Last month, Bermuda partners Tammy Richardson-Augustus and Matthew Ebbs-Brewer shared their thoughts on the use of "poison pill" shareholder rights agreements as an anti-takeover mechanism of particular interest during the period of economic uncertainty caused by the COVID-19 pandemic. This week we revisit their advice, which has proven prescient, taking a broader offshore perspective on anti-takeover strategies in our core jurisdictions.
The unprecedented market volatility and substantial declines in stock prices that we have witnessed in recent weeks increase the probability of corporate invaders seeking to capitalise on price dislocation and shareholders' liquidity needs.
Helpfully, companies in offshore jurisdictions generally have broad flexibility to adopt various defence mechanisms, whether in their constitutional documents or other contractual arrangements with their shareholders. Defence mechanisms therefore tend to be somewhat bespoke and tailored to the needs of the individual company. However, in all of our jurisdictions, defence mechanisms will be (a) driven by market practice in the jurisdiction where the company is listed, (b) limited by the directors' fiduciary duties (which typically consist of one or both of common law principles and statutorily-mandated standards), and (c) subject to any applicable takeover rules.
Given that the same overarching considerations apply in each of our core jurisdictions, we are able to offer practical advice that applies across the board:
- Companies need to be prepared to respond quickly to hostile approaches. For UK-listed companies this will usually be in the form of having a defence manual.
- Companies should assess their vulnerability to hostile approaches.
- Companies should have a defence strategy ready and keep it up-to-date (especially if the board believes that the company's current share price does not reflect its intrinsic value due to the market dislocation caused by the COVID-19 pandemic).
- Company directors should remind themselves of their duties and potential liabilities in a takeover situation and of the need for compliance with applicable stock exchange rules. In the case of companies listed in the US and Hong Kong, a special independent committee of the board may be established to review the offer and lead any negotiations.
- Company directors should continue to be briefed on developments in the market and the proposed defence strategy and tactics of the company.
- An active shareholder communications plan should be put into place to foster open and proactive shareholder engagement on how the company intends to weather and rebound from the crisis.
- Processes should be established to monitor changes in the shareholder base and to ensure that any movements in the shareholder base suggesting a predator is building a stake are notified to the board immediately (including by the company's brokers and registrar). For US-listed companies, Schedule 13D filings (often referred to as a 'beneficial ownership report') should be closely monitored. A Schedule 13D must generally be filed with the U.S. Securities and Exchange Commission (SEC) when a person or group of persons acquires more than 5% of a company's shares. A shareholder is required to amend its Schedule 13D upon any change in beneficial ownership or any change in their previously stated investment intent.
- Companies should have an 'on the shelf' rights plan and pro forma announcement ready to respond to any possible offer.
- Other administrative arrangements should be put in place in readiness for a hostile approach. This might include having a spokesperson appointed and putting key advisors on standby. Companies may wish to ensure that they have the technical capacity to establish an internet microsite quickly if required to publish documents/announcements in connection with a possible bid.
Another defensive step that companies could take would be to identify a potential white knight (i.e. a friendly bidder that might be prepared to offer a fair value for the company's shares in the event of a hostile bid). However, current market conditions might make this harder than usual.
In addition to the above considerations, which apply to companies in all of our jurisdictions, there are additional jurisdiction-specific considerations, which we explore further below.
A Note of Caution
While offshore companies generally enjoy broad flexibility in their use of defensive measures, it should be noted that institutional investors and shareholder advisory firms have historically disapproved of anti-takeover defences. Accordingly, directors should carefully consider the terms and duration of any new defence mechanisms and be able to justify them to the market. The most obvious justification in the current climate would be the need to protect the company and its shareholders from opportunistic bidders if the company has witnessed a severe stock price decline as a result of the pandemic. Some shareholder advisory firms (including ISS and Glass Lewis) have provided guidance with respect to poison pills, suggesting that they would support them if they are limited in duration to one year or less unless otherwise approved by a shareholder vote and their percentage ownership triggers are not unreasonably low.
In Bermuda, a key defensive measure is the shareholder rights plan, which would most commonly operate via a shareholders' agreement, although it may be contained in the bye-laws of the company. As was noted more generally above, the implementation of any shareholder rights plan is of course subject always to the fiduciary duties of the directors to act in the best interests of the company and for a proper purpose. As a general matter, the existing constitutional documents and any existing contractual arrangements of the company should be reviewed to ensure that they aren't prohibited in some way from implementing the plan. Whilst they may not be restricted from implementing a shareholder rights plan prima facie, a prudent board must be able to satisfy themselves as to whether the implementation of such a plan is appropriate in the specific circumstances in which the company finds itself.
