Takeover bids are usually friendly, but not always.

The most common response to any bid, hostile or friendly, is surprise.

But alert managers and directors must recognize that their bank's successes or troubles do not preclude the bank from a purchase offer.

Management and the board of directors must prepare well in advance for any takeover attempt.

This prepares the bank to deter not only any hostile offers, but to lay the proper foundation for responding to any bid.

Tools Must Be Ready

Once a bid has been made, the directors must respond to the offer with prudence, and timeliness.

The proper tools must already be in place to respond, rather than react, to a proposal.

Preparation for dealing with takeover attempts is a vital aspect of corporate planning. Though favorable financial results, effective management, and a stock price that reflects the full value of the bank are the principal means of eliminating vulnerability to an unsolicited takeover, a number of precautionary measures can be implemented to reduce this vulnerability.

|Ordinary Prudence'

The board of directors is charged with ordinary prudence in the management and supervision of a bank's affairs. When this standard is applied to the board's response to a proposed offer, the directors must acknowledge the duty they have to act in good faith and use "sound business judgment" in making their recommendation to shareholders.

In responding to a takeover bid, the directors must prove that they have made an informed decision to be protected from personal liability. Although the business judgment rule varies from state to state, generally it provides that where there is no showing of bad faith or self-dealing, a court will not interfere with the judgment of a board of directors.

A decision of the Delaware Supreme Court has added that directors who fail to avail themselves of all reasonably available relative information before making a decision, regarding either solicited or unsolicited offers, may be found liable for gross negligence if their decision is questionable.

|Shark Repellants'

To successfully deflect any hostile offer, the bank's bylaws and articles of incorporation should contain common "shark repellants."

Common shark repellant amendments to a bank's charter may stagger terms for directors, require super majority shareholder approvals of mergers or business combinations, prevent removal of directors without cause, or provide for post-acquisition executive compensation.

These amendments must be approved by the shareholders and be put in place before any takeover arises.

Another effective tool gaining increased usage is the employee stock ownership plan. When such a plan is set up properly, it provides employee benefits, serving effectively in blunting the bidder's ability to acquire control.

With these programs in place, the board can respond to any offer with the confidence that it enjoys the majority of the shareholder's support.

But the major issue remains, what do we do when a bid is made and how do we do it?

Replying to an Offer

The board should respond to the proposed offering in a formal manner.

The directors should appoint a spokesperson for the bank to respond to the potential buyer. This spokesperson should handle all communications dealing with the tender.

The board should immediately establish a committee composed of its members and instruct these committee members to collect the information necessary for the board to make a recommendation to the shareholders concerning acceptance or rejection of the offer.

The board should give the committee guidelines regarding the latitude the committee has in contracting with outside third parties for information and assistance.

In addition, the board should empower this committee to negotiate the terms of the proposed offer with the bidder for presentation to the board.

Reviewing the Proposal

Once the committee's responsibilities have been assigned, it should proceed to accumulate information on a confidential basis and review the proposed offer.

This review should not only consider the financial terms of the offer itself, but facts concerning the purchaser's management style and its reputation as well as the integrity of its officers and directors.

The committee must consider the effect the proposed transaction will have on current management and the bank's employees, as well as the future impact of the acquisition on customers, employees and the community as a whole.

If a purchaser is a similar organization and the acquisition is to be structured as an exchange of stock or other securities, the general attractiveness of the purchaser's stock or other securities offered must be determined.

Moreover, the committee must compare the financial strength of the buyer relative to competing companies and to the bank.

The list of considerations, including management and director compatibility, is extensive.

Outside Advice

The board should engage an independent party to provide the committee with an opinion on whether or not the proposed offer is fair.

This professional should advise the committee of the perceived strengths and weaknesses of both the bank and the purchaser. The board should receive an objective evaluation of the bank's current market value.

This adviser should openly convey information regarding the possibility of obtaining a higher price or better terms from the same or another prospective purchaser now or in the future.

The committee also should engage knowledgeable counsel to advise it on the legal and tax consequences of the acquisition and whether any state or federal regulatory authorities will not allow the proposed acquisition.

Only after all the necessary information has been accumulated and analyzed should the committee start negotiations with the purchaser.

Once the committee has determined the purchaser's final position regarding the terms of the proposed offer, then it should report its findings and recommendations to the full board.

When the committee has made its report to the board, and the board has analyzed this report, board has three options:

* Accept the proposed offer and proceed to enter an agreement with the purchaser with the intent to recommend acceptance of the offer to all shareholders.

* Take a position of neutrality but acknowledge the offer in its presentation to the shareholders.

* Reject the offer outright.

The board may choose to reject the offer if the price is inadequate or the terms are unacceptable. If there is doubt on the ultimate receipt of the necessary regulatory approvals, the board may also reject the offer.

Other reasons for rejection of the bid would be:

* The value and marketability of the purchaser's securities are in doubt.

* The independent adviser identifies the possibility of obtaining a higher price or better terms in the future.

* The board determines the purchase will negatively effect the bank's shareholders, management, employees or the bank's customers and community as a whole.

The board is not under any obligation to present all offers to its shareholders if, in the exercise of good business judgment, the directors determine it is not in the best interests of the majority of the shareholders for the presentation to be made.

If any member of the board or officer of the bank has a direct conflict of interest, that director or officer should abstain from the decision on whether the shareholders should accept the offer.

If the bank's board responds in the manner described, it is a safe assumption that the directors have followed the dictates of the business judgment rule and that the board's decision will be viewed as proper and prudent.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.