In this article we set out certain key issues the board of a Norwegian listed company faces in a public takeover situation
The article is not to be regarded as a full scope article covering all aspects of the topic, but will focus on some selected issues of importance. Furthermore, the article will also be limited to situations where the takeover take place through a share acquisition, and not by way of an asset deal or merger. It has not been prepared with any specific transaction in mind, for which specific advice will always be required.
Questions that the board normally faces in case of a takeover situation will to some degree relate to regulatory obligations, e.g. issuing a board statement on the offer with respect to whether or not the shareholders should accept the offer, the maintenance of a list of insiders, the disclosure obligations and the imposed restrictions with respect to defensive measures. In addition the board will also need to take a stand to more commercial issues like facilitating a due diligence and the entering of an NDA and a possible transaction agreement.
When entering into a takeover situation the board must always bear in mind its general duty to act in the best interest of the Target and its shareholders, to treat all shareholders equally and to ensure that the Target’s business activities are not disrupted unnecessarily. In addition the board has a particular responsibility to ensure that the shareholders are given sufficient information and time to form view of the offer. Also the Norwegian Securities Trading Act (“STA”) and the Norwegian Code of Practice for Corporate Governance (“Code of Practice”) set out legal restrictions and guidance to the board in takeover situations. The guidance principles in the Norwegian Code of Practice apply on a “comply or explain” basis, but generally listed companies confirm adherence to the applicable principles. Given this, the possibility for the board to make controversial decisions in case of a takeover situation is very limited without liability exposure.
The treatment of inside information and the NDA
Once contact between a potential bidder and the Target has been established, Target and its board will need to focus on the regulation regarding the treatment/disclosure of “inside information” and the need for a Non-Disclosure Agreement (NDA).
The general obligations for a listed company to keep a list of persons who are given access to inside information also apply in a takeover situation, and in order to secure that no violation is made, the Target normally starts to draw up the list at a early stage in the process. In addition the Target and its board must also pay close attention to its disclosure obligations with respect to “inside information”.
Said obligations imply that the Target at a certain point in a takeover process will become liable to disclose information regarding the takeover to the market. Negotiations for an agreed offer may well constitute inside information before the parties have reached an agreement and are ready to announce the offer. However, in such situations the Target will normally be entitled to defer disclosure until an agreement has been reached, however, in such case, the Target will havean obligation to inform the Oslo Stock Exchange on a confidential basis.
The Target and its board will also demand that the potential bidder commits to an NDA, which often also includes clauses regarding “standstill” and “non-solicitation”. A “standstill” normally prohibits the potential bidder from purchase or agree to purchase any shares or other financial instruments issued by the Target until the announcement of the offer, while the “non-solicitation” prohibits the bidder to solicit or endeavour to entice away from the Target any person who is an employee of the Target or to contact any of the Target’s customers or business relations.
The due diligence process
For listed companies, a due diligence has traditionally been the only way for a potential bidder to obtain information about the Target before making an offer. The Target is not restricted from facilitating such a due diligence process, although the scope and structure for such processes vary significantly. The board allowing a due diligence is normally uncontroversial in a friendly takeover situation. A more interesting question arises in cases where the Target faces a hostile takeover situation. Whether or not the board will have an obligation to facilitate a due diligence in these situation may not be answered on a general level, but will to a large extend depend on a board assessment based on what is in the best interest of the Target and its shareholders.
The transaction agreement
Since a bidder in a take-over situation normally invests a substantial amount of time and money and also not wishes to act as a stalking horse for other potential bidders, of the execution of a transaction agreement including certain deal protection measures is fairly common. Measures towards a target company used in the Norwegian market include:
- Board recommendation
- Non solicitation
- Right to match
- Undertakings by the Target
- Break fees and reimbursements of costs
Normally the bidder will require that the Target board undertakes to announce a unanimous recommendation of the offer satisfying the requirements in section 6-16 of the STA and that the Target board recommendation shall be incorporated in the upcoming voluntary offer document. The board members will in these situations be obliged to act in the best interest of the Target and its shareholders, and are to a large degree expected to put pressure on the bidder in order to seek the best possible offer price. If choosing to accept to provide a board recommendation, it will normally be unconditional with limited access to withdraw or modify the board recommendation, only giving the Target board the opportunity to withdraw or modify the recommendation in case of competing offers at a higher offer price.
