Shareholder Rights Plans In Bermuda

• Published date: 02 April 2024
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Walkers
• Author: Ms Natalie Neto, Rachel Nightingale and Marah Smith

Background

In recent years, the global markets (predominantly in the US) have experienced a significant surge in hostile takeovers, largely due to the COVID 19 pandemic, which impacted public companies' equity values and ultimately resulted in increased exposure to opportunistic acquisitions. However, more recently there has been a shift away from corporate raiders seeking outright control of a target, to hedge fund and private equity activists seeking to challenge corporate management.

In response to this surge, and regardless of the reason for the takeover, many companies now consider and implement defensive tactics. As you would expect, it can be quite difficult for directors to navigate their fiduciary duties when using such defensive mechanisms and this is something the board of the target will have to grapple with when considering any form of same (see below for further discussion on fiduciary duties).

The focus of this advisory will be the defensive tactic of a 'poison pill' which is the adoption of a shareholder rights plan by the target. The poison pill is often considered to be one of the most effective defensive tactics to protect a company from a hostile takeover. The purpose of the pill is to block the accumulation by an acquirer of the target's issued share capital by making the purchase of the said shares expensive and the target will therefore be less attractive as an acquisition prospect in the near and further term. 2023 saw a poison pill adopted by the board of directors of Twitter as a defence tactic against the eventual takeover by Elon Musk.

The purpose of the Twitter poison pill was to make Musk's acquisition less attractive by flooding the market with new shares, also called a 'flip in' poison pill (described in further detail below).

This advisory will explore:

1. how poison pills work;
2. their legality from a Bermuda law perspective
3. how directors of a Bermuda company can prepare themselves for potential hostile takeovers

What is a Poison Pill?

A poison pill is typically triggered when a hostile acquirer announces its intention to obtain a particular percentage of a target's shares, with the triggering percentage usually being between 10% to 20% (Twitter's trigger was 15%). The existing shareholders react by purchasing additional shares at steep discounts, resulting in dilution of the target's equity and therefore becoming less attractive to a buyer overall.

Most acquisitions are profit driven; with the result that if a target can...