Getting On The Front Foot: Responding To A Takeover Approach

In brief

Receipt of an unsolicited non-binding offer – or even more so an unsolicited takeover bid – can make a target company and its board feel immediately on the back foot, even for directors and executives who have been involved in a change of control transaction in the past.

In this article, we provide practical guidance to help target boards get on the front foot early, take control of the process, and position themselves to be able to assess a proposal with shareholders' best interests front of mind.

Early warning signs: hints that a proposal is coming

A very near-term warning sign is a financial adviser or other external contact getting in touch to seek contact details for the Chair, or test their weekend availability. In most cases, the first direct contact to foreshadow an approach will be to the Chair over a weekend or in an evening outside of market hours.

Changes in the register – or to beneficial ownership uncovered through the tracing notice process – may signal stake building. Sometimes a company is alerted by major shareholders to a stake building approach. In more dramatic circumstances the board may be informed by the media or shareholders of an overnight raid.

Given offence is the best defence, it is important to prepare and maintain a takeovers defence manual and have this readily available to the board as a comprehensive resource in the event of an unanticipated proposal. We often assist with preparing and updating these manuals, including initial 'leak' response announcements should a company be required to say anything at this early stage.

Prepare the Chair for the initial approach

There is much content in takeovers manuals about how to manage any initial approach, including logistical tips such as maintaining contemporaneous file notes.

As part of its initial call, a bidder will typically be seeking to gain as much insight as it can as to how the proposal may be received, whether the target will announce and when the board is likely to be able to meet to consider the proposal and respond to the approach.

A target Chair should seek to be in listening mode and be non-committal, while asking questions to get as much detail as possible regarding the bidder and the terms of its proposal.

Convene board and advisers

The board should be informed promptly, to commence consideration of the proposal and to appoint or confirm existing external advisers.

If the target has an up-to-date takeovers manual, that should be a handy reference point for who to contact, internally and externally, including financial, communications and legal advisers.

As soon as practical, a board meeting should be convened to consider the offer, including any initial announcement approach. Consider whether to appoint a sub-committee since quick board input may be required during the process, although typically at the earliest stages all directors will want to be actively involved given the importance of a control transaction for shareholders.

Identify and manage conflicts

If there is any insider participation in the proposal – e.g. the offer is by an existing major shareholder or a director or executive is directly involved – there is some complexity involved in managing the conflict. It is important to put processes in place early to manage the conflict appropriately. This is an area for bespoke legal advice based on the particular facts.

If there is clear potential for such an insider transaction to arise, it can be useful to adopt relevant board procedures in advance so as to have clear guidelines for all parties to follow at the time of the transaction.

Check D&O insurance

Usually a company's existing D&O insurance will be fine in a control transaction context. However, it is worth a check to make sure there is no relevant exclusion which leaves a gap in the board's protection – e.g. if there is some unusual aspect like the bidder being a related party of the target company. If there is a gap, take steps to get it covered.

Determine initial announcement approach

Where the first time that the board hears of a proposal is when the bidder has launched a takeover bid – or will do so imminently, the decision is what the target will say in an announcement rather than whether to announce. That announcement will typically include a "take no action" statement and a promise to say more once the board has considered it.

The more common approach is a confidential non-binding indicative offer which the bidder will usually not want disclosed immediately. Provided it remains confidential, the target is not obliged to announce, and the board then has a strategic decision to make whether to announce. Some of the key considerations are below.

Possible drivers to announce

• Take proactive control of the messaging around the approach, rather than reacting in the event that confidentiality is later lost.
• Enable the board to canvass the views of shareholders on a non-wallcrossed basis. This can be particularly important if the company has large shareholders who may play a key role in the success or otherwise of a transaction.
• Announcing the approach might trigger rival interest or an auction process and put pressure on the bidder to pay more.
• Disclosure can mitigate the risk of criticism from shareholders, the market and other stakeholders if the takeover approach becomes public at a later date.

