Effective defence plan required when a hostile bid is received

The concept of a hostile corporate bid in the Irish market is relatively rare but it does seem to have raised its head this week with Kerry Group's offer of one Kerry share for every 10 Golden Vale shares, or €1.37 (£1.08) per share for the entire shareholding in Golden Vale plc, valuing the Co Cork food company at €218 million.

Whether the bid turns out to be hostile remains to be seen, but initial reaction by the Golden Vale board, rejecting the bid immediately, indicates we may well be presented with a hostile-bid scenario. It is fundamental that when a hostile offer is received an immediate and effective defence strategy is implemented. Implementation will very much depend on the preparedness of the board. It remains to be seen whether the board of Golden Vale was taken totally unaware; certainly the agri-business sector and the food industry were.

The Golden Vale board has described the approach as inadequate, indicating it has failed to recognise either the underlying value or the potential of the company. The next few days and weeks will be extremely important as the board implements its defence strategy to justify this initial reaction.

Among the duties of chief executive Mr Jim Murphy and his co-directors under Irish law is an obligation to exercise their powers in the interests of Golden Vale as a whole. Legitimate reasons for defence planning include:

preventing an offer being made when the share price does not reflect the genuine value of the company (as indicated by the Golden Vale board);

ensuring shareholders receive the best offer possible for their equity;

preparing management to meet its obligations;

reassuring employees as to the status of the takeover;

minimising the disruption to the ongoing activities of the company if a bid is made.

If the offer by Kerry is considered hostile, the directors of Golden Vale will examine whether there is a white knight on the horizon.

As a corollary, Mr Murphy and his co-directors must not act unlawfully. Accordingly, they may not act to preserve their own position (even if such intention is laudable) and they may not seek to protect a particular aspect of the business, such as the employees, without reference to other aspects of the business.

Their duties are to act in the best interests of Golden Vale as a whole. The Golden Vale directors may, however, contest the takeover by questioning the benefits the Kerry Group, as predator, brings to the table - including its share price, any economies of scale, tax issues and the track record of the predator's management team.

Such has been the success of the Kerry Group in Ireland and internationally in the last number of years, the task facing the Golden Vale directors is daunting.

A defence manual, or the black book as it is more commonly known, is an important part of the defence planning process. Such a manual, if available to Golden Vale, should contain the minimum advice a chairman would need to access immediately on the announcement of an unexpected bid.

It is the primary means to develop procedures and allocate responsibility before, or at least in the initial stages, of a bid.

In order to be effective, certain pitfalls must be avoided in the preparation and drafting of the defence manual. Ideally it should be user friendly. The level of detail included will depend on the circumstances of each company.

It is important for all directors to ensure that their black book is updated on a frequent basis.

Because of the extremely short period within which a takeover battle occurs, it is vital for a potential target to avoid chaos and errors from the outset. The black book should be used as a reference point to contact and assemble key personnel and advisers at short notice.

It should provide a mechanism to allocate authority for the conduct of the bid defence during the first few days. For example, all plcs should establish a defence committee to meet in the interim if it is difficult to convene a quorate board meeting in the immediate aftermath of the announcement of a takeover bid. The black book should also contain advisory materials gathered in advance of any actual threat, including basic advice from the company's professional advisers on its obligations in the context of a takeover attempt.

Although much of this advice will be general, its advance preparation allows directors to brief themselves quickly without recourse to extensive meetings. It also enables the company's bankers and lawyers to concentrate solely on issues arising from the specific circumstances of any announced bid. All companies should determine at an early stage which areas of defence planning work are most appropriate for their particular situation and the black book should revolve primarily around such areas.

In particular, it is crucial that the target should include an analysis of its own business. This should detail its strengths and weaknesses and set out pertinent information on its competitors. It may even be possible to prepare a valid regulatory defence to a bid.

Stanley G. Watson is a corporate finance partner with Matheson Ormsby Prentice Solicitors