Defense strategies against hostile takeovers in Colombia

On the recent announcements regarding hostile takeovers, a regulatory and doctrinal discussion arises regarding the scope of the discernment that the management of Colombian companies listed on the stock exchange has within the framework of said takeover processes.

In Colombia, hostile takeovers are carried out through tender offers (OPAs for their acronym in Spanish). This type of offer consists of offering the shareholders of a listed company or Target acquiring a significant percentage of its shares for a price higher than their market value. OPAs are usually aimed at acquiring control over the Target, or at least a significant percentage of its stock which allows the offering company or Bidder to have a certain degree of influence in the administration and direction of the Target. OPAs can be either friendly or hostile; this means, with the knowledge or consent of the Target’s directors regarding the acceptance of said takeover 1 Brent Hammack, “A Comparative Analysis of U.S. & U.K. Regulations Pertaining to Domestic Corporate Takeovers, and the Resulting Differences in Hostile Takeover Activities between the Two Markets,” Willamette Journal of International Law and Dispute Resolution 25, No. 2 (2018): 121. or, to the contrary, without it. Consequently, an OPA is friendly when the Target’s directors do not contest it and is hostile when made directly to the Target shareholders without having been previously negotiated and/or agreed with its directors 2 Suescún de Roa, Felipe “Deberes de los Administradores en fusiones y adquisiciones: la versión colombiana de la “píldora venenosa”, Revista de Derecho Privado, Facultad de Derecho Universidad de los Andes, No. 53 (2015): 18. .

Regarding hostile OPAs, the Bidder aims to replace the management body of the Target with a more efficient one aligned with its interests. This type of management replacement serves two purposes, namely: (i) the avoidance of conflicts of interests between the new management and the Bidder; and (ii) enhancing the Target’s business performance 3 Gorzala, Jeanette “The Art of Hostile Takeover Defence, The Roadmap to Fighting Corporate Raiders”, Igel Verlag Fachbuch (2010): 15. after the fulfillment of the OPA. Consequently, in these scenarios, the management body seeks to implement defense strategies with the purpose of avoiding the acceptance of the OPA by the Target shareholders. However, said strategies are not always aimed at protecting the Target and the shareholders’ interests; sometimes they only seek to protect the selfish interest of such management body, which seeks to maintain its position in the company. This theory is known as the Management Entrenchment Hypothesis. Thus, when a Target management body acts against its interests aiming to avoid an OPA at any cost and the corporate restructuring resulting therefrom, the Target shareholders might suffer direct consequences as their investment in the Target would be directly affected 4 Gaughan, Patrick A., “Mergers, Acquisitions and Corporate Restructuring”, John Wiley & Sons, Inc. Fourth Edition (2007): 172. .

Within the defense strategies developed by American doctrine and courts, the Poison Pill is perhaps the most recognized. This strategy allows the Target preexisting shareholders to acquire additional shares at reduced prices or at no cost at all, therefore diluting the Bidder’s stock participation. By triggering the Poison Pill, the Target’s management seeks to discourage the control takeover over the Target to the extent that, to acquire it, the Bidder would have to invest a greater amount of resources, making the transaction more onerous for the Bidder 5 Suescún de Roa, Felipe “Deberes de los Administradores en fusiones y adquisiciones: la versión colombiana de la “píldora venenosa”, Revista de Derecho Privado, Facultad de Derecho Universidad de los Andes, No. 53 (2015): 21. . In Colombia, the implementation of strategies similar to the Poison Pill is limited by Decree 2555 of 2010, which imposes certain restrictions on a Target facing an OPA. In accordance with said regulation, during the occurrence of an OPA the Target cannot (i) issue convertible shares or securities; (ii) directly or indirectly carry out transactions on the shares or securities affected by the OPA when said operations may disrupt it; or (iii) carry out transactions whose purpose or effect is to generate a substantial variation in the price of the securities subject to the OPA 6 Artículo 6.15.2.1.19. Decreto 2555 del 2010. Obligaciones del emisor de los valores afectados con la oferta pública de adquisición. .

There are other defense strategies, such as the Crown Jewel Defense. This strategy consists of selling the Target's key and most valuable assets, therefore affecting the Bidder's interest in the Target. In this regard, the applicable Colombian regulation restricts Targets subject to OPAs, which prohibit them from alienating, encumbering, or performing any type of activity that involves a definitive disposition of any asset or group of assets that represent a percentage equal to or greater than five percent (5%) of the total assets of the Target 7 Ibidem. .

As previously mentioned, although these measures are focused on protecting the Target, on occasions, their implementation may have irreversible and adverse effects on its shareholders. To mitigate any risk raised from the implementation of said measures, courts in the United States have embraced the Business Judgment Rule doctrine. This doctrine protects the Target director’s business decisions, under the legal presumption that they, in use of their qualifications and knowledge, have acted in observance of their fiduciary duties, in an informed manner, in good faith, and under a sincere belief that such decisions were taken in the best interests of the Target.

In addition, American courts have developed other criteria in developing the Business Judgment Rule to protect the fundamental interests of a Target subject to a hostile takeover. This guarantees that the direction and administration decisions of the Targets management against a takeover respond to the best interests of the Target, including the acceptance of a takeover bid favorable to Target. In this regard, the aforementioned defense strategies are subject to a rationality and proportionality test to determine if they are (i) reasonable concerning the damage that may eventually be caused to the Target; and (ii) adequate to face the existing threat 8 Suescún De Roa, Felipe, “The business judgment rule en los estados unidos: una regla con dimensión procesal y fuerza sustantiva” 127 Vniversitas, 354 (2013). . Thus, even though the Business Judgment Rule provides a wide discernment margin to the directors since it is not absolute, it must be accompanied by proof of rationality and proportionality to avoid the materialization of the Management Entrenchment Hypothesis.

Considering the Colombian case, in connection with the application of defense strategies against the filing of OPAs, it is essential to mention the fiduciary duties governing directors' actions under Colombian law. According to the applicable regulation, management body members are bound to act under the principles of good faith, loyalty, and a good businessman's distinguishable diligence ("buen hombre de negocios"). Furthermore, the administrators' conduct in the OPA framework must always be oriented towards the interest of the Target and its shareholders, avoiding the temptation to seek their profit at the expense of their duties. Moreover, Colombian legislation obliges a Target "to refrain from performing any act that is not inherent to the ordinary course of business of the company or that has the purpose or effect of disturbing the offer". Bearing in mind the foregoing, it would seem that, in the framework of an OPA, Colombian regulation is inclined to protect the rights and interests of the shareholders of the Target. Therefore, the success of a OPA is conditioned to the mere liberality and business decision of the shareholders, limiting the margin of discretion of the management body.

In conclusion, unlike the American corporate regime, although in Colombia there is not a deep normative and doctrinal development that regulates the possible defense strategies against an unwanted OPA, Colombian law includes provisions that prevent the adoption of reactive measures or carrying out acts that may hinder the acquisition of important equity interests with voting rights, such as OPAs, imposing a duty of passivity on the Target’s directors.