In this environment of declining stock prices, it is more critical than ever for companies to be prepared for unsolicited takeover bids. Selling a company when its stock price is at historically low levels may not necessarily maximize shareholder value, even if a potential acquirer offers a premium on the current stock price. Preparation for takeover attempts requires careful planning and a proactive, flexible approach. To minimize the risk of becoming the target of an unsolicited bid, a company should consider taking the following preventive measures:
Prepare the board of directors. Companies should prepare their boards to deal with unsolicited bids by maintaining a unified board consensus on key strategic issues. Companies should review basic strategy with their boards in light of possible arguments for sales of divisions or business units, spin-offs, share buybacks, special dividends, or other structural changes. Companies also should schedule periodic presentations by legal counsel and investment bankers to familiarize directors with the current takeover environment. Finally, companies should instruct their directors to refer all approaches by bidders to the chief executive officer (CEO).
Articulate and demonstrate a well-vetted corporate strategy. Companies should communicate key priorities for management and provide realistic benchmarks and milestones that investors can use to evaluate management's execution progress. Additionally, companies should communicate their strategy proactively, consistently, and in a manner that is understandable and that responds to issues raised by others, including analysts or investors.
Monitor shareholder relations. Companies should solicit regular feedback from all types of shareholders to determine areas of discontent, detect potential points of company vulnerability, and determine the support level for the direction of the company. They should review their financial public relations process and policies, maintain regular, close contact with major institutional investors, and proactively address reasons for any shortfalls in comparison to peer-company benchmarks. Companies also should monitor analyst and media reports for opinions or facts that might attract the attention of unsolicited bidders (e.g., an analyst report indicating that the company is in a good position for sale). Companies should anticipate that they will receive more strategy suggestions, calls, and requests for meetings from shareholders, and they should be prepared to address any concerns or ideas raised. With Regulation FD in mind, companies should address those ideas and concerns on public conference calls during which company representatives can discuss strategy proposals, reasons the company has declined to pursue a given strategy, and alternatives to a proposed strategy.
Monitor Trading. Companies should look for and take note of the use of trading and hedging strategies by potential acquirers or those seeking to have the company sold. Companies should consider utilizing a stock watch service to monitor new large shareholders and unusual trading activity and should watch for Schedule 13D and Hart-Scott-Rodino Act filings, which will provide notice that a potential bidder has acquired an ownership position.
Preparation for an unsolicited takeover also should include the following considerations:
"Advance notice" bylaws. Companies should ensure that they have in place unambiguous advance notice bylaws relating to shareholder proposals (including director nominations) so they can avoid the problems illustrated by two recent Delaware cases, JANA Master Fund Ltd. v. CNET Networks, Inc., and Levitt Corp. v. Office Depot, Inc. The holdings in these cases demonstrate that Delaware courts will construe the language of advance notice bylaws narrowly and will resolve any ambiguity in favor of shareholders. At a minimum, advance notice bylaws should include the following: (1) clearly drafted requirements relating to timely prior notice to be provided to the company for any proposal a shareholder intends to bring before the annual meeting; and (2) disclosure requirements for making a proposal, including requirements that the proposing shareholder disclose (i) any material interest of the shareholder in the proposal; (ii) the full and complete "ownership" interest of the proposing shareholder; and (iii) any relationship (economic or otherwise) between a shareholder nominee and the shareholder proposing the nomination.
Removal of directors for cause. Companies should consider whether they can amend their bylaws without shareholder approval to provide that directors may be removed only for cause. In some states, companies can provide in their bylaws that directors may be removed only for cause, and an amendment to the bylaws generally will not require shareholder approval. In other states, however, companies can limit the ability of shareholders to remove directors only through a charter amendment, which shareholders are unlikely to approve.
Action by written consent. In states where companies can restrict shareholder action by written consent through their bylaws without shareholder approval, companies should ensure that their bylaws either eliminate or greatly limit (e.g., through procedural rules and time limits) the ability of shareholders to act. However, this tactic would not be feasible in states where limitations on shareholder action by written consent would require a charter amendment.
State anti-takeover statutes. Companies should ensure that they have not opted out of state anti-takeover statutes, which restrict specified business combinations and could help thwart a takeover attempt.
Staggered board of directors. Companies should anticipate that activist shareholders will attempt to eliminate staggered director terms. However, companies should not assume that the shareholders will prevail and should actively resist any such attempts. A number of companies have been successful at persuading a majority of shareholders to vote against declassification proposals.
Shareholder rights plan. Companies should consider adopting a shareholder rights plan or extending a plan that is scheduled to expire. Companies continue to face pressure to eliminate rights plans but they should not yield automatically to that pressure. In addition, boards should be prepared to move quickly to adopt a rights plan when the situation warrants.
Preparation for an unsolicited takeover attempt is critical to a company's survival. A public proposal results in enormous pressure on the target company's board and management team. An unsolicited bid that escalates into a proxy battle can cause irreparable harm to the target company, regardless of who "wins." In order to defend itself in a takeover situation, a company must have in place, and regularly reconsider effective defenses like those suggested above.
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.
