Hostile takeover bids: What directors need to know

While true hostile takeovers remain rare in Australia, aggressive tactics such as pre-bid stakes and ultimatum-style approaches are increasingly common, making board preparation, calm judgement and clear-eyed valuation discipline essential for directors navigating these high-pressure scenarios.

In the midst of the contentious takeover battle for GrainCorp, chair Don Taylor had a clear guiding principle – the company valuation. "It's the most important piece of the puzzle," he says.

The GrainCorp board placed takeover offers into one of three zones relating to the valuation. The red zone was unequivocally too low; the grey zone was in the middle; then there was the green zone. "Anything above that number and you're good to go," says Taylor.

"Fundamentally, it's for the board to see if they can get the valuation into the green zone, or as close to the green zone as they possibly can, which would be a good result for the shareholders, and probably something better than you could ever do as a company."

The 2013 attempt by US agribusiness giant Archer Daniels Midland (ADM) to acquire GrainCorp still stands as one of Australia's most controversial takeover attempts. It spilled over from the finance pages into the popular media, with members of the Coalition government objecting to the deal and then influential talkback host Alan Jones campaigning against the proposed takeover.

The first Tayor knew of the takeover attempt for Australia's largest grains handler was when the company got a call from ADM saying it had bought 19.9% of GrainCorp and was going to take it over.

"It was a hostile takeover in every sense of the word," he recalls. ADM's tactics were unusual a decade ago, but observers say there's been an increase in hostile tactics used by acquirers in Australia over the past couple of years.

When hostilities begin

Strictly speaking, a true hostile takeover is a bid presented directly to the shareholders either on or off-market, without the blessing of the target board. These are rare in Australia and there were only three last year. Most acquirers – and in particular, private capital investors – don't want to be left with a minority stake in their target or even minority shareholders if their bid isn't accepted by enough shareholders. Most bidders' endgame is an offer recommended to shareholders by the board, which allows them to structure a deal to take all of their target or none of it.

But that's not to say acquirers won't use hostile tactics – and these are on the rise.

"Rocking up to a board confidentially, but with a 19.9% pre-bid stake – that will be viewed as pretty hostile to the board, says Kiara Mitchinson, head of mergers and acquisitions at investment bank Barrenjoey Capital Partners.

Another hostile tactic is the Friday night approach call to the target chair, presenting them with a non-binding indicative offer (NBIO) and telling them they're going to go public on Monday morning.

More bidders are using pre-bid stakes, NBIOs and support from shareholders who plan to sell into the offer to put pressure on boards to engage. Mitchinson says it has become rare for an acquirer to approach a target board without the support of at least one significant shareholder.

Aggressive takeover bids might be more prevalent, but that doesn't mean boards should reject them out of hand.

"Directors and boards have to remember - and sometimes it's easy to forget this - that actually your duty is to act in the interest of the company, not to defend at all costs," says Mitchinson. "We spend a lot of time educating target boards that it's to ensure the company is not sold too cheap. It's not to ensure that the company is never sold."

The most important thing for targets in prosecuting a successful takeover negotiation is having a good relationship with their share register and having them on side, she says.

Barrenjoey advised Kerry Stokes' Seven Group in its hostile takeover of Boral in 2024, which succeeded, despite offering no share price premium, because shareholders had "completely lost patience" with Boral and capitulated.

"If you understand your top holders and you know they've got your back, or you know where you think their value expectations are, as a board, you're much more confident in rejecting an offer," says Mitchinson.

Another hostile takeover currently playing out in Australia is UK-based Fraser Group's bid for Accent Group, owner of Athlete's Foot and sneaker chain Hype DC. At the time of publishing, the board has advised shareholders to reject the bid, warning that ceding control to the British retail giant will likely result in an immediate halt to dividend payments.

The takeover of AusNet Services in 2021 is an example of a board driving a better price for shareholders during a contested takeover. With infrastructure investors Brookfield, APA Group and IFM Investors circling the gas and electricity distributor, the AusNet board managed the tension between competing parties with discipline, ultimately facilitating a Brookfield scheme at $2.65 per share, materially above opening offers.

What directors need to do

All of the normal directors' duties apply when a board deals with a takeover offer. Tony Damian, co-head of M&A in Australia at law firm Ashurst Perkins Coie, says there are "plenty of honorary lawyers in takeover land", who will threaten to sue for breach of duties if directors don't disclose an offer, or if they don't recommend an offer – but calm and well-prepared boards can mostly ignore them.

