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Anti takeover defenses and the interests of investors. Measuring corporate governance performance includes the analysis of antitakeover defenses.
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Measuring corporate governance performance includes the analysis of antitakeover defenses • A corporate governance score (CGS) is Standard & Poor’s opinion on the extent to which a company adopts generally accepted corporate governance practices that clearly serve the interests of its financial stakeholders, with an emphasis on investors • Assessment of non-financial risks for investors • At its most basic level – corporate governance is the interaction of a company’s management, board of directors and shareholders to ensure that all financial stakeholders (shareholders and creditors) receive their fair share of the company’s earnings and assets • One of the issues related to shareholder rights – a possibility for the company to be taken over.
Company Analytical Framework • Ownership structure and external influences • Transparency of ownership • Ownership and External Influences • Transparency, disclosure and audit • Content of Public Disclosure • Timing of, and Access to, Public Disclosure • Audit Process • Shareholder rights and stakeholder relations • Shareholder Meeting and Voting Procedures • Ownership Rights and Takeover Defences • Stakeholder Relations • Board structure and effectiveness • Board Structure and Independence • Role and Effectiveness of the Board • Director and Senior Executive Compensation Scores from 1 to 10 1 10
Component 2: Shareholder rights and stakeholder relations KEOVER DEFENSES • There are no takeover defenses, whether structural or non-structural. • If there are anti-takeover provisions, there are other factors (like a substantial majority independent board and evidence from S&P’s meetings with directors) that mitigate concerns or provide comfort that bids attractive to and in the interests of shareholders will be accepted. • If there are structural defenses, they have been approved by shareholders.
Reasons for treating takeover defenses as negative governance features • Takeover is a means for shareholders to receive a premium for control • A danger of takeover should be a disciplining factor for management, I.e. they should be focused on increasing the company value to protect it from takeovers • Takeover defenses make takeovers more expensive for the bidding company (and its shareholders) • Still there may be certain advantages in having takeover defenses. Should be addressed on an individual basis
MARKET FOR CONTROL • The company is completely open to potential bids. • There is an appropriate amount of oversight by shareholders over takeovers/ changes in control, including the ability of shareholders to judge the merits of (and vote on) potential bids. • Takeover protections would not dissuade potential acquirers or increase the costs of mounting a takeover
The history of takeover defenses • Late 70ies – early 80ies – huge amount of hostile takeovers in the U.S. • Majority of takeovers – “two-tier” transactions (51% at one price, the rest at lower price) • The legal concept of fair price provision • The role of the Board of Directors • Fiduciary duty – to evaluate the bid with regard to its benefits for shareholders • Provide reasonable recommendation to shareholders • However: The decision on the merits of a bid may only be as good as independent the board is • There should be shark repellents to prevent hostile takeovers • Takeover defenses were designed as shareholder rights plans, but eventually became poison pills
Types of takeover defensesType 1. Mildly frustrating to a bid for the company • Poison pills that allow shareholders to vote/consider the merits of the offer • Issue of a new series of preferred shares that give shareholders the right to redeem them at a premium price after a takeover. • Issue of new shares in some ratio (2 for every 1 already held) to all shareholders except the one making a bid • A classified board structure, where only one-third, or one-fourth of the board is elected each year
Types of takeover defenses - ’dType 2. Highly frustrating to a bid for the company • Poison pills that do not allow shareholders to vote on the merits of the offer (Issuance of voting preference shares to third parties friendly with management - Netherlands) • Articles that require a supermajority voting threshold to approve a takeover bid. • Ability (allowed by Articles) to issue shares above a reasonable amount (10-20 percent?) without pre-emptive rights. • Restrictions on a particular class or type of shareholder from making a bid for the company (Korea, European national banks) • Ownership limits (Control Share Acquisitions) • Voting limits (no shareholder can vote more than X% of the company’s shares, regardless of number of shares held) • Shareholder voting agreements, or Syndicate Pacts (Italy, France), • Golden Shares, where the government must approve any change in control (Europe) • Double voting rights (by class of holder or to those who have held their shares for more than a certain length of time) (Sweden, U.S.) • Crown Jewel Provisions • All or Nothing Provisions
Protected board seats, where no shareholder can remove a particular director as s/he never stands for re-election • Golden Parachutes, or excessive executive director contracts that specify massive payouts if the CEO leaves the company following a change in control • Articles that allow for removal of board members for “cause” only. • Excessive share-buyback authorizations (20% or less to buy from a greenmailer).
Prevalence of takeover defenses in the U.S. 2,000 U.S. companies have “poison pills”
Global tendencies with regard to takeover defenses U.S. Europe • May 2003 – European Court of Justice’ ruling against Golden Shares in the U.K. and Spain • Growingstrive to go after other protective structures in other countries “poison pills”, voting limitations, etc.)
Takeover climate in Russia • Structural takeover defenses are not allowed by law • No involvement of the board • Total “shareholder democracy”, but are shareholders to decide? • Shareholder voting is required only in cases of corporate reorganization, not just any takeover • “Fair price provisions” only imply the market price, no premium for control (together with disclosure requirement for the acquisition of 30%) • Share buy-backs are limited to 10%, although restrictions can be easily circumvented • Some limitations for foreigners • Golden Parachutes and other CEO protections are theoretically possible, but rare • Companies in most cases are majority controlled (70% of 45 largest companies; the rest is held by large blockholders of more than 25%) • Takeover is their decision – but: War or Peace?