Very often a potential bidder will insist on some form of non solicitation commitment from the Target, covering no shop, no talk and no solicitation. Being presented with a non solicitation clause, it’s important for the board to keep in mind its obligation to act in the best interest of Target and its shareholders. Even though it’s within the discretion of the Target’s board, the board must in general exercise caution to any such form of such an undertaking if the board is of the opinion that it’s not self-evident that such clause is in the common interest of the Target and its shareholders. This will in particular apply in situations involving an undertaking from the Target not to consider an unsolicited and bona fide approach from a competing bidder.
If the transaction agreement shall allow the Target to consider competing offers, it’s common for the bidder to insist on a right to amend the original offer and announce a revised offer to match the new offer. A matching right provision is often subject to intense negotiations and can take various forms and strengths, from a strong form requiring Target to negotiate in good faith with the first bidder to weaker forms only requiring keeping the first bidder informed of the competing bid.
It’s also common for a bidder to try to “ring fence” the Target’s business by committing the Target to conduct its business in the ordinary course. Such undertaking will normally also include elimination of any possible frustration attempts by the Target, by depriving the Target the possibility of issuing new shares, sale of major assets, mergers etc.
On the question of assuming costs and expenses in relation to a takeover bid there are some restriction, but as a main rule the Target may undertake to cover costs as long as it’s the opinion of the board that it is in the best interest of Target and its shareholders to cover such costs. This may include the Target’s due diligence cost as well as reasonable expenses incurred by the bidder if the deal doesn’t go through.
Whether or not a board should accept a break fee if the deal doesn’t go through is a more complex question. Norwegian takeover legislation does not prohibit break fees. However, due to the fact that such an agreement must be in the best interest of Target and its shareholders, the board should exercise extreme caution toward any form of break fee clause. As general guidance to the board, one may state that only when facing a very good offer price with no prospect of higher competitive offers, should the board consider accepting a break fee.
The bidder’s offer document – statement by the Board of target
The most important obligation for the board in a takeover situation will be to issue a board statement on the offer to whether the shareholders should accept the offer or not. An offer document must be prepared by the bidder in accordance with the requirements set out in STA and approved by the Oslo Stock Exchange. Among the requirements is the board’s obligation to issue a board statement on the offer to whether the shareholders should accept the offer or not, including its views on the effects of implementation of the bid on the Target’s interests, the bidder’s strategic plans for the Target and their likely repercussions on employment and the locations of the company’s places of business. Should the board consider itself unable to make a recommendation to the shareholders on whether or not to accept the bid, it shall explain why this is so. Information shall also be given about the views, if any, of the board members and the manager effectively in charge in their capacity as shareholders of the company.
Where a bid has been made by someone who is a member of the board of the Target, or the bid has been made in concert with the board of Target, the takeover supervisory authority shall decide who shall issue a statement as mentioned above on behalf of the Target.
The statement shall be available at the latest one week before the offer period of the bid expires.
Restrictions on defensive measures
After the Target is informed that a mandatory offer will be made pursuant to the takeover rules and until the period of the bid has expired and the result is clear, the board or manager effectively in charge may not make decisions in regard to issuance of shares or other financial instruments by the Target or by a subsidiary; merger of the Target or subsidiary; sale or purchase of significant areas of operation of the Target or its subsidiaries; or other dispositions of material significance to the nature or scope of its operations, or purchase or sale of the company’s shares. However, exemptions from these restrictions are made for (i) dispositions that are part of the normal course of the Target’s business, and (ii) where the general meeting has empowered the board or manager effectively in charge to make such decisions with takeover situations in mind.