From Bank Director’s research and popular opinion at our most recent Acquire or Be Acquired conference in January in Scottsdale, Arizona, M&A activity is due to pick up in 2013, even if only slightly. Not every offer is a good offer, and not every bank wants to sell. So whether it’s pricing or timing, we want to know what is actually required from a board when an offer is made.
How should boards respond to unsolicited takeover offers from other banks if they’re not interested in being acquired?
The real question is not how should boards respond, but if they are legally required to respond. That depends on the nature of the proposed unsolicited offer. If it is a mere cocktail conversation or even a friendly overture during lunch, typically there is no duty to respond at all.
On the other hand, if a formal written offer is presented with actual proposed contractual terms, the board of the target organization, from a fiduciary duty standpoint, must respond even if they want to remain independent. The target board often must have a legitimate process that is followed with a financial analysis undertaken to determine if the offer is valid or not.
The decision of whether the organization can remain independent is based on whether the targeted organization can do better for its stockholders over the long-term compared to how the stockholders would fare in the deal. If the board has a legitimate basis to make that determination, then a simple “no thank you” is all that is needed.
— Philip Smith, Gerrish McCreary Smith PC
Boards must make an informed, good faith decision and can’t just ignore the offer. The record must reflect directors’ thoughtful consideration, including reviewing the bank’s strategic plan and value remaining as a standalone entity.
Assemble a team. Hire investment bankers to prepare financial analyses and market checks. Hire legal counsel to assist with proxy fights, public disclosures, securities laws and regulators since a takeover bid will require the bidder to seek regulatory approval. If the offer could become public, hire a media relations firm.
Before information leaks to employees or the public, establish clear communication protocols. Identify specific people authorized to speak on the bank’s behalf and ensure all communications are pre-cleared by counsel.
— Kim Schaefer, Vorys, Sater, Seymour and Pease LLP
For public companies, the public announcement of an unsolicited acquisition proposal can place the target at a significant disadvantage. This is particularly true where the putative buyer announces the offer directly to stockholders, rather than first approaching the board in an attempt to reach a negotiated transaction. In these instances, boards are well-advised to adopt a stockholder rights plan in order to afford ample time to obtain adequate information and advice and, on that basis, to consider an appropriate response.
Ideally, a well-functioning board will have considered and structured such a plan in advance, maintaining it “on the shelf” and reviewing it periodically to assure that it can be adopted quickly should a surprise offer be announced.
Most states also have some combination of control share or business combination statutes that limit a hostile suitor’s ability to quickly acquire control of business corporations, whether public or private. These statutes are less common, however, for states that have separate statutes governing state-chartered stock banks, particularly where the state corporate law does not apply to stock banks.
— Marcus Williams, Davis Wright Tremaine LLP
A board must exercise its business judgment as that is defined under the law of its state of incorporation. For example, in Delaware, the Revlon doctrine may drive a board’s consideration. In essence, the board must exercise its fiduciary duties with the specific goal of maximizing shareholder value.
Assuming receipt of a bona fide offer, a board should work with its legal and/or financial experts to understand the Revlon doctrine and state law to determine the elements to consider and document the exercise of business judgment in rejecting an offer. Many states permit boards to consider constituencies other than the shareholders, including employees, vendors and the community, in the proper exercise of business judgment.
— Susan Zaunbrecher, Dinsmore & Shohl LLP
As a threshold matter a board needs to understand that it, as a body, must make decisions that enhance shareholder value. A board cannot shift its decision making responsibility to the shareholders. The board must consider through a financial analysis whether the unsolicited offer is one that could put the shareholders in a better position than holding the existing bank shares. If the board’s conclusion is that the offer is legitimate and could put the shareholders into a more favorable position than maintaining the status quo, then the board has decided to sell to some entity.
Most states through their version of the business judgment rule will protect the board’s decision and the courts tend to be reluctant to second guess the board’s decision-making as long as the board adheres to the bank’s established documented governance processes and recusal mechanisms that are consistent with peer institutions so that board member self-interest influences are eliminated, the board in good faith relied upon expert advice without a conflict of interest, and the minutes establish that the board conducted a thoughtful decision-making process. If the financial analysis is close enough that the board seeks to consider non-economic issues and the bank’s by-laws permit non-economic factors, it will be imperative to document the negotiations over non-economic concerns to mitigate litigation risk.
— Frank Mayer, Pepper Hamilton LLP