COMMENT: As quasi-trustees, directors must not exercise their powers for their personal benefit but for the benefit of the shareholders, writes Eithne FitzGerald.

Recent months have seen public-to-private transactions emerging for Alphyra, Riverdeep and possibly Arnotts. Conduit is about to be taken private and Dunloe Ewart was the subject of a takeover bid by one of its directors and shareholders, Mr Noel Smyth, before being taken private by rival shareholders.

Such transactions bring the directors of a target under close scrutiny from opponents, regulators, the press and the public.

As we have seen with Riverdeep and Alphyra, it is often the independent directors, relied upon by shareholders to give a balanced view, who are particularly under the spotlight.

One of the key duties of any person serving on the board of a company is that they act honestly in good faith for the benefit of the company as a whole. As quasi-trustees, directors must not exercise their powers for their personal benefit or the benefit of a particular group of shareholders but rather have regard to the interests of the shareholders collectively.

Any conflicts of interest that may prevent a director from being able to be involved in the consideration of a takeover offer should be identified at the earliest possible stage.

There is an obvious conflict of interest in a management buyout (MBO) where some of the directors of the target company involved in its management are also directors of the bidder. The bidder will wish to pay as little as possible while still getting shareholders to accept the offer. Conversely, the target company's board will wish to get the best price from the bidder.

As a result, the target company should, at the outset, appoint a committee of its board comprising directors who are completely independent of the MBO team to advise shareholders on whether or not to accept the MBO team's offer. As we have seen from recent deals, this will often consist of a small number of non-executives.

A director will be regarded as having a conflict of interest if it is intended that he will have any continuing role (whether in an executive or non-executive capacity) in either the bidder or the target company. They may also be seen as having a conflict of interest if they have close ties with any of the parties in such a situation, including advisers.

All of the directors of Conduit were likely to have some ongoing connection with the bidder and the target and so, somewhat unusually, instead of the board appointing independent directors, Davy Corporate Finance Limited, as independent financial adviser to Conduit, took responsibility for advising on the offer.

The management bidder team also needs to be mindful that they may end up as a stalking horse and, by their bid, put the company into play.

As a general rule, directors owe their duties to the company itself and not to its shareholders personally, although there have been instances where directors have been held to have obligations to the shareholders. Companies legislation requires directors to have regard to the interests of shareholders and the company's employees in the performance of their functions.

The Takeover Rules set down a series of general principles designed to ensure the fair conduct of an offer and to give certain protections to shareholders. These include requirements that:

all shareholders of the same class must be treated similarly by a bidder;

shareholders must be given sufficient information and advice at an early enough time to enable them to make an informed decision on any offer;

directors must disregard their personal interests when giving advice to shareholders and furnishing information in relation to an offer;

they must give careful consideration before they enter into any commitment that would restrict their freedom to advise their shareholders in the future; and

once a bona fide offer has been communicated to the target's board, or they have reason to believe that an offer may be imminent, the directors must not take any action without shareholder approval that could result in an offer being frustrated.

MBOs work on the basis that management will take a stake in the bidder, an option that is not normally available to other shareholders. In a public-to-private transaction, the Takeover Panel has to be consulted in advance and its consent obtained for any special deals with management. In some instances, shareholder approval may also be required.

Under the Takeover Rules, the target board is required to obtain competent independent advice (usually from its corporate finance adviser) on every offer and must let shareholders know the substance of that advice, together with the board's view. Directors have to take responsibility for any documents or advertisements issued by them in the context of a bid.

Takeover negotiations can be challenging at the best of times. Directors need to carefully consider any course of action they propose to take in such circumstances and obtain advice, as necessary, at an early stage.

Eithne FitzGerald is a corporate finance partner at A&L Goodbody