Rules of engagement: board conduct in hostile takeover situations

The Enterprise Chamber of the Amsterdam Court of Appeals (“Enterprise Chamber”) clarified the rules of engagement that apply in case of an unsolicited takeover bid of a listed company.

In AkzoNobel/Elliott the Enterprise Chamber finds that a target company’s response to an unsolicited proposal is in principle a strategic matter and thus a board matter. There is no general legal duty for the board to negotiate with a bidder or to enter into discussions, but in particular circumstances there may be a duty to discuss. The decision also confirms that accountability to shareholders can be accountability post facto. Please find the decision here (in Dutch).

AkzoNobel: painted in a corner?

AkzoNobel N.V. (“AkzoNobel”) received three unsolicited takeover proposals from PPG industries Inc (“PPG”). The management board and supervisory board of AkzoNobel rejected all three proposals.

Elliott International L.P. (“Elliott”) – an AkzoNobel shareholder – demanded that AkzoNobel engage in discussions with PPG. Because AkzoNobel’s boards did not engage, at least not in Elliott’s view, Elliott asked AkzoNobel to organize an extraordinary general meeting (“EGM”), during which the possible dismissal of the chairman of the AkzoNobel supervisory board would be the key – and only – agenda item. AkzoNobel rejected the agenda item and later also rejected the request to organize an EGM.

Elliott filed a petition at the Enterprise Chamber, requesting (i) a corporate inquiry into the affairs and proper management of the company and (ii) immediate measures including an EGM to vote on the dismissal of the chairman of the supervisory board and the appointment of a special member of the supervisory board to supervise the EGM.

The decision provides lessons on how the board may behave in case of a takeover attempt.

i. A hostile bid for the company is a strategic matter and the strategy is for the boards to decide

• A company’s response to a – hostile – takeover bid is a strategic matter. Because the management board in principle determines the company strategy, the board is also in principle free to decide how to respond to a takeover proposal.
• When deciding how to respond to a takeover proposal, the management board and supervisory board must be guided by the interests of the company and its shareholders, with a view to longterm value creation.
   

ii. There is no general legal duty to discuss the takeover proposal with the bidder, but a duty to discuss may exist

• There is no legal duty for the management board to enter into negotiations or discussions with the – potential – bidder.
• However, under circumstances and in case of a serious takeover proposal the management board and supervisory board may have a fiduciary duty to enter into discussions. Relevant circumstances that may give rise to such a duty to discuss include:

1. i. The bid price.
2. ii. The strategic intentions of the bidder.
3. iii. The non-financial elements of the proposed bid.
4. iv. Whether the management board/supervisory board can properly assess the proposal without discussions with the bidder.
5. v. The substance and course of further interactions with the bidder.
    

iii. Accountability towards shareholders: necessary but can be post facto

• Shareholders are entitled to receive sufficient information from the management board, not only to be able to make use of shareholder rights, but also to determine which investments to make.
• Because the management board, under supervision of the supervisory board, determines the strategy, the accountability can take place post facto, i.e. after a proposal is rejected.

• A continuing lack of trust of a substantial part of the shareholders in response to the strategy determined by the management board and supervisory board will be to the detriment of the company and its stakeholders. The management and supervisory boards must determine how to normalize relationships with shareholders.

• The Enterprise Chamber did not decide whether or not AkzoNobel’s boards did make themselves properly accountable, because the Enterprise Chamber determined that there was no need for immediate measures in the situation at hand.
   

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