Directors' terms repel boarders

SUCCESSFUL bids are often good news for the target company's shareholders because the share price usually soars as the bid proceeds.

But they are generally less welcome news for the company's directors. They can find themselves facing removal from the board, followed by dismissal. The new principal shareholder usually wants its own management team to take over.

Recommending shareholders to accept an offer for their shares can create a conflict of interest for directors, who find themselves torn between their duties to the company and their own employment worries.

Many directors seek to protect their position by negotiating long-service agreements. The Companies Act requires only directors' employment contracts of more than five years to have prior shareholder approval. The terms of some service agreements allow directors to treat themselves as having been dismissed in the event of a successful takeover.

This is usually coupled with the right to automatic compensation. The existence of such agreements can act as an obstruction to a successful takeover bid. Nick Bertolotti of Arthur Andersen, the accountant and consultant, says: 'If the costs of a successful takeover bid have to take into account the expense of paying off five directors each with a five-year rolling contract and a package of pounds 200,000 per annum, it can be sufficient to deter any potential predator.'

Directors' powers and responsibilities are governed by a cocktail of regulations including statute, common law and Stock Exchange rules. The Companies Act provides that directors' service agreements of longer than 12 months must be available for inspection at the company's registered office. In the case of listed companies, the Stock Exchange extends the right of inspection to include potential investors and other interested parties. In addition, public companies are required to disclose the size of any termination payments made to directors.

However, payments made to directors as compensation for loss of employment don't normally require shareholder approval. The City code on takeovers states that when a bid for a company is in progress, advantageous amendments to a director's service agreement should receive prior shareholder approval. And under common law, directors have a duty to act in the best interests of the company.

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