PROPOSAL - CHANGES TO CORPORATE GOVERNANCE IN M&A TRANSACTIONS
International Securities and Equities Commission is contemplating a proposal that if effected would make far-reaching changes to corporate governance in M&A transactions.
After passing several proposals recently on the use of shareholder rights, International Securities and Equities Commission is considering making a change that will allow the shareholders of companies that are the target of a hostile takeover to simply refuse the offer.
International Securities and Equities Commission is also in the process of looking at amendments to related party transaction rules in the hope of addressing various shortcomings in corporate governance that have recently come to light.
Shareholder Rights Plans in the Face of a Hostile Takeover Bid
The main rule in contention is whether or not to let companies that are the subject of a hostile takeover bid keep a shareholder rights plan. If passed the rule would allow the plan to be kept as long as it has the shareholder’s approval.
The purpose of the rule would be to allow more transparency in hostile takeover bids and prevent the need for the intervention of International Securities and Equities Commission on a regular basis to evaluate and adjudicate cases.
Currently the only use for a rights plan is to “buy time” for the board of the target company to look for alternatives to the hostile takeover and look for ways of getting more value.
If the proposal is passed this will signal a significant change in that target boards would effectively be able to refuse a hostile bid provided they have the backing of the shareholders.
Various other international jurisdictions allow the use of a rights plan by a target board to be used to block inadequate hostile takeover bids with the caveat that the board is acting in the best interests of the company and have carried out a reasonable and objective investigation.
Considerations for Related Party Transactions
International Securities and Equities Commission is currently also considering modifications to bring greater transparency to related party transactions. These are in part being suggested as a result of a lack of investor confidence in the judgment of corporate boards in their decision-making and would open up these decisions to more scrutiny.
Special committees to supervise transactions that involve related parties with the remit to oversee and negotiate terms and also consider alternative options. The committees would provide recommendations as to whether the transaction under consideration represents a fair deal to the minority shareholders. This would vastly increase transparency and objectivity in these types of transactions.
We also believe that minority shareholder approval should be required in all related party transactions whose value is more than 15% of a company’s market capitalization. In the case of transactions of more than 30% of market capitalization a formal valuation would be required in addition.
Related party transactions are commonly the target of litigation and International Securities and Equities Commission believes that the changes proposed will minimize this along with providing the fairest possible outcome to minority shareholders.
Further documentation on this matter will be published in the public section of our website in the coming weeks.
For any questions or feedback on this matter please e-mail [email protected]