Acting in the best interests of the company does not necessarily mean that directors must obtain the very best price available for each individual share. By example, a plan was challenged and subsequently upheld by the Supreme Court of Bermuda1, where its stated objective was purportedly to protect shareholders against coercive attempts to acquire control of the company, whether through accumulation of shares in the open market or tender offers that did not offer what the board believed to be an adequate price to all shareholders.
With respect to acting for a proper purpose, it is important that a board is not acting for a collateral purpose, such as in order to entrench the existing management of the company. The board's power must also be exercised fairly between shareholders and not in such a way as to favour improperly one section of the shareholders against another. It was noted in the same Supreme Court of Bermuda decision that the action taken by the directors in the adoption of the rights plan treated all shareholders the same as at the date of adoption. The fact that the subsequently acquiring shareholder would be prohibited from benefitting from the issuance of bonus shares in the same manner as the other shareholders was not considered unfair treatment or a different treatment of one shareholder over another because the rights plan provided that ANY person acquiring 20% or more of the issued shares in the company would be equally prevented from the bonus provided for by the rights plan.
In our view, consistent with the limited case law in Bermuda, the distribution of rights to existing shareholders in anticipation of a possible hostile takeover bid is not unlawful, provided that the directors:
- have the requisite powers under the company's bye-laws to issue such rights;
- exercise those powers bona fide for a proper purpose, that is not for the purpose of entrenching the existing management of the company; and
- exercise those powers fairly as between shareholders.
However, it should be made clear that, whilst the limited jurisprudence is helpful, the issues discussed here were not fully examined. As a practical suggestion, board deliberations and investor materials should clearly identify the terms and purpose of any proposed poison pill so that any board which becomes the subject of subsequent challenge has contemporaneous evidence to justify the pill that any company was asked to swallow.
1. Stena Finance BV v Sea Containers Ltd. (1989) 39 WIR
BRITISH VIRGIN ISLANDS and CAYMAN ISLANDS
BVI business companies and Cayman Islands exempted companies are widely favoured due to their flexibility. The BVI Business Companies Act, 2004 (as amended) and the Cayman Islands Companies Law (as amended) are lightly prescriptive, with the bulk of the rules around the management of the business being set out in a company's articles of association. This, combined with the absence of takeover bid legislation in either jurisdiction, means that a company and its shareholders are free to agree to such anti-takeover provisions as they see fit, subject only to the rules and policies of any stock exchange or quotation system and any securities commission (or similar authority) having jurisdiction over the company and, if the company is a regulated entity, subject to the rules and policies of the BVI Financial Services Commission or the Cayman Islands Monetary Authority, respectively and any relevant regulatory law (in the case of a regulated entity, the prior consent of the Commission or Authority would typically be required for a change of control).
Neither the BVI nor the Cayman Islands has legislation that prohibits the use of poison pills (which could be adopted either in a shareholders' rights plan or in the company's articles of association). However, in practice, the use of a poison pill as a defence against takeover bids presents substantial challenges to the directors of the company in the discharge of their fiduciary duties. As is the case in Bermuda, the directors of a Cayman Islands or BVI target must give due consideration to any offer made in good faith to determine if the acceptance of such an offer would be in the best interests of the company.
While the Stena decision of the Supreme Court of Bermuda is not legal precedent in either BVI or the Cayman Islands, it is likely that the courts in these jurisdictions would consider the decision persuasive.
The BVI does not have its own stock exchange, but the Cayman Islands has the Cayman Islands Stock Exchange (CSX) with its own rules governing takeover bids and substantial acquisitions of shares of companies listed on the CSX (Takeover Code). Similar to takeover codes of other jurisdictions, the objective of the Takeover Code is to ensure fair and equal treatment of all shareholders in relation to takeovers and provide an orderly framework within which takeovers are conducted. However, given the relatively small number of public companies listed on the CSX, it is more common that a takeover bid would concern a Cayman Islands public company listed on a foreign exchange and so the specific provisions of the Takeover Code are not discussed here.
Whilst not specifically directed towards fending off hostile approaches, there are structural arrangements that can be put in place to make a successful takeover of a Cayman Islands or BVI company more difficult to achieve in practice, irrespective of the listing venue. Firstly, weighted voting rights can be afforded to certain share classes in the company's articles of association (for example, to a class of shares held by the founders) to make it more difficult to attain required shareholder approval thresholds. Secondly, board appointment rights can be afforded to certain share classes in the company's articles of association (for example, to a class of shares held by the founders). Target board support is a prerequisite for a number of the legal mechanics most commonly used to acquire a Cayman Islands company (namely statutory mergers and schemes of arrangement). Thirdly, secured creditor arrangements can be used as a tool to delay the takeover process and scupper deal timelines which are usually very tight (for example, proceeding with a takeover without obtaining required secured creditor consents could trigger cross defaults under the target groups finance agreements and even enforcement action by creditors).
