The Takeover Offer and the Conflict
A private hospital operator with $520 million revenue receives an unsolicited, non-binding indicative offer from a larger listed competitor at a 38% premium to the last traded price. The board has six directors. One director, a former surgeon, holds 4% of shares personally and has a consulting arrangement with the bidder worth $120,000 a year, disclosed in the register of interests. Another director is the chair of a charity that receives $2 million annually from the company and is up for renewal in three months. The CEO stands to receive $4.5 million in accelerated vesting if a change of control occurs. The board must decide whether to engage, and if so, how. The offer is conditional on due diligence and financing. The company's largest shareholder holds 19% and has told the chair privately that it thinks the board should 'hold out for more'.
1. Map the conflicts on this board and assess how each should be managed. Which, if any, require the director to leave the room?
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Director 1 - former surgeon, 4% shareholding, $120k consulting with the bidder.
This is the most serious conflict. He is on both sides: a shareholder who benefits from a premium, and a paid adviser to the acquirer. The consulting arrangement creates a direct financial interest in the bidder's success and, at minimum, an appearance that his advice is shaped by the relationship. He should be excluded from all deliberations on the offer, receive no papers beyond what is publicly filed, and not vote. His shareholding alone would not require exclusion, since all shareholders benefit from a higher price; the consulting arrangement is what makes it untenable.
Director 2 - charity chair with a $2m grant up for renewal.
This is a real but lesser conflict. Her interest is in the charity's funding continuing, which could make her favour certainty over price or favour a bidder likely to maintain the grant. She should declare the interest, participate in discussion, but abstain from the final recommendation vote, unless the board concludes the grant renewal is materially connected to the outcome. She should not be excluded from the room; over-exclusion deprives the board of a director the shareholders elected.
CEO - $4.5m accelerated vesting.
Management conflict is normal in change-of-control situations. The CEO should not run the process. The board should appoint an independent subcommittee of unconflicted directors to manage the response, with its own advisers, and the CEO's incentives should be disclosed to shareholders in any target's statement.
Largest shareholder at 19%.
Speaking privately to the chair is fine; the chair should relay the substance to the board. The board must not treat one shareholder's view as the answer, but must not ignore it either. It should inform the board's thinking on price and be tested against the independent valuation.
2. Design the process the board should follow from here, including adviser arrangements, disclosure, and how it handles the 'hold out for more' pressure.
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Immediately:
- Constitute an independent subcommittee of the unconflicted directors to manage the process, with delegated authority to engage advisers and negotiate. Record the delegation in writing.
- Appoint independent advisers - a financial adviser with no existing relationship to the bidder, and independent legal advice. Check and disclose any prior engagements.
- Confirm the conflict management in the minutes, including which directors are excluded and why.
- Do not respond substantively to the bidder until the board has an independent valuation and a view on standalone value.
Assessment:
- Obtain an independent valuation and a standalone plan. The board cannot judge a 38% premium without knowing what the company is worth on its own. A premium to a depressed price may still be inadequate.
- Test the offer's conditionality: financing, regulatory approval, and timing. A conditional, unfinanced offer is worth less than its headline.
- Consider whether other bidders exist and whether a market check is appropriate.
The 'hold out for more' pressure:
The chair should thank the shareholder and explain the process. The board should not commit to a price floor in private conversation with one holder. It should test the shareholder's view against the independent valuation. If the valuation supports a higher number, the board pursues it on the merits. If it does not, the board says so and explains why, because a board that negotiates to satisfy one holder is not exercising independent judgement.
Disclosure:
- Announce the approach promptly if it is material and has leaked or is likely to.
- Ensure any target's statement is accurate, includes the independent expert's report where required, and discloses director interests and CEO arrangements.
- Keep a contemporaneous record of every board decision and the reasons, because a takeover process is the most litigated period in a company's life.