Hostile takeovers are not a new phenomenon. For years, acquiring companies have been deploying multiple, financially aggressive tactics, sidestepping management and going direct to shareholders in the hope they can force out the target’s incumbent management team and get themselves in.
Given the fact that the target company does not want the acquisition to happen, it is no surprise that a company’s management can also deploy several defense mechanisms to deter hostile takeovers. Poison pills, for example, dilute the interest of an acquiring company by allowing existing shareholders the right to purchase further shares at a discounted price. Similarly, golden parachutes (large payments to executives), the Pac-Man (try to acquire the buyer), and the crown jewel (sell off most attractive assets) are all defenses that can be utilized to prevent a hostile takeover.
Increasingly, though, the market is seeing another lever coming into play: environmental, social, and corporate governance (ESG).
With new regulations coming in surrounding ESG disclosure in the European Union, and with investors and private equity funds divesting from “brown” companies and investing more in sustainable, green businesses, ESG is rapidly evolving into one of the key contributors to financial performance.
How any board manages it is crucial, but the growing focus on ESG is also proving to be an effective alternative to the more traditional corporate defense strategies.
French PACTE Act
The French Civil Code has always required that every company must declare a lawful purpose for it to exist. However, the definition of corporate purpose was amended with the introduction of the PACTE Act (Action Plan for Growth and Transformation) in May 2019. The amendment brings three additional factors into consideration.
First, companies are required to take ESG issues into consideration when assessing the impact of their business on society.
Second, it provides a chance for any company to state its purpose. Including such a “raison d’être” in its bylaws means the company is obligated to comply with that vision, giving a legal basis for corporate social responsibility.
Last, the law allows for the establishment of a “société à mission,” a new corporate form that allows companies to write ESG goals into their by-laws.
It must be noted that this does not mean that firms are obligated to act in favor of its ESG considerations, just to ensure that they are included as part of the process. The French economic minister said one of the purposes of the PACTE Act was to “put companies back in the centre of society.”
These changes were not designed to prevent or force through a hostile takeover, but it appears the changes can be used for those purposes. If a company can declare that the acquirer is entirely incompatible with its purpose when it comes to ESG, it can be a powerful way to fight the acquisition.
A Preventive and Defensive Measure
In May 2020, food-products company Danone became the first company of the CAC 40 Index (which groups the 40 larger French companies) to declare itself as a “société à mission.” As part of its purpose, Danone has strong social commitments, which it has an active interest in maintaining. Most notably, it is committed to developing a project in Bangladesh to manufacture and sell a products to meet the specific nutritional needs of the population at an affordable price.
This creates financial value and also results in recognition among its employees, suppliers, and the wider community. It’s pursuit of social responsibility strengthens its business while also protecting it from possible takeover; with such a strong record of acting on its ESG considerations, it would be well placed to use incompatibility as a defense mechanism.
French-based utility company Suez, on the other hand, has used ESG in a more defensive way to fight a bid from Veolia, a rival company. Among the various arguments advanced by Suez is that the social interest of the company is not limited to the defense of the shareholders but must take into account the social and environmental aspects, as well as the purpose of the company. Suez established a foundation in the Netherlands to make it impossible for anyone to take over its water and sanitation business in France.
A Global Trend
The Danone and Suez examples are good indicators of this trend, but it is not restricted to France. According to Lazard, ESG activism gained momentum in 2020, allowing activist shareholders to improve the management of ESG in business.
But for some global brands, including a Fortune 500 food and beverage company, the trend has been building over the last decade—its approach changed its strategy entirely. Fundamentally, the company’s ESG efforts have moved away from superficial corporate social responsibility in the traditional sense and toward establishing a true sense of purpose that would simultaneously deliver value to shareholders. Its focus on four main pillars—financial, human, environmental, and talent sustainability—led to 80% net revenue growth.
This approach stood the board in good stead when an activist investor attempted a hostile bid. The activist investor claimed that the company should be focusing on the production of products that went against its ethos to improve human health, and the board was able to effectively squash the attempt as it contradicted its ESG strategy.
There are multiple mechanisms companies can employ to defend themselves and ESG is rapidly becoming an integral strategy. Increasing focus on ESG considerations more generally means that it is crucial to any board for protecting investment and financial performance. Incorporating it into the company purpose could then be used as an uncompromising alternative to traditional methods for deterring hostile takeovers—a trend that is undoubtedly set to continue.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Nicola Bonucci is a partner in the Global Trade and Investigations & White Collar Defense practices at Paul Hastings in the firm’s Paris office. Previously he served as the director for legal affairs for the Organisation for Economic Co-operation and Development (OECD).