BERMUDA Law and Practice Contributed by: Natalie Neto, Rachel Nightingale and Marah Smith, Walkers
9.2 Directors’ Use of Defensive Measures
can be acquired by a shareholder or a group of shareholders. There are typically two approaches, commonly known as: • “flip in” these rights are usually contained in a company’s by-laws and provide that exist - ing shareholders have the right to subscribe for more shares in the target company at a discounted price where a hostile bidder reaches a certain percentage of ownership in the target company, or where a bid is made; and “flip over” these give current sharehold - ers the right to purchase shares in the target company from the bidder once the takeover has taken place. Such plans are often adopted for a specific time period (eg, 364 days) as an aggressive attempt to prevent a hostile takeover by making the acquisition expensive or making the target seem less attractive to a bidder, and potentially slowing down any future attempts at a hostile takeover. Other defensive mechanisms that could be adopted in the by-laws of the target in order to make it more difficult for the bidder to take con - trol include: • staggered terms for the directors; • advance notice of shareholder proposals to nominate candidates and election of direc - tors; • requiring a supermajority for mergers and amalgamations and/or amending the by-laws; and • permitting the issuance of “blank cheque” preferred stock, with terms determined by the board.
Bermuda does permit directors to use defensive measures in a hostile takeover. These are most effective when prepared in advance. However, the directors must ensure that they have regard to their fiduciary duties when deciding whether or not to implement a defensive measure, as well as with respect to their handling of bids gener - ally. The directors do not generally have a duty to advise individual shareholders on the merits or otherwise of a bid, and are not generally obliged to give shareholders advice on whether to accept or reject a bid. The courts have held that direc - tors do not generally owe shareholders the duty to obtain for them the opportunity to accept or reject the best bid reasonably obtainable, but they must not do anything that prevents the shareholders from considering and accepting an offer. If directors take it upon themselves to give advice to shareholders with respect to a takeover bid, then they have a duty to advise in good faith and not to mislead, whether deliberately or careless - ly. When seeking shareholder approval of trans - actions or recommending particular courses of action, the directors are obliged to make full (as well as honest) disclosure. Directors could be held liable if shareholders were to suffer loss by relying on negligent mis-statements made by the directors. 9.3 Common Defensive Measures Common defensive measures that have been implemented by potential Bermuda target com - panies include the adoption of poison pills, also referred to as shareholders’ rights plans, often limiting the amount of the company’s shares that
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