Risk management: mutual directors’ duties in dealing with a takeover or merger offer

The criticism of the NIB Board last week for failing to disclose a takeover offer at nearly double the current share price illustrates the difficulties boards face in making decisions "in the best interests of members". (see The Australian)

It is often easy to forget the many aspects of a director's duty to act in the best interests of all of the company's shareholders, whether your company is listed or not.

When you are on the board of a mutual, regardless of whether a merger offer is from a non-mutual or another mutual, the issue is the same: what is in the best interests of the members?

A merger between a mutual in difficulty and another mutual may increase the risks for the members of both entities. What are the benefits for your members? What is the effect on their rights as members?

When a merger proposal is made by one mutual to another should the directors of the "target" reject the offer (on the basis that the mutual will do better under current management), try and negotiate a better offer ( to reduce the risk of claims they "gave away" reserves) or recommend members' acceptance of the offer (for fear that the mutual may fail if it doesn't)?

In the case of an offer by a non-mutual which involves the payment of cash to members in return for agreeing to demutualising there is another set of factors for directors to consider including the "value" of the mutual.

If the directors reject the offer do the directors tell the members anything at all? What disclosure obligations do they have? Even ASX listed companies are not obliged to disclose offers which are incomplete, conditional or indicative. But they can't mislead members.

For listed companies, an early announcement by the target may put pressure on the bidder to clarify or improve its offer. If the target makes no announcement but the bidder makes a unilateral statement the target may have to defend its silence. Disclosure is essential eventually; it's all a matter of timing. 

When AMP made an offer for GIO, GIO recommended that its shareholders reject AMP's takeover offer of $5.36 per share based on forecasts that it would make a substantial profit in 1998-99. However, GIO ended up making a massive loss and missing its profit target by almost $1 billion due to problems in its reinsurance division. Its shares plummeted, enabling AMP to take over the part of GIO it did not already own for just $2.75 per share. More than 22,000 GIO shareholders were subsequently paid damages totalling $97 million on the grounds that they had been misled.

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