Is a target company’s board ever allowed to recommend to shareholders a bid other than the highest-priced bid for the company?

The question will be addressed in the context of English law.

A duty to promote the success of the company lies with a director's obligation to do what they consider to be the best option to promote the success of the company for the benefit of its members. This rule can be found in the Companies Act 2006, section 172 (CA). This duty is proscriptive and applies when the directors are exercising their powers. It obligates a director to further a corporate interest when using their delegated power. This duty does not prescribe an action on the part of the director and, therefore, it is not a positive duty to act to gain more corporate interest.[1]

The common law approach defined the best interest of the company as the same as the shareholders' interest, both present and future.[2] This means shareholders as a constituency and not as individual members of the group at any point in time. Section 172 of the CA does not change the position of the shareholders as the main subject of a director's decisions, but pursuant to section 172 (1) (a)–(f), the directors have to take into consideration other stakeholders when making a decision. These stakeholders include employees, suppliers, the community, and the environment. According to section 172 of the CA, directors must also consider the long-term effects and reputation of the company when making a decision. Section 174 of the CA sets a rule, a duty of care, which defines an objective benchmark against which this consideration must be measured when exercising corporate power.[3]

A duty to promote the success of the company is a subjective duty for the director. As long as the director honestly believes that the decision furthers the corporation’s best interests, it does not matter if, for example, a judge thinks the decision is absurd, unreasonable, or ridiculous. “Honestly believes” means that a director acts in good faith.[4]

As stated earlier, the company's best interest indicates shareholders as a constituency during the company’s lifespan rather than at some particular moment in time and regarding some particular shareholders. Therefore, it does not require that the board should render a decision at some particular point in time to get particular shareholders to receive the highest price for their shares. The long-term value of the company is what should be considered in the decision-making process, rather than the value at one particular moment (section 172 of CA (1) (a)).[5]

In cases where the value of the bid exceeds the company’s standalone value, the target company's board must recommend accepting the bid in light of section 172 of the CA duty to promote the success of the company. If the value of the bid does not exceed the company’s standalone value, the board must recommend rejection of the bid.[6]

It is important to note that section 172 of the CA is not a prescriptive duty, as already mentioned earlier. The board needs to be required to act, for example, to make a recommendation, for section 172 of the CA to have this effect. If there is no requirement to act, section 172 of the CA does not create a duty to recommend a bid.[7]

In the case Re A Company, Hoffmann J held that: “I cannot accept the proposition that the board must inevitably be under a positive duty to recommend and take all steps within their power to facilitate whichever is the highest offer… I do not think that fairness can require more of the directors than to give the shareholders sufficient information and advice to enable them to reach a properly informed decision and to refrain from giving misleading advice or exercising their fiduciary powers in a way which would prevent or inhibit shareholders from choosing to take the better price”.[8]

In the case Dawson International Plc v Coats Paton Plc and others, the significance was in the Court’s reasoning that directors are under the duty of recommending a particular bidder they deem as beneficial to the company. In this case, there was also an observation that the Heron International case is not an authority for the proposition that directors are under a positive duty to recommend a bid on the basis that it is the higher bid.[9]

Therefore, against this given backdrop, the following answer can be provided: It is irrelevant which bid is the highest priced, and there is no duty to recommend that bid. The relevant bid is the one which creates the highest long-term value for the company and must be higher than the standalone value to be mandatorily recommended. Value is a different thing than a one-time price. Price is one factor among others when evaluating the value of the company. The board has a fiduciary duty to act in the best interests of the company as a whole. This means that it has to consider, for example, stakeholders and other issues, as stated earlier, besides the price.

[1] David Kershaw, Principles of takeover regulation. [Oxford University Press 2016] p. 10.05-10.06.

[2] Brady v Brady [1988] BCLC 579; Gaiman v National Association for Mental Health [1970] 2 All ER 362.

[3] Rosemary Langford, Ian Ramsay, Director’s duty to act in the interest of the company: subjective or objective? [ journal of Business law 2015] https://law.unimelb.edu.au/__data/assets/pdf_file/0005/1709501/4-Directorsdutytoactintheinterestsofthecompany-subjectiveorobjectiveJBL20152.pdf p. 173–174; Ibid 1, p. 10.06.

[4] Ibid 3, p .181-182; Ibid 1, p. 10.07.

[5] Ibid 1, p. 10-14.

[6] Ibid 5.

[7] Ibid 1, reference 130.

[8] e A Company [1986] BCLC 382.

[9] Dawson International Plc v Coats Paton Plc and others [1989] BCLC 233.