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A common reason for
shareholder dissatisfaction is apparent prejudice when an offer for a
company is made by a third party. All shareholders can be disadvantaged in
comparison with "insiders" such as senior management, who often can
crystallise their existing share options at a large profit, and be awarded
lots of new ones and uprated salary packages by the acquirer. The role of
the independent non-executive directors is to protect shareholders against
such abuse, but this is often ineffective (it has even been known for
dominant shareholders to remove the independent directors where they were
opposed to a takeover as happened recently with Silentnight).
Smaller shareholders
can also be disadvantaged when there are large blocks of shares held by
individuals or institutions (or by an apparent "concert party"), who may be
acting in a specific interest. Often the complaint with institutions is that
they simply wish to make a quick exit and ignore the long term fundamental
value of the business being sold.
The rules on what
should happen, such as the sequence of events, and what can and cannot be
done, are complex and designed to protect the interests of all shareholders.
However their very complexity can lead to manipulation and misinformation by
both the bidders and the defenders (and incumbent management is often very
keen not to become redundant as one might expect). It's rather like tax law
in some cases - the more the rules are adapted to plug obvious loopholes,
the more clever lawyers find ways around them that technically avoid
breaches while driving a coach and horses through the principles that were
designed to protect all parties.
Another practice by
incumbent management (fortunately not yet as common in the UK as it is
rampant in the USA and other parts of Europe) is the adoption of "poison
pills". These are various devices that make it more difficult for a hostile
bid (ie. one without the support of the company's management) to be
successful. This can range from adding terms in the Articles that delay
voting on the matter, and writing contracts with executives that deliver
massive bonuses when the company is sold (see McCarthy & Stone for example),
to a promise recently made in the Peoplesoft/Oracle battle to the formers
customers that they could cancel software purchases and get their money back
if the deal went through). Almost all of these devices are clearly not in
the interest of shareholders.
Sometimes management
are so keen for their favoured bidder to win a takeover battle, that they
agree to pay penalties if the deal does not complete, or some other bidder
wins the day. Again it's prejudicial to shareholders interests.
Many of these practices
are not illegal as they probably should be (unfortunately one man's "poison
pill" is another's "device to ensure measured and fair takeover consultation
and protect the interests of other stakeholders").
Competition law also
comes into play as many large mergers and acquisitions are nowadays
dependent on approval of the competition authorities in one or more legal
jurisdictions. The simple invocation of competition law can delay takeovers
so much that they are abandoned before they have barely commenced.
One reason why all
shareholders should be wary of takeovers, unless you are on the receiving
end of a cash offer, is that from academic research it is obvious that most
such events do not improve shareholder value for the acquirer. They seem to
be more beneficial to the ego building of management, than they are to
generating cash profits. So be sceptical of the "synergistic benefits", the
"cost rationalisations" that will take place, and the "boundless
opportunities" to get into new markets.
Submissions by UKSA on
the matters covered above have included the following:
Company_Law_Takeovers_1994 |
