Together, the Companies Act and the Takeover Regulations ensure that a company’s response to a takeover is both legally compliant and geared towards protecting the collective interests of its shareholders.

 

Strategic defensive measures

When a takeover attempt is launched, the board of the target company must carefully assess the offer. The primary obligation is to evaluate the bid’s merits objectively, considering both immediate financial implications and long-term strategic impacts. At the heart of this evaluation lies the board’s duty to act impartially and in the best interest of all shareholders.

 

Part of the strategic response is to seek an independent expert opinion. This not only reinforces the board’s objectivity, but also provides shareholders with a robust analysis of the offer’s fairness. The expert’s assessment can cover valuations, the strategic rationale behind the bid, and the potential impact on the company’s prospects. By grounding their response in independent analysis, the board can help ensure that its recommendations are both credible and legally sound.

 

Another important strategic measure is the careful management of information disclosure. Under the Takeover Regulations, the target company is required to communicate material developments promptly and accurately to its shareholders. This includes circulating a response that outlines the board’s position on the bid, any concerns regarding potential conflicts of interest, and recommendations for shareholders. Transparency is crucial in preventing misinformation and ensuring that all stakeholders are equipped to make informed decisions.

 

Neutrality and fiduciary duties

Central to the strategic response is the board’s commitment to observe neutrality. The Companies Act, particularly section 76, emphasises that directors must not favour one outcome over another if doing so would compromise their duty to the company as a whole. In practical terms, this means that defensive measures should not be implemented solely to frustrate the bid, unless such measures have been explicitly approved by shareholders in a general meeting.

 

This principle of neutrality is reflected in the prohibition on defensive actions without shareholder consent. The Takeover Regulations restrict the board from taking measures such as issuing new shares or disposing of key assets during the offer period unless the shareholders have sanctioned these actions. This safeguard is designed to prevent management from unilaterally altering the company’s structure to deter the takeover attempt.

 

The Takeover Regulations ensure that directors are able to adequately comply with their fiduciary duties. They require that an Independent Board be set up to manage all aspects of the potential takeover, including negotiating the offer and evaluating its reasonableness; this is especially relevant when the directors are potentially conflicted. The primary purpose of the Independent Board is to ensure that the bid offer is fairly evaluated by independent directors whose assessment would not be swayed by personal interests or biases. 

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Case in point: BHP and Anglo American

As a case in point, the strategic manoeuvrings observed in the BHP/Anglo American deal are worth pointing out. In that instance, Anglo American embarked on a series of defensive strategies in response to an unsolicited bid from BHP. Although the specifics of the BHP/Anglo transaction remain a matter of public debate, the case illustrates several key points that are applicable to any takeover scenario.

 

The BHP/Anglo American case underscores the importance of a well-structured and transparent response. The board’s decision to engage with independent advisors, coupled with a clear communication strategy to shareholders, was critical in ensuring that the company’s actions were seen as fair and balanced. Moreover, by avoiding overtly aggressive defensive measures, Anglo American was able to preserve the integrity of its governance framework and maintain confidence among its stakeholders.

 

Balancing commercial and legal considerations

In formulating a strategic response to a takeover, companies must strike a delicate balance between commercial imperatives and legal obligations. On one hand, there is the need to safeguard shareholder value and ensure that any countermeasures do not inadvertently diminish the company’s market position or prospects. On the other hand, adherence to legal standards and regulatory guidelines is non-negotiable.

 

A comprehensive approach involves a thorough due diligence process that evaluates the bid from multiple perspectives. This includes assessing the financial valuation, understanding the bidder’s strategic objectives, and considering the potential impact on existing operations and long-term growth. Equally important is the need for proactive engagement with legal and financial advisors whose expertise can help navigate the complexities of both the Companies Act and the Takeover Regulations.

 

Practical guidance

For companies facing a takeover situation, several practical steps are recommended:

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1.           Engage independent advisors early: obtain unbiased valuations and strategic assessments to support the board’s decision-making process.

2.           Ensure transparent communication: draft response circulars and disclosures that comply with regulatory requirements and clearly articulate the board’s rationale.

3.           Maintain board neutrality: avoid unilateral defensive measures that could be perceived as protecting management interests at the expense of shareholders.

4.           Conduct comprehensive due diligence: evaluate both the financial and strategic merits of the bid, considering the current market environment and the company’s long-term goals.

5.           Prepare for shareholder engagement: be ready to present a balanced view at shareholder meetings, explaining both the potential benefits and risks associated with the bid.

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Conclusion

The strategic response to a takeover attempt is a complex and nuanced process that requires careful navigation of South African company law. By grounding their actions in the legal framework provided by the Companies Act and the Takeover Regulations, companies can ensure that their defensive strategies are both compliant and strategically sound.

The key lies in balancing legal obligations with commercial realities, ensuring that every step taken in response to a takeover bid is both measured and forward-looking. In an environment where market conditions and regulatory landscapes continue to evolve, the ability to craft a strategic, legally robust response remains a critical asset for any company facing a takeover attempt. 

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Fenyane is an Executive and Gamsu a Candidate Legal Practitioner in Corporate and Commercial | ENS