potential conflicts of interest.

Although a board receiving an unsolicited bid will face a number of decisions, directors ultimately choose from among three possible outcomes:

1. Sale to the bidder

2. An alternative transaction

3. Remaining independent

To fulfill their fiduciary duties of care and loyalty, directors should decide the corporation’s response to the bidder based on a thorough discussion and understanding of the implications of each alternative. This may require reassessing strategic goals in light of macroeconomic trends and industry developments as well as exploring alternative approaches to business growth.

The article is available here.