BF&M’s board has put into place a controversial but highly effective takeover defence less than two months after Argus Group Holdings agreed to buy more than a third of the insurer.

The measure has the potential to make the deal all but impossible and stall the continuing consolidation of healthcare in Bermuda.

The shareholder rights plan, announced on Thursday, is triggered if any party buys more than 15 per cent of the company. If that threshold is crossed, each shareholder — other than the acquirer — can purchase another share per share owned at a discount, or the board can simply give them a share of common stock.

This would dilute the ownership stake of the acquirer and reduce the level of control the acquirer can achieve, making a deal far less attractive, potentially scuttling it. If the defences are initiated, the purchase of the BF&M stake may no longer work for Argus and its own shareholders.

Shareholder rights plans are commonly referred to as poison pills, and the plan announced last week by BF&M fits the definition.

Poison pills have been controversial since they were pioneered in the United States decades ago, but they are often used. Yahoo and Netflix have employed them in the past.

While academics are mixed on the cost and benefit to shareholders, some argue that the use of the defence ultimately destroys value and may have negative consequences for directors, even potentially exposing them to director and officer liability claims.

Shareholder rights plans have been used extensively in Bermuda and have been upheld by the Supreme Court. The Bank of Bermuda instituted a poison pill in 1997, as did Aspen insurance in 2014.

They are not allowed in Britain, and have been prohibited and discouraged in other jurisdictions, including some US states.

“While offshore companies generally enjoy broad flexibility in their use of defensive measures, it should be noted that institutional investors and shareholder advisory firms have historically disapproved of anti-takeover defences. Accordingly, directors should carefully consider the terms and duration of any new defence mechanisms and be able to justify them to the market,” Appleby wrote in a 2020 post on anti-takeover defences.

The announcement from BF&M said that its board passed the resolution in part because of the decision by its “principal 36.9 per cent shareholder“ to sell its stock.

“The rights plan ensures that the board has sufficient time to make thoughtful and prudent decisions that are in the best interests of the company and all BF&M shareholders,” it said in its statement.

In early June, Argus agreed to buy 36.9 per cent of BF&M from an existing shareholder for $100 million. Camellia plc, a British-listed conglomerate and the world’s largest private producer of tea, is the seller.

Under the terms of the deal, an Argus subsidiary is to buy the BF&M stake from a Camellia plc subsidiary for $50 million of cash on hand and $50 million raised through the issuance of debt.

The transaction is scheduled for completion in the autumn.

BF&M has been losing money, and Camellia plc has said that the investment has been a drag on its performance.

In its 2022 annual report, Camellia plc noted: “Our results were, however, also adversely impacted by the poor performance of our associate, BF&M, which was severely affected by the volatility in financial markets and recorded a significant loss, our share of which was £3.6 million.“

In 2022, BF&M reported a shareholders’ net loss of $8.8 million.

Camellia plc’s deal to sell its stake immediately hit a wall of criticism, the main concerns revolving around excessive concentration in healthcare on the island. Argus already controlled 40 per cent of primary care in Bermuda, and with the purchase of BF&M, could have an outsize share in the local health insurance market.

Bermuda has no competition law, so market dominance alone could not be used to halt the acquisition of the shares.

AM Best also expressed some concern about the Argus purchase of a stake in BF&M, saying that it is putting the insurer’s financial strength rating of A- under review.

Under the terms of the BF&M shareholder rights plan, anyone who was a shareholder on July 20 will receive a right. The company may make discounted shares available to shareholders with a right, or grant shares to them, if any party buys more than 15 per cent of the company within a year.

The company declined to speak on the record about the use of the poison pill defence. It did provide a statement to shareholders and a FAQ via the Bermuda Stock Exchange.

BF&M shares last traded on June 6, when 5,000 changed hands for $22.95 each, according to BSX data. It has a market capitalisation of more than $200 million.