"Assuming the work's been done, there's an advisory team on board and the models have been done, then directors have quite a bit of latitude," he says.

Many directors are inclined to disclose a takeover offer to the market for the sake of transparency, but Damian notes that's not always a good idea. The parties lose control once a bid goes public, he says. In a public negotiation, a bidder can come under pressure from its own stakeholders not to pay too much for an asset, hampering discussions.

"What if the bid goes nowhere after two weeks? There's a lot of disruption there to the company, management, the employees - and to what end?"

Being ready for a takeover

The boards that do best when a takeover bid arrives are those that are prepared.

They have bankers, lawyers and communications advisers already lined up, so they're not scrambling around on the phone on a Friday trying to assemble a team and hoping their chosen advisers don't have any conflicts that will stop them acting on their behalf.

Crucially, they also have an idea of their company's valuation and a valuation model the bankers can quickly refresh over the weekend.

They know the drill, so when the chair gets that phone call, the board subcommittee is already identified and can start the process, exercising calm, well-informed judgement.

Ashurst Perkins Coie's Tony Damian says the board should also have thought through tactical decisions, such as whether it discloses an offer to the market and how easily it allows due diligence, although the specific circumstances of each takeover offer will inform the final decision.

However, some shareholders take the view that all takeover offers should be disclosed, because it's ultimately their decision whether to accept an offer or not, and they should always be given that opportunity.

Another question is whether and when to grant due diligence. If the bidders walk away after they've had a good look at the books, the decision might not be a reflection on the company, but it leaves "a bit of a taint", says Damian.

One option is for the target board to provide the bidder with some limited information that will support the board's view on value. "That can be helpful for boards, because it might be something that has a shorter time frame and doesn't distract everyone as much," says Damian. "If you can keep it private, terrific, and then you see where you get to."

Funds management company Perpetual took this approach in July, when it rejected a $22.50 a share third offer from EQT, but agreed to provide the Swedish private equity with limited non-public information to see if it could solicit a higher bid. At the time of writing, the takeover was ongoing.

Aidan Allen, executive chair of investment bank Jarden Group, lists some key questions the board subcommittee should ask itself when presented with a takeover offer. How certain is the bid? Who is the bidder? Are there conditions? Are there regulatory or shareholder considerations that could stop the deal?

"You'll look at it through the lens of could it be made more attractive? Could it be made more certain?"

Allen rubbishes the idea of a "defence manual" – a pre-prepared playbook for responding to a takeover approach, saying Al could produce the same manual in 15 seconds.

In fact, 90% of a takeover response is pro forma, he says, and what makes the real difference are the judgement calls where the board and its advisers weigh competing interests that suggest the board goes one way or the other.

Directors need to debate and test the different views, says Allen, but adds that outright conflict during a takeover is rare.

"The onus is on the chair and board to collectively test the advisers on the information and robustness of analysis, so that a consensus can form."

The final act

Taylor, a Queensland cattle farmer, says one of his main focuses during the GrainCorp takeover battle was using retention bonuses to hold onto the senior staff - who know that executives are often fired by new owners - and shielding the business from the distraction.

"You've got to continue to run your business, because you don't know where this is going to going to end up," he says.

"So you need to make sure you have quite a small team that deals with the takeover."

ADM's hostile tactics of buying a stake and aggressively approaching the board was seen as an un-Australian way of conducting a takeover, and the GrainCorp board suspected ADM's takeover team wasn't listening to their advisers.

Taylor concluded that the bidders were driven by something else, such as ego. "That's a powerful tool to keep them bidding against themselves," he says, adding that the board's tactic became to make the takeover a waiting game.

"Cooperate with them in a very hands-off way, but don't give them a target zone to strike for, don't give them any more information than you absolutely have to."

The tactic worked. ADM eventually increased its offer from $I1.75 a share to $12.20 plus a S1 per share dividend, which the GrainCorp board unanimously recommended to shareholders. Job done for the shareholders, thought Taylor.

However, it wasn't to be. In the face of opposition from farmers and National Party MPs, Treasurer Joe Hockey blocked the foreign acquisition of the country's largest grain storage and handling network on national interest grounds.