Bear hugs and grizzly bears

Steven Glanz discusses the board’s role in deciding which unsolicited takeover bids are put to shareholders.

TPG’s stalking of Billabong is the most recent use of a "bear hug" by a prospective bidder in an attempt to obtain target company co-operation with its proposed takeover bid. A relatively aggressive tactical mechanism, a bear hug involves an unsolicited proposal that is publicly announced by the putative bidder, or otherwise leaked to the public, to prompt shareholders into pressuring the company’s board to engage the bidder and recommend the proposal.

Another recent example of this pressure at work is the Spotless and Pacific Equity Partners (PEP) saga. Almost six months after PEP put its first "indicative, non-binding and conditional" proposal to the Spotless board – that is, six months of relentless media coverage and shareholder threats to remove the directors – the Spotless board recommended an offer by PEP to its shareholders.

Unsolicited approaches focus attention on target company directors – eliciting strong views that can cut both ways. If a company board entertains a proposal, it can still be criticised if it fails to create an auction for the target company. On the other hand, if a board refuses to engage a bidder, shareholders will feel disquiet if they subsequently see the value of their shares decline.

Company boards should be free to decide which unsolicited bids deserve the co-operation of the target company and the board without undue tactical pressure and public manipulation in the form of a bear hug. It is one of a board’s key roles to assess potential bid proposals and determine which, if any, of those proposals are worthy of shareholders’ consideration, based on the value of the bid and the value of the company. If a bidder is convinced its offer price is sufficiently enticing to shareholders, it is always open to the bidder to mount a formal bid without a board recommendation.

In Australia, there are restrictions on a target company’s ability to take deliberate actions to stifle an unsolicited proposal, such as a new capital raising, without shareholder approval. However, on the flip side, a company’s board is not generally required to engage a prospective bidder or to act as auctioneers of the target company.

So, if directors cannot take proactive actions to stifle a hostile proposal, but are also not obliged to stimulate an auction for their company, can they just say "no" to a potential bidder without consulting shareholders? In Australia, the answer is yes. Rejecting an unsolicited approach without shareholder consultation is possible.

There is no obligation on a target company’s directors to put all legitimate takeover proposals to shareholders for their consideration.

This means that generally target boards can interpose themselves between the prospective bidder and shareholders and act as gatekeepers of shareholders’ interests.

It is largely for this reason that the "bear hug" is on the increase in Australia. If directors had to co-operate with every bidder and put all approaches to shareholders, prospective bidders would not be using bear hugs to muster the influence of shareholders, and in many cases the media, and make it harder for directors not to engage them.

Of course, if an offer is economically attractive, target company directors will most likely find it hard to resort to a "just say no" defence unless the company has a strategic plan for delivering more value to target company shareholders and can persuade shareholders and other stakeholders of the efficacy of that plan.

While there are a few conspicuous examples of target company boards having made the wrong call on unsolicited approaches, there are also numerous examples where target board hostility to an unsolicited approach has provoked a higher offer. There are also many more examples where target boards have rejected opportunistic offers and the target companies have gone on to create greater medium- to long-term value for shareholders.

Boards may not have crystal balls, but they typically have the greatest knowledge of the target company’s performance, prospects and plans. As long as target company directors are doing their jobs diligently, they are best placed to decide which unsolicited approaches should be considered by shareholders. The real issue is that shareholders and market commentators tend to judge target company directors after the event with the benefit of rose-coloured glasses. That can sometimes turn shareholders into grizzly bears.

Steven Glanz
Partner
Baker & McKenzie