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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Concept of Governance in Professional Managed Company and Promoters Driven Company

Himalaya Pharma Ltd, a professionally managed listed company, faces a hostile bid. Its CEO, whose job is at risk, proposes issuing a large block of shares to a friendly party at a discount, without shareholder approval, solely to defeat the bidder. Which assessment is most appropriate from a governance perspective?

It is management entrenchment. Directors must act in good faith in the interests of the company and its shareholders, not to protect their own jobs, so issuing discounted shares to a friendly party merely to block a bid breaches that duty and should not be permitted.

  1. AIt is a management entrenchment action conflicting with directors' duty to act in good faith in the interests of the company and its shareholders, and the board must not allow itCorrect
  2. BIt is acceptable because managers know the company best and may defend the post
  3. CIt is acceptable if the Chairperson alone approves it
  4. DIt is required because the board must always reject takeover offers

Explanation

Directors must act in good faith for the benefit of the company and its stakeholders, not to protect their own positions. Using share issuance purely to defeat a bidder, bypassing shareholders, is entrenchment. The Chairperson alone cannot approve it, and boards have no duty to reject every bid.

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