What Is a Frustrating Action?
A frustrating action is any step taken by the board of a target company during a takeover bid that could frustrate, prevent, or make more difficult the success of the bid without giving shareholders the opportunity to decide on the offer. The concept originates from the UK Takeover Code’s “board neutrality” principle and has been adopted in various forms across multiple jurisdictions, including Australia, India, and the EU.
The prohibition on frustrating actions reflects the fundamental principle that shareholders — not directors — should decide whether to accept or reject a takeover bid.
What Constitutes a Frustrating Action?
Actions Typically Prohibited
| Action | Why It Frustrates |
|---|---|
| Issuing new shares | Dilutes the bidder’s existing stake and increases the cost of the bid |
| Selling crown jewels | Removes the assets the bidder is most interested in acquiring |
| Entering into material contracts | Creates obligations that reduce the target’s value or flexibility |
| Granting lock-ups | Gives preferential terms to a favoured party |
| Making large acquisitions | Fundamentally changes the business the bidder is seeking to acquire |
| Paying special dividends | Depletes cash reserves |
| Changing the capital structure | Taking on debt to make the company less attractive |
| Amending constitutional documents | Creating structural barriers to the bid |
Actions Generally Permitted
- Seeking a competing offer from a white knight
- Providing shareholders with information and advice
- Issuing defence documents recommending against the bid
- Continuing ordinary course of business operations
- Seeking regulatory intervention on competition grounds
Regulatory Frameworks
UK Takeover Code (Rule 21)
The UK’s approach is the most restrictive:
- Board cannot take any action that could frustrate a bid without shareholder approval
- Applies from the time the board has reason to believe a bid is imminent until the bid lapses
- Shareholder approval requires a vote at a general meeting (not just board approval)
- The Takeover Panel enforces compliance
EU Takeover Directive (Article 9)
Member states may adopt the board neutrality rule:
- Similar to the UK approach — board actions restricted during the bid period
- Member states have discretion in implementation (some have not fully adopted the rule)
- Reciprocity provision — companies may be exempt if the bidder is not subject to equivalent restrictions
US Approach
The US does not have a board neutrality rule:
- Boards retain broad discretion to deploy takeover defences
- Poison pills, staggered boards, and other defences are generally permissible
- Courts review defensive actions under the Unocal proportionality standard
- Directors’ fiduciary duties provide the primary constraint
Key Legal Principles
Shareholder Primacy
The frustrating action prohibition is grounded in shareholder primacy:
- Shareholders own the company and should decide whether to sell
- Directors should not substitute their judgment for shareholders on whether to accept a bid
- Shareholders may have different investment horizons and risk tolerances than directors
Proportionality
Even in jurisdictions without strict frustrating action rules, defensive actions must be proportionate:
- Actions taken solely to entrench management are not protected by the business judgment rule
- Defences must be reasonable in relation to the threat posed
- Actions must not be preclusive (must leave shareholders with a genuine choice)
According to the UK Takeover Panel Annual Report, frustrating action inquiries are among the most frequent issues addressed by the Panel, reflecting the ongoing tension between target board autonomy and shareholder rights.
APAC Context
Australia — the Corporations Act and the Takeovers Panel restrict frustrating actions during a bid period. The Panel can declare circumstances “unacceptable” if the target board takes actions that have the effect of denying shareholders a reasonable opportunity to participate in the benefits of the bid.
Japan — Japan does not have a formal frustrating action prohibition, but the METI M&A Guidelines and related court decisions increasingly constrain defensive actions. The 2023 guidelines emphasise that target boards should provide transparency about their evaluation of offers and should not take defensive measures solely to entrench management.
India — SEBI’s Takeover Regulations (Regulation 26) explicitly prohibit the target board from taking certain actions during a bid period without shareholder approval, including issuing new securities, selling material assets, and entering into material contracts outside the ordinary course.
“The frustrating action prohibition is the regulatory expression of a simple principle: shareholders, not directors, should decide the fate of their investment,” observes Daniel Bae, founder of Amafi. “In APAC, where the line between permitted board action and impermissible frustrating action varies by jurisdiction, boards must navigate carefully.”
Advising on takeover bids across Asia Pacific? Amafi helps companies and investors understand regulatory frameworks and board obligations. Learn more.