Recent takeover activity in the London market, prompted by the relative undervaluation of some UK companies, has clear implications for Boards. A takeover is evidently an instance where interests almost inevitably collide. How should the Board navigate this? What constitutes the best outcome for shareholders – and other stakeholders? The ability of a Board to deal with ambiguity and complexity is essential to Board effectiveness, as Fidelio sees clearly in both our Search and Evaluation assignments. A takeover bid obviously tests this ability. The requirement, in a takeover situation, for Boards to form a view on financial value for shareholders is broadly understood, although company valuation is arguably more art than science. Increasingly, however, for the Board there are other factors involved – it’s no longer just a matter of accepting the highest bid but rather taking other interests into account as well. These become especially important – and politically sensitive - where national defence, key information technologies, or broader societal issues are at stake. Importantly in a UK context the requirement to consider other interests is also reflected in Directors’ formal duties under the 2006 Companies Act: though enforcement actions in this regard have been infrequent so far, there is evidence that the landscape is shifting. During recent discussions as to the ownership of a leading inhalation specialist, the target company stated that it:
“endeavours to hold shareholder interests and those of our wider stakeholders in equilibrium as required by section 172 of the Companies Act 2006”.
Stakeholders expressed ESG concerns about a tobacco company, PMI, acquiring a manufacturer of heath products. Following the Board’s acceptance of PMI’s bid, the Directors noted that “wider stakeholders could benefit” from PMI’s financial resources and investment in research.
This takes place against a backdrop of greater regulatory scrutiny of Boards. As we have noted before the UK Government’s recent white paper discussion document includes regulation of audit and governance that is both tighter and broader in scope, and there are also moves afoot to make it easier to take criminal action against companies. The Law Commission has recently proposed measures to make corporate criminal liability easier to establish.
All this heightens expectations of Boards at critical junctures such as takeover bids; in this Overture we discuss, in particular, navigating shareholder and stakeholder interests a time when scrutiny is likely to be intense.
Board Members don’t need to be experts in corporate finance, but they do need to be able to demonstrate a robust understanding of valuation and use good judgment in particular with regard to the interests of shareholders and stakeholders.
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