However, more commonly a target board will choose not to announce immediately due to opposing drivers:

• The bidder will often threaten not to proceed if confidentiality is lost, putting at risk a potential transaction which may be in the best interests of shareholders.
• Early-stage announcements can unnecessarily destabilise key stakeholders, including employees, customers and lenders.
• The announcement may convey to the market that the company is "in play" even if the initial approach is opportunistic or undervalues the company and is dismissed out of hand by the target. Event-driven hedge funds may, for example, buy up shares, shifting the composition of the register toward a short term outcome focus.
• There will be enhanced distraction from the business as a result of the daily media commentary which often applies in a takeover context.
• Even where the approach is positively received by the board, early disclosure before there is a signed deal risks creating a perception of failure if the transaction does not proceed, which can be damaging to value and the board's future credibility.

Preparing for announcement

If the board decides to announce the approach, the target needs to prepare its communication process to other stakeholders – including shareholders, employees, regulators and potentially politicians, customers and lenders. This needs to be done at pace and in compliance with the insider trading and continuous disclosure rules.

Maintaining confidentiality if the board chooses not to announce

If the board seeks not to announce the approach (e.g. because it is progressing confidential discussions with the bidder), it will be important that the existence of the proposal remains confidential to ensure compliance with continuous disclosure rules. In this context, the target should keep the circle of insiders as small as possible, with management informed on a 'need-to-know' only basis. It can be helpful to adopt processes to reinforce confidentiality, such as individual NDAs, passwords on all documents, code names for all parties and similar.

Determine engagement approach

The mantra for target directors to work towards at all times is to inform themselves (including through expert advice) and act in what they genuinely consider to be the best interests of shareholders.

There is generally a bit of time for the board to consider the offer and its engagement approach with the bidder. This is where it is important not to over-commit to the bidder on a response within any particular time frame. To be on the front foot, the target needs to signal that it is dancing to its own tune, not the bidder's.

Even with an announced takeover bid, the target has at least two weeks to respond before the bid can open (but possibly not before the bidder can buy target shares). In a non-binding indicative offer there is no particular time frame, however, all things being equal a board would usually have around 1-2 weeks to evaluate an approach and respond.

Some factors the board will be working through in evaluating whether the proposal is in the company's best interests (and accordingly how to engage with the bidder) include:

• valuation / proposed price – financial adviser input is highly relevant here;
• the likelihood that the bidder will increase the offer price or of any competing bids emerging;
• any terms or conditions which make the execution risk particularly high or otherwise make the proposal unappealing;
• the identity, reputation and financial capacity of the bidder; and
• potential disruption to the target company's business and any mitigants.

Decide whether to grant exclusivity

A bidder will often seek "exclusivity", effectively limiting or shutting off the board's ability to respond to any alternatives while negotiating with the bidder and allowing it due diligence. Again, it is up to directors to decide in their best judgement, with the benefit of advice, whether granting exclusivity is in the best interests of shareholders.

A board may decide to grant exclusivity because:

• A bidder may not be willing to commit the time, effort and cost to the process including due diligence without exclusivity.
• A board might be able to extract other concessions from a bidder in exchange for granting exclusivity- e.g. a standstill where the bidder is restricted from dealing in the company's shares or from engaging with its shareholders.

A board may be more willing to grant exclusivity where alternative proposals are considered less likely, such as where the bidder is a significant shareholder.

In contrast, a board might be less inclined to grant exclusivity where the board has decided to engage with an offer but is not convinced that the value offered is sufficient or the board considers there to be a good chance that competing proposals might emerge.

Decide exclusivity terms

While the decision to grant exclusivity can be a key strategic decision, agreeing the terms of exclusivity will also be critical. Some of the most important issues include:

• Duration: In particular, a shorter exclusivity period limits the period in which the board is subject to the exclusivity regime and can motivate bidders to complete due diligence and agree transaction documents more expeditiously.
• Hard exclusivity and fiduciary out: The Takeovers Panel has indicated it may be permissible to have a period of 'hard exclusivity' (up to four weeks) during which the board is not able to have a fiduciary out to consider alternative proposals received, even if they are unsolicited. This can be a very significant decision and should be reserved for exceptional circumstances. Boards should be very careful in agreeing to limit their ability to consider alternative proposals.
• Other rights for the bidder: Bidders also commonly seek additional rights, such as the requirement on the board to notify the bidder of any alternative approaches and the bidder having a right to 'match' any other offers received before the board can engage and even seeking to have costs reimbursed in some instances.

In considering the above, it is important for boards to have regard to what is likely to produce the best outcome for its shareholders in the context of the particular proposal. In particular, this may include seeking additional protections for the company, such as non-approaches and standstills.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.