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Hostile takeover tactics

Hostile takeover tactics

Corporate directors would do well to prepare for a rise in unsolicited takeover offers.NEW YORK: There may be signs of so-called "green shoots" in the economy, but one of them does not…

Corporate directors would do well to prepare for a rise in unsolicited takeover offers.

NEW YORK: There may be signs of so-called "green shoots" in the economy, but one of them does not necessarily bode well for all boards of directors. Indeed, a sharp rise in unsolicited takeover offers in the US means many may now have to confront the very real disruption and distraction that results from a predatory threat to ownership.

Hostile offers accounted for 47 per cent of the M&A transactions that took place in the United States during the first few months of 2009, compared with 24 per cent in all of 2008 and just 7 per cent in 2004, according to a report from the Conference Board Governance Center (CBCC).

"Today's market conditions permit some companies to be 'put in play' more easily than before," said the author of the report, Frederick Alexander.

The concern particularly applies to companies with undervalued stock prices, surplus assets or constrained performance - often resulting from short-term liquidity issues - that invite bargain-hunting by acquirers capable of obtaining financing or using their equity currency to pursue growth opportunities.

"Over the past few years, in response to pressures from proxy advisory groups and activist shareholders, some of those companies have reduced their structural takeover protections by repealing poison pills and declassifying boards, and may now be particularly vulnerable," Alexander said.

The report, titled The role of the Board in Turbulent Times: Responding to Unsolicited takeover Offers, encourages directors to become familiar with the corporation's governance profile and the tactics that can be used to protect shareholders' interests from opportunistic behaviours in the marketplace.

"The tactics discussed in the report are not about thwarting unsolicited offers," Alexander emphasised. "They are about ensuring that directors are given enough time to fulfil their fiduciary obligations and obtain the information necessary to make a rational business decision with respect to the offer, as well as to explore all alternatives."

Recommendations included in the report include: reviewing existing organisational (charter and bylaws) provisions; monitoring shareholder base and intentions; maintaining proactive external relations; and understanding how investors and gatekeepers (proxy advisors and governance rating agencies, in particular) could perceive and react to possible amendments to the company's governance profile.

- Mark Phillips

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