THE CROWN DEPENDENCIES
Company law in the Crown Dependencies (Guernsey, Jersey and the Isle of Man) tends to be permissive rather than prescriptive, so most of the rules that would apply to the adoption of a new anti-takeover mechanism will be found in the company's constitutional documents and applicable stock exchange rules.
Companies in the Crown Dependencies are listed on many of the world's main stock exchanges, but the United Kingdom tends to be the most popular listing venue due to the geographical proximity.
The use of US-style poison pills by UK-listed companies that are incorporated in the Crown Dependencies is rare. This is partly a reflection of Rule 21 of the City Code on Takeovers and Mergers, which applies to offers for Guernsey, Jersey and Isle of Man companies the securities of which are traded on UK markets and in other limited circumstances. Rule 21 prohibits a company's board from taking any action that may frustrate an offer (or a potential offer) without shareholder approval. It is also because the adoption of a poison pill will typically involve a change to the rights that attach to the company's shares, which would require shareholder approval. Even if no offer is imminent, meaning the restrictions on frustrating action do not apply, the long-standing opposition of UK institutional investors to anti-takeover defences would make it difficult to obtain shareholder approval to adopt a poison pill.
A number of companies from the Crown Dependencies are listed on North American stock exchanges. Those companies could in theory adopt a shareholder rights plan, but any decision to do so would be subject to the directors' fiduciary duties, including the duties to act in the best interests of the company and for a proper purpose. The other considerations noted in the main article above would also apply. In particular, companies should bear in mind the guidance from the major shareholder advisory bodies.
As in Bermuda, the directors of a target in the Crown Dependencies must give due consideration to any offer made in good faith to determine if accepting the offer is in the company's best interests. But if the directors consider the adoption of a poison pill to be justified, perhaps by the need to protect the company and its shareholders from opportunistic bidders in view of the current market dislocation, it would be open to the directors to conclude that doing so would be consistent with their fiduciary duties.
SEYCHELLES AND MAURITIUS
The Seychelles International Business Companies Act, 2016 provides considerable flexibility to companies and the rules for management of the business are usually prescribed in a company's articles of association. Further, there is no specific take over legislation or case law precedent with respect to hostile takeover bids. In view of the above, the parties are free to agree to such anti-takeover provisions as they see fit.
In Mauritius, the Security (Takeover) Rules 2010 (Rules) apply where the target of the takeover bid is a reporting issuer but will not apply to a corporation holding a Global Business Licence unless it is listed on a relevant securities exchange.
The Rules provide for equality of treatment of shareholders and require that directors act in good faith in the best interests of the shareholders, employees and creditors of the target without having regard to their personal and family interests.
Directors have a high level of responsibility regarding any offer as all documents issued in connection with a takeover by the offeror or the target must contain a statement signed by all the respective directors that they jointly and severally accept full responsibility for the accuracy of the information contained in the documents and a confirmation that, having made all reasonable inquiries and to the best of their knowledge, opinions expressed in the document have been arrived at after due and careful consideration and that there are no other facts omitted from the document, which omission would make any statement in the document misleading.
It is worth noting that where a firm intention of an offer has been communicated to the board of a target or where the board of a target has reason to believe that an offer may be imminent, the board of the target or any shareholder thereof cannot take any action in relation to the target's affairs which may directly or indirectly result in:
- the offer being frustrated; or
- the shareholders of the target being denied an opportunity to decide on the merits of an offer.
However, this does not prevent the board of a target, with the approval of the shareholders of the target in a meeting, to:
- issue shares;
- issue or grant options in respect of any unissued shares;
- create, issue or permit the creation or issue of any securities carrying rights of conversion into, or subscription for the shares of the target;
- sell, dispose of or acquire or agree to sell, dispose of or acquire assets of a material amount, or otherwise than in the ordinary course of business;
- enter into contracts, including service contracts, otherwise than in the ordinary course of business; or
- cause the target, any of its subsidiaries or associated companies to purchase or redeem any shares in the target or provide financial assistance for any such purchase.
Takeover timetables are tight, and proper organisation is crucial. As listed company valuations remain under pressure, and event-driven investors sense an opportunity to exploit shareholders' liquidity needs, the directors of all offshore listed companies should ensure that they are fully equipped to respond rapidly to any hostile bid.
Article originally published on 13 May 2020
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.