The Bank of Bermuda in a special shareholders meeting July 24 is asking for approval to issue 4 million shares for executive and employee ownership plans from its already authorised share capital. A story on Friday stated the bank's board was asking for authorisation of an additional 4 million shares. The bank has 6,000 shareholders and not 2,000 as stated in the story.

Bank puts up barricades against `Hostile takeover': By making it more expensive for someone to acquire a controlling interest, the Bank of Bermuda hopes to ward off takeover bids, reports Ahmed ElAmin . The defence has been termed `The Poison Pill' The Bank of Bermuda Ltd. plans on increasing by five-fold its unissued authorised share capital as protection against a possible hostile takeover.

The bank also plans on increasing executive and employee ownership in the bank through two separate programmes.

In a letter to shareholders bank chairman Eldon Trimingham said a proposed increase in authorised share capital by 100 million shares "represents the final building block in the structure of the so-called `Poison Pill', which is designed to protect the bank against hostile takeover''.

He said the new share ownership plans also being proposed are a strategy for "encouraging the broadest possible employee share ownership and creating a contemporary and competitive incentive plan for senior management which, through rigorous performance guidelines, aligns their economic interests firmly with those of the bank's shareholders as a whole.'' Shareholders will be voting on the proposals at a July 24 special general meeting. The additional authorised 100 million shares will be reserved solely for use in case the bank's board determines a hostile takeover bid is in process. The board will then determine whether the bid is unfair to shareholders and could then decide to issue a rights offering of a number of the authorised shares. The rights offering will make the "hostile'' bidders have to pay additional money for the extra shares so as to maintain a controlling percentage ownership.

The letter doesn't state what criteria would determine a hostile bid and trigger the rights offering.

The bank currently has an authorised share capital of 40 million, of which 20.2 million are in the hands of shareholders and the rest are unissued.

If the board took drastic action and determined it had to issue a full rights offering for 100 million shares, the bank's earnings per share will be diluted by about 490 percent.

At last year's annual general meeting in June shareholders approved "poison pill'' amendments to the bank's bylaws aimed at making it more difficult for someone to buy a controlling amount of shares. The change gave the board the ability to grant rights to acquire shares not exceeding 20 percent of the issued and outstanding shares in the bank. Another provision established an officers share option plan under which options to buy shares could be exercised as long as the shares bought by executives don't exceed ten percent of the issued and outstanding shares.

Another change made at last year's annual general meeting requires a two-thirds "Super Majority Vote'' by shareholders to remove a director or to sell or transfer the bank's assets elsewhere.

The change also requires two-third's approval in the event someone wants to move the bank outside of Bermuda, or in the event of winding-up, liquidation or reorganisation.

The "Super Majority Vote'' makes it more difficult for a hostile bidder to move the bank to another jurisdiction, making the company less attractive as a takeover target. The two-thirds amendment was also put in place in anticipation of the bank's plan to list its shares on the Nasdaq stock exchange. The bank is asking Parliament to exempt it from Bermuda's rule limiting foreign ownership in local companies to a maximum of 40 percent so as to make the secondary listing.

Bank protects itself against takeover bid The bank's request for exemption was turned down by Parliament's private bills committee, but is reportedly going to be put directly before MPs today. See story: Page 1 Another proposal to be put before shareholders on July 24 will be a two-part executive share plan and a new employee share purchase plan.

Under the first part of the plan, executives will be required to use 20 percent of their annual cash bonuses to purchase bank shares at a 25 percent discount. The share purchase part of the plan is meant to increase executive ownership in the bank and align their interests with shareholders.

"To reinforce the share ownership culture among executives of the bank there will also be a target ownership level in bank shares for executives as a multiple of salary to be achieved within five years,'' Mr. Trimingham stated.

He did not say what the target was.

Under the performance accelerated restricted share element part of the plan executives and key employees will be granted shares depending on performance.

"These shares can vest as early as three and four years based on achievement by the bank of performance criteria as established by the compensation committee of the board,'' the letter states.

Mr. Trimingham does not state what performance criteria will be used to determine entitlement to share grants under the proposal.

The board is asking shareholders to authorise an additional 500,000 shares it estimates will be needed over five years for the new plan.

Executives can also be granted share options under another plan approved by shareholders last year. Share options give the holders a right to buy shares in a company at some future date at a set price. Share options are usually given to executives as a performance incentive. When a company's stock price rises beyond the set price the executives gain the difference when they exercise the option.

As at June 30 last year a total of 725,000 options had been granted to key executives at a market price of $20. At December 31 the number granted had increased to 745,000.

The board is also proposing to increase the number of shares employees are allowed to purchase under an existing plan. The current plan allows employees to use up to five percent of their yearly salary to purchase bank shares at a 25 percent discount to the market price.

The board is now proposing to allow employees to use up to ten percent of their salary, to a maximum of $25,000 a year in buying the bank's shares at a 25 percent discount.

The board estimates it will need to increase its authorised share capital by a further 3.5 million needed for the five year plan.

If all the amendments are passed by shareholders at the July 24 meeting the bank's authorised share capital will have been increased by a total of 104 million to 144 million.

If all the four million shares authorised for the executive share plan and the employee share purchase plan are issued, at the end of five years earnings per share will decrease or will have been diluted by a total of about 20 percent.

However that extreme will be the worst case scenario for larger shareholders who stand to suffer the dilutive effect more than smaller shareholders.

Currently bank employees collectively own about two percent of the bank. About 45 percent participate in the current employee share purchase plan.

The bank's has 2,000 shareholders, of which about 80 percent are Bermudian.

The bank hired a team of "international compensation consultants'' to come up with the share ownership proposals.

Eldon Trimingham