Directors’ discount for a seat on the board?
New research suggests company directors are acting in their own self-interest by securing their own future, rather than the best price for shareholders, when their company is acquired under what is known as a scheme of arrangement.
The research, and an earlier study, raise the question of whether changes are needed to avoid potential disadvantage to shareholders from schemes of arrangement.
In Australia there are two ways an organisation can acquire another publicly listed organisation – one is a scheme of arrangement and the other is a takeover.
In this study, led by Professor Martin Bugeja, Head of Accounting at UTS Business School, researchers compared 108 schemes of arrangement and 155 friendly takeovers completed for ASX listed firms between 2000 and 2011. Hostile takeovers were not considered.
The findings, published in the Accounting and Finance journal, reveal significantly more target directors end up sitting on the board of the acquirer in a scheme of arrangement than for a takeover.
At the end of the first financial year after acquisition, 24 per cent of target directors sit on the board in a scheme of arrangement, while only 16 per cent do so after a takeover.
“It appears that directors are negotiating a board seat for themselves in return for selling the firm at a lower price. It appears they are acting in self-interest,” Professor Bugeja says.
The possibility of such a link should concern both shareholders and regulators, the researchers say.
Previous research by Professor Bugeja and colleagues found shareholders of a target firm receive significantly less for their shares – up to 40 per cent less – when schemes of arrangement are used.
The current research shows that the more target directors appointed to the new board, the lower the premiums achieved for shareholders. Appointing more target directors did not result in better performance for the company down the track, it found.
“With a takeover, the acquiring company can go straight to shareholders if they want – bypassing management. With a scheme of arrangement, the target company has to be on board, so it gives directors more bargaining power relative to the bidding firm,” Professor Bugeja says.
The study didn't determine “causality” between scheme use and director appointment, but the researchers say there is an issue for regulators to consider.
“The policy issue we address is the appropriateness of directors’ accepting inducements targeted to their self-interest in return for facilitating a scheme of arrangement,” the study says.
Professor Bugeja says that in 2009 the government, through the capital markets advisory committee, concluded there wasn’t any disadvantage to shareholders by having two different mechanisms of acquisition.
“Our research shows there is a disadvantage to shareholders. And the disadvantage to shareholders might be because directors are acting in their own interest,” he says.
Professor Bugeja says the potential answer is to more closely align the two sets of mechanisms, to ensure shareholders are treated the same in both situations.
“By having these differences in mechanisms it is giving the firm being bought a lot more power, and it seems they are taking advantage of that."