ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues

Kovar plc has 200 million shares in issue at $3.00. A bidder offers $3.60 per share. The board rejects the offer, and a shareholder argues the board is protecting jobs and its own positions. Directors' total holdings are 5% of shares. Management also proposes a poison pill that would dilute any bidder passing 30% ownership. Which assessment is most consistent with agency theory?

The premium is $0.60 × 200 million shares = $120 million. Rejecting the bid and adopting a poison pill may serve managers' job security rather than shareholders, so an independent committee should compare the offer with realistic standalone value. A 5% director holding does not remove the agency conflict.

AThe rejection and poison pill may entrench management, so an independent committee should assess the offer against standalone value; the premium over the current price is $120 millionCorrect
BThe poison pill increases shareholder wealth with certainty because it raises the bid price
CDirectors owning 5% eliminates all agency conflict, so the rejection must be valid
DThe offer premium is $0.60 per share, so the total premium is $12 million

Explanation

Premium = ($3.60 - $3.00) × 200m = $120m, so the last option's $12m is a decimal slip. Defensive tactics can entrench managers whose jobs are at risk, so independent directors should judge the offer against credible standalone value. A 5% stake does not remove the conflict, and a poison pill does not guarantee a higher bid.

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