The Hostile Bid and the Poison Pill
Arden Group plc is a listed company. A rival, Trelawney Holdings, announces a cash offer at £12 per share, a 30% premium. Arden's board believes the offer undervalues the company and that Trelawney intends to break up the business. The board proposes to issue new shares to a friendly investor at £9 per share, representing 20% of the enlarged capital, to dilute Trelawney. The board also plans to sell Arden's most profitable division to a friendly buyer at a discount, on condition that the buyer votes against Trelawney. Arden's articles permit share issues with board approval but require shareholder approval for disposals above 25% of net assets. The division represents 40% of net assets. Shareholder meetings would take weeks to arrange. Trelawney has 25% of the shares and has threatened litigation.
1. Are the board's defensive measures lawful? Analyse the share issue and the disposal separately.
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Share issue. The board has power to issue shares under the articles, but the power must be exercised for a proper purpose. Defeating a takeover bid is not a proper purpose where the board is motivated by entrenchment rather than the company's interests. Issuing 20% of the enlarged capital to a friendly investor at a discount is a classic entrenchment measure. It is likely to be invalid, and the board may be liable for breach of duty. The discount also raises questions about whether the company is receiving fair value.
Disposal. The disposal represents 40% of net assets, above the 25% threshold, so it requires shareholder approval. The board cannot lawfully proceed without it. The condition that the buyer vote against Trelawney is also problematic: it seeks to influence shareholder votes, which may be an improper use of company assets and could amount to treating shareholders unequally.
Frustrating action. In a listed-company context, the board must not take action to frustrate a bid without shareholder approval. The share issue and the disposal both have that effect. The board should seek shareholder approval before acting.
Conclusion. Neither measure is lawful as proposed. The share issue is an improper use of the issue power; the disposal breaches the articles and is a frustrating action. The board should instead make its case to shareholders, seek a higher price, or negotiate with Trelawney.
2. What should the board do instead, and what are the risks if it proceeds with the plan?
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Lawful alternatives.
- Publish a defence document setting out why £12 undervalues the company, with financial projections and an independent valuation.
- Seek a white-knight offer or invite Trelawney to improve its bid.
- Negotiate commitments on employees, locations, and break-up protections.
- Convene a shareholder meeting to approve any defensive measure, giving full disclosure.
- Consider buying back shares at a fair price if the articles and shareholder approval permit it.
Risks of proceeding.
- Injunction: Trelawney or a shareholder could seek an injunction to stop the share issue or disposal.
- Personal liability: directors may be liable to compensate the company for losses caused by an improper share issue.
- Invalidity: the disposal without shareholder approval is void or voidable, and the buyer may sue for breach of contract.
- Regulatory risk: listing rules may require disclosure and may prohibit frustrating action without shareholder approval.
- Reputational harm: shareholders may lose confidence, and the board may face removal.
Recommendation. The board should abandon the poison pill and the discounted disposal. It should focus on a transparent defence, seek a higher offer, and if necessary convene a shareholder meeting. The board's duty is to the company, not to its own tenure. A court would ask whether the measures were a genuine response to an undervalue or an attempt to entrench. On these facts, the latter is likely.