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Public M&A – The Availability of the Poison Pill Defence in Ireland
“Firstly, on the moment of his awakening, the thought occurred to him: ‘Why do I lie here? The night is wearing on, and at daybreak it is likely that the enemy will be upon us.’”
Since 2009, the number of Irish registered companies listed on US exchanges, principally the NYSE and Nasdaq, has grown steadily and currently numbers 30. These companies are typically holding companies for large international groups, in many cases with global operations. A number of these groups located here through corporate migration and inversion transactions, while others first listed with an Irish parent. Given a number of factors, including, in particular, the buoyant cross-border M&A activity of recent years and the growth of global activism, we are frequently asked by companies, investors and other market participants whether, and to what extent, poison pill defences are permitted in Ireland.
In the US, the poison pill is a well-established defensive measure which may be utilised against a hostile bidder. Most poison pill strategies involve a form of dilutive discrimination against an unwelcome acquirer in the form of a shareholders’ rights’ plan. This is a kind of spring trap which makes an unfriendly takeover prohibitively expensive. Though endless variations exist, these types of pill generally have certain common features.
A rights’ plan typically enables a target company to issue “flip-in” rights, “flip over” rights or both. Under a “flip-in” plan, the holders of a company’s ordinary shares (i.e., common stock) are issued rights for each ordinary share held. These rights give them an option to buy additional ordinary shares at a discount to the market price when the rights become exercisable, typically, upon an unwelcome acquirer crossing a particular share ownership threshold. For example, the rights might become exercisable at up to a 50% discount from market price in the event an acquirer purchases more than 15% of the ordinary shares in the target company. All the shareholders except the unwelcome acquirer can exercise their rights to purchase shares at the discount, resulting in a significant dilution in the shareholding of the acquirer and making its bid more expensive. In most cases, rights can be redeemed at a nominal value prior to the triggering event.
A “flip-over” plan allows rights’ holders to purchase shares in the unwelcome acquirer at a similar discount upon the completion of a subsequent merger, and is often included as a backstop protection in case the “flip-in” does not work.
Irish law does not expressly authorise or prohibit a company from establishing a rights’ plan and issuing rights to shareholders pursuant to such a plan. A number of Irish registered, US listed companies have adopted such plans and issued rights. While the validity of these plans has not yet been tested in an Irish court, they would fall to be tested against general provisions of applicable law, principally those relating to directors’ fiduciary duties and the Irish Takeover Rules’ restrictions on frustrating actions.
In taking a decision to establish a rights’ plan and to issue rights, the directors of an Irish company are required to act in accordance with their fiduciary duties under Irish law to the company and this is similar to the position in the US. As is the case in the US, fiduciary duties under Irish law can be divided into partially overlapping categories of loyalty, good faith and due care. The primary fiduciary duty for every director is to act in good faith in what the director considers to be the interests of the company, which, in a solvent company, is equated to the interests of the shareholders as a whole. The directors should have regard to the interests of the shareholders, both present and future, and should consider and balance the potential short term and long-term impact of their decisions.
Unlike the position with a US corporation, the directors of an Irish company with a US listing are also required to have regard to the frustrating action provisions of the Irish Takeover Rules. The Irish Takeover Rules are administered by the Irish Takeover Panel, which oversees the conduct of takeovers and other transactions falling within its jurisdiction. Among other matters, the Irish Takeover Rules operate to prohibit - from the time a board receives an approach which might lead to a takeover offer or has reason to believe that an offer is, or may be, imminent - the taking of defensive actions by a target company which might result in the frustration of an offer, or potential offer, without shareholder approval or the consent of the Irish Takeover Panel.
Because of the operation of the frustrating action rules, once an approach has been received or is imminent, it is too late to establish a rights’ plan or issue rights without express shareholder and Irish Takeover Panel approval. Of those Irish companies who have adopted plans and issued rights, the plans have been adopted and the rights issued at a time before an approach had been made or was likely. Furthermore, in an effort to insulate the directors from having to take any additional action which might be questioned as frustrating, these plans have been carefully constructed to automatically trigger and operate without the need for a further target board decision during any period when the frustrating actions prohibition applies (leaving the directors with discretion only to disarm the rights by redemption).
As the principles and practices of permissible defence mechanisms typically differ for US and non-US companies, an understanding of the legal rules applicable in the jurisdiction of registration is important. This applies to other jurisdictions and not just Ireland, and poison pills are but one example, but an important one. While permitted if established in good time, this will not be the case if battle has commenced or the enemy is close. In Xenophon’s case, it may have been too late to adopt a pill under Irish law.
With a wealth of experience across our six partner led offices worldwide and a dedicated 100 person Corporate Department, Matheson has some of the most experienced corporate lawyers in Ireland and were named Ireland M&A Legal Adviser of the Year at the 2017 Mergermarket European M&A Awards. Excellence matters and Matheson’s Corporate Department, led by 20 partners, has unparalleled experience in complex and innovative domestic and international corporate transactions across all industry sectors.