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Directors need to act in the best interest of the company Back  
Stephen Hegarty looks at the responsibilities facing company directors when a bid is made for their company focusing on the Irish Takeover Rules.
Any decision taken by the directors of a company in respect of an offer for the company must take into account the fiduciary duties, which they owe to the company in respect of that offer. These duties are owed to the company only and not to the company’s shareholders, creditors or employees. These fiduciary duties require the directors of a company to act for the benefit of the company as a whole.

Irish takeover rules
In addition to the fiduciary duties of directors, the Irish Takeover Panel Act, 1997 and the Irish Takeover Rules now impose statutory obligations on directors of Irish listed companies in bid situations. Many of these statutory obligations are directed towards ensuring that shareholders in the target company are not disadvantaged and that they treated equally and have access to all relevant information concerning that company so as to allow them to properly consider the offer. If necessary, the Irish Takeover Panel can enforce these obligations by issuing directions to the directors of the companies involved in an offer.
Under the Irish Takeover Rules, the directors of the target company are expected to advise the target shareholders on the merits and demerits of an offer or to state that they have not formed a view on the offer. When the directors communicate their views to shareholders, the Irish Takeover Rules require that their views be accompanied by advice from professional advisors.

Potential liability
In addition to sanctions, which can arise for a breach of the Irish Takeover Rules, civil and criminal liability can arise for directors in respect of statements made by them in the course of an offer. Such liability could arise if a director makes a misleading statement (or omission) on which an investor, to whom the director owes a ‘duty of care’, relies and the investor suffers loss as a result.
An action for defamation can be brought where words are published about a company or an individual which would affect the business or trading reputation of the company or would lower the individual in the opinion of right thinking members of society. However, whereas individuals can potentially recover substantial damages for defamation, a company is unlikely to be able to do so unless it can show special damages.
Conduct of an offer
During the course of an offer for a company, it may not be feasible to convene Board meetings because of the very limited time available to deal with urgent matters arising during the course of the offer. For this reason, it is often advantageous for the Board to appoint a Board committee with power to take all necessary action on their behalf during the course of an offer including the issue of announcements etc.
Even when a Board committee is appointed, there is often a delay before the committee is in a position to respond to statements or announcement made by or on behalf of the offeror. For this reason, holding announcements are commonly issued so as to notify shareholders that the matter is being considered and that they should not take any action until a full response has been made.
It is recommended that only a very limited number of individuals should be authorised to release any information about the company during the course of an offer. It is important these person familiarise themselves with the Irish Takeover Rules. Generally, it will be appropriate for enquiries to be redirected to the company’s financial adviser.
Absolute secrecy must be observed before the public announcement of an offer. This requirement is reinforced in the prohibitions on insider dealing contained in Part V of the Companies Act, 1990 where it can be an offence to disclose unpublished price sensitive information in certain circumstances.

Defences to an offer
It is not possible in this article to outline the range of defences, which are available to the board of a target company wishing to defend against a bid. However it is worth high-lighting some of the more important aspects of any bid defence.
The Irish Takeover Panel Act, 1997 prohibits actions that may potentially frustrate an offer for the company unless the consent of the company’s shareholders has been obtained. The Irish Takeover Rules contain detailed provisions concerning actions that must not be taken by the board of the target company once they have reason to believe that an offer may be imminent. These provisions restrict the defences available to the board of a target company wishing to defend against a bid.
A high share price is normally the most effective defence to a potential bidder. Conversely a company whose shares are trading at a discount to its asset value, or less than the average earnings multiple for the industry, may be vulnerable. In the past, directors in takeover situations have attempted to bolster their share prices by procuring third parties to purchase shares in the company on the strength of an indemnity from the company should the purchased shares subsequently fall in value. Such activities are always illegal. They constitute a variety of offences in both Ireland and the UK. It is also an offence in both Ireland and the UK to deliberately publish false information in order to increase a company’s share price.
Another important defence available to the directors of a target company is to decline to recommend the offer and to persuade their shareholders that the offer is inadequate and/or does not represent good business logic of the company. This may be achieved by including valuations of the company’s assets and/or profit forecasts in its defence document.
The track record of the bidder can also be attacked and any ‘skeletons in cupboards’ appropriately highlighted. This may be particularly important where the bidder is offering paper. Good media advice is essential in all such circumstances.
The Irish Takeover Rules lay down stringent requirements for independent verification of valuations and profit forecasts. In addition, the Irish Takeover Rules preclude a target company from announcing trading results, profit or dividend forecast, and valuations or proposals for dividend payments, subject to certain exception, after the 39th day the posting of the offer document.
As an alternative to the bidder, the directors of the target company may seek out another entity (i.e. a ‘white knight’) willing to offer to acquire the company. In doing this, it is important that any recommendation made by the directors of the target company in respect of the offer by the white knight must be bona fide and in the best interests of the company.
As a tactical move, the directors of a target company normally introduce a white knight at the last possible moment making it less likely that the original bidder will increase his price.
If the original bidder is given an opportunity to increase his price, it will be difficult for the target company’s directors to refuse to recommend the increased bid unless the white knight also increases its bid. The advice of the target company’s advisers in such circumstances is always critical. There have been cases where the target company’s directors have recommended a lower offer.
In some cases, a target company’s Group may comprise different businesses, which if traded separately could realise a combined price higher than the best price achievable for the target company’s shares. This can be achieved by a demerger of the relevant businesses from the group by issuing shares in the trading companies concerned directly to the target company’s shareholders. This will normally require the consent of the target company’s shareholders.

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