Variety of Post-bid Defences Available for Takeover Targets’ Boards
This article discusses the extent to which takeover defences are available to the target company’s board of directors in a post-bid situation (i.e. after the publication of the takeover bid) – before the company’s shareholders are asked to decide which kind of defence should be adopted. The key issue for the target board to keep in mind is the correct division of powers between the company’s board of directors and the shareholders.
A total of eight tender offers have been launched for companies listed on the main market of the Nasdaq Helsinki stock exchange in 2019 and 2020 YTD.  Of these, six were recommended by the target board (including two tender offers that were still ongoing). One of the two offers that were not recommended was successful (i.e. the company went private) and the other resulted in the bidder holding approximately 80 per cent of the target’s shares. Traditionally, takeover bids that are not supported by the target board, i.e. hostile takeover bids, have not been successful. It is also noteworthy that three of the tender offers were structured as mandatory takeover bids preceded by a share acquisition to surpass the statutory limit.
During the initial months of the current global COVID-19 pandemic, the share prices of many public companies around the world plunged, leading many commentators to speculate that these companies could become subject to hostile takeover bids.
Hostile takeovers can benefit shareholders, but the target board may have cause for defence
Hostile takeovers aid in improving discipline in the management of listed companies and the companies’ allocative efficiency. The positive effects of hostile takeovers do not require an actual disclosed takeover bid – the threat of a takeover is often sufficient. In the market for corporate control, inefficiency in the management of a listed company and the use of the company’s resources is often reflected in a relatively lower share price, which makes these companies prone to becoming the target of a hostile takeover. However, hostile takeovers do not target only underperforming companies but can originate from perceived operational and strategic benefits that the target board and the offeror do not share. Further, the question of whether a company is undervalued and by how much is not always clear cut, and the target board may have a good reason to take defensive action to protect the interests of the target’s shareholders.
In general, the purpose of these defences is to frustrate the takeover bid or to solicit a better offer for the target shareholders e.g. in terms of the offer consideration. Due to the statutory duty of loyalty towards the company and its shareholders that applies to the management of the company (including the board of directors) and the company’s purpose, which is to generate profit for shareholders, takeover defences adopted by the board are acceptable only when the board seeks to defend the interests of the shareholders.
Present legal standpoint
The present Finnish legal standing on which kinds of takeover defences are available to the target’s board against a disclosed takeover bid is not clear. As a rule, in accordance with the Finnish Limited Liability Companies Act (the “Companies Act”), the board of directors has an extensive general competence covering all matters that do not fall under the general meeting’s powers or the general competence of the managing director. In the event of a takeover, the Finnish Securities Markets Act, however, imposes restrictions on the competence of the board of directors.
Pursuant to the Securities Markets Act, the board of directors must transfer certain matters to the general meeting for a decision in a takeover situation. The duty to convene a general meeting applies when the target board intends, after a takeover bid has been disclosed, to use its authority to issue shares or decide on other actions or arrangements that would otherwise fall under the board’s general competence in a manner that prevents or may prevent or materially impede the success of the takeover bid or its material terms. The requirement is based on optional provisions of the Directive 2004/25/EC on takeover bids (“Takeover Directive”) that have been implemented in Finland, and it applies only to post-bid takeover defences.
However, the Securities Markets Act includes an exception pursuant to which the matter does not need to be transferred to be decided by the general meeting if (1) the action intended to be taken by the board complies with the general principles of Chapter 1 of the Companies Act and Article 3 of the Takeover Directive and (2) the target board discloses, without delay, the reason for the non-transfer.
Further, the provision does not apply to seeking alternative bids, which means that the white knight defence is permitted under Finnish legislation.
The general principles of special significance include:
- the purpose of the company’s operations to generate profit to the shareholders (unless otherwise decreed in the company’s articles of association); 
- the principle of the equal treatment of shareholders; 
- the duty of the management to act with due care and loyalty and to promote the interests of the company;  and
- the principle pursuant to which the target board must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid. 
In accordance with the preparatory works for the Securities Markets Act, in addition to the obligation to ensure that the decision complies with the aforementioned general principles, there must be an important justified reason for not convening a general meeting. The board of directors must also make public the reason why it has chosen to refrain from transferring the issue to the general meeting without delay after making such a decision.
Examples of important justified reasons include:
- takeover bids that, to the board of directors’ reasonable understanding, are not in the best interests of the shareholders;
- the consideration offered is lower than the prevailing stock price;
- the takeover bid is decidedly hostile and intended to hamper the target company’s business operations; and
- consideration at the general meeting is not appropriate due to the conditions set for the takeover bid.
Consequently, the Securities Markets Act does not categorically prohibit the target board from taking defensive measures, but it does leave it to the discretion of the board to decide whether specific matters should be transferred to the general meeting.
This results in a case-by-case consideration regarding the target board’s competence to use takeover defences without any authorisation from the general meeting.
Emerging trends for mandatory tender offers in 2019
The Finnish tender offer market was active in 2019, and three launched tender offers were structured as mandatory tender offers. The average premium paid by the acquirers was 9.8% compared to the last trading day before the triggering of the obligation to launch the tender offer and 14.1% compared to the volume-weighted average trading price of the shares during the three-month period preceding the triggering of the obligation to launch the tender offer. Only one of these mandatory tender offers was recommended by the target board.
Hostile takeovers during the pandemic
Due to the plunging share prices of many public companies globally as the COVID-19 pandemic began to spread, governments in the EU, Canada, the US, and India have stepped up to review their processes in order to ensure that strategic industries are not snapped up at discounted prices.
In the US, vulnerable companies have adopted so-called poison pills to thwart hostile takeovers. The poison pill tactic allows investors to buy additional shares should a potential bidder or activist buy a stake in the company above a certain threshold, which is generally between 5% and 20%. In general, the usage of poison pills by US companies had dramatically decreased over the past decade, from an average of 30 to 40 companies in 2008 and 2009 to less than 10 companies in 2018 and 2019. However, in the first quarter of 2020 alone, ten US companies employed the poison pill strategy to prevent a hostile takeover. Companies adopting poison pills in 2020 included Williams Companies, Occidental Petroleum, Hexcel Corp., Woodward Inc., Dave and Buster’s Entertainment Inc., CommVault Systems Inc., and Tempur Sealy International Inc.
In the first large hostile takeover bid in the US during the pandemic, it was reported on 26 June 2020 that Cannae Holdings and Senator had made a USD 7 billion unsolicited bid to buy CoreLogic, a real estate data analytics company. CoreLogic’s stock had declined dramatically in early March 2020 but had recovered considerably by early June. While CoreLogic has rejected the bid, it does not have a poison pill mechanism allowing investors to buy additional shares.
 Recommended voluntary offers: Loxam S.S.S for Ramirent Plc; Aureit Holding Oy for Hoivatilat Plc; Boels Topholding B.V for Cramo Plc; Mehiläinen Yhtiöt Oy for Pihlajalinna Plc; Alfa Laval for Neles Plc
Recommended mandatory offers: Telenor Finland Holding Oy for DNA PLc
Not recommended mandatory offers: Preato Capital AB for Yleiselektroniikka Plc; Coronaria Oy for Silmäasema Oyj
 Chapter 1 Section 5 of the Companies Act
 Chapter 1 Section 7 of the Companies Act
 Chapter 1 Section 8 of the Companies Act
 Article 3(1)(c) of the Takeover Directive
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert.