Mutuals face up to takeover prospects

Restructuring in the life insurance industry means mutual life insurers boards may receive overtures from other companies to abandon mutual status or for takeover. The competition for control of the National & Provincial Building Society has raised a new spectre for the directors of mutuals – the prospect of a publicly contested takeover. But what are the board's duties and what rights do policyholders have?

The City Takeover Code, with its delineation of the responsibilities of offerer and offeree, does not apply to mutuals. However, directors of a mutual have the same fiduciary duties as directors of a company with share capital, including the obligation to act in good faith in the interests of the company. A board should consider the interests of members both as policyholders and members when deciding whether to abandon mutual status.

If the board decides not to propose demutualisation, an aggrieved member would find it difficult to challenge the decision successfully. The courts will not second-guess the commercial judgement of directors who have acted in good faith on the basis of proper advice, only intervening if no reasonable director could have reached their conclusion.

If either a predator or the mutual's own policyholders wish to persuade a reluctant board to pursue demutualisation then they might need to enter the public arena. Members may be able to requisition a general meeting, although voting power in mutuals is so dissipated that pressuring the board in this way would be far more difficult than in a company with a share capital.

If the board decides upon a preferred suitor, it will have to satisfy itself that doing a deal with that suitor is more in the interests of the company than remaining a mutual, pursuing another partner or closing the fund to new business.

The final agreement with the preferred suitor will normally be subject to the consent of policyholders in general meeting and to court approval. It will also usually prevent a mutual from soliciting offers from other parties, but should not prevent the board from changing its advice to members as to how to vote on the agreement if a better offer comes along.

In practice a board will find it difficult to recommend switching suitors unless it has a legally binding agreement with the competitor. That will be difficult to achieve in the time before the policyholders' meeting, doubly so unless the competitor is in a position to exactly match the previous deal offered but at a higher consideration. The predator may be better advised to persuade policyholders to vote the recommended proposals down or the court to throw it out.

If policyholders do approve the deal, then persuading the court to throw the scheme out will be difficult. The court does not have to be satisfied the scheme is the best that could have been negotiated by the company and will only determine whether it is fair for the interests of the different groups of people it affects.

Would a code of conduct similar to the takeover code change the position? Tinkering with codes would have little impact on the commercial tension between buyers and sellers. It is probably not realistic for policyholders to expect a choice between two fully negotiated deals, so a competing offerer may need to adopt a more aggressive stance than purchasers in the life market have shown, braving the risk of public defeat. But, given the pace of change in the sector and the commercial pressures potential targets and predators are under, a publicly contested takeover for a mutual is a possibility.