As merger activity teems down like summer rain, directors need to be utterly clear that they are the ones responsible for making the key decisions about M&As; there is no fobbing off their judgment to Mamp;A advisers. Director duties during M&As. Don't believe everything that comes to you, reports Ali Cromie
As merger activity teems down like summer rain, directors need to be utterly clear that they are the ones responsible for making the key decisions about M&As; there is no fobbing off their judgment to M&A advisers.
Michael Ryan, senior partner at legal firm Coudert Brothers says equivocally that it is the directors involved in the acquisition or defence activity who "run the transaction". Directors ought to make an independent assessment of their advisers says Ryan, 20 years in the takeovers game and speaker at a recent AICD briefing on Director's Duties during Mergers and Acquisitions.
"Don't believe everything that comes to you," he advises. A useful self-test to ensure directors are getting at the nub of the issues is to ask themselves, "Would you rely on this person if you were the shareholder?"
Peter Kennan, executive director investment banking at USB Warburg says the key duty of directors in a takeover is to make decisions that create value for shareholders. "Neither a good lawyer nor a good financial adviser can satisfy the duty of a director." he says. "Directors are the custodians of shareholders' funds and that is why directors exist."
Kennan says directors have a duty to make money for shareholders. For large companies, M&As are primarily a means of realising growth and capital for investments. Consequently, decisions about M&As have a major effect on the board's responsibility to create value for shareholders.
But what exactly is shareholder value? And for which lot of shareholders is value being created? asks Kennan. Even within the institutional investor community there are different interests – domestic vs foreign vs hedge funds. What about the interests of particular strategic investors? asks Kennan. If directors are befuddled by all the questions that is just the beginning.
Over what investment time frame should decisions be made? Most people would consider the medium- to long-term to be a more valid basis than the short-term; however some institutional investors have quite short-term time horizons.
And what is more important? Absolute performance or relative performance? Retirees can't live off relative returns. Witness the growth in absolute return managers, says Kennan. Little wonder making properly objective M&A decisions can be difficult. The typical pressure cooker M&A environment doesn't help.
With stakes in M&As high given the power of takeovers to create or destroy significant shareholder wealth, directors have little room for error and shareholders show little tolerance for director excuses when shareholder funds dissipate.
Standing the test of time as cornerstone of the Takeovers Code are the Eggleston principles, the pivotal rules applying to fairness and information for acquisitions of shares. An additional precept is that acquisition of listed companies take place "in an efficient, competitive and informed market". (The Masel principle).
In recent times, the Takeovers Panel has played an increasingly important role in the conduct of M&As; intervening in takeover disputes once predominately dealt with by in the courts. The primary power of the Takeovers Panel is to declare circumstances in relation to a takeover to be "unacceptable circumstances". Its key objective is to protect the rights of shareholders, especially target company shareholders
Jeremy Kriewaldt, counsel for the Takeovers Panel says, there are limits to what the panel can order but undertakings allow a lot of issues to disappear.
In looking at "unacceptable circumstances", he notes the panel's focus is on "circumstances not conduct".
Ryan bluntly warns directors that if a statement made during a takeover turns out to be misleading, it's your fault.
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