BAYER-MONSANTO: A "KILLER" DEAL

From war survivor to conqueror

On 1 August 1863, a dye salesman Friedrich Bayer and a master dyer Johann Friedrich Weskott founded the general partnership "Friedr. Bayer et comp.," laying the foundation for expansion in 1881 by transforming Bayer into a joint stock company. Bayer's initial progress was interrupted by World War I, the Great Depression, as well as World War II, during which Bayer removed itself from the commercial register to merge with a community of interests into I.G Farbenindustrie AG in order to remain competitive and regain access to vital export markets.

Having survived various economic struggles through both World Wars, Bayer rebuilt itself in the midst of the Wirtschaftswunder, or "economic miracle", in Germany in the 1950s.

Between 2001 and 2014, Bayer went through major expansion and restructuring. It issued American Depository Receipts (ADR) in 2007, making it easier for U.S. investors to invest in the German-listed firm. This period also marked the beginning of Bayer's aggressive strategy of expanding and strengthening its diverse businesses with multiple acquisitions. It acquired Aventis Crop Science for 7.25 billion in 2001 making it a world leader in crop protection, and subsequently bought Roche's consumer health business unit in 2004 to become one of the world's top three suppliers of non-prescription medicines. It then bought Schering AG, a research-centred German pharmaceutical company, in 2006, as well as Athenix Corp, a privately held U.S. biotechnology company, in 2009. In 2014 alone, Bayer completed three separate acquisitions of Algeta, Dihon Pharmaceutical Group, as well as land management assets of DuPont Crop Protection, consolidating its position as a global pharmaceutical powerhouse. This relentless pursuit of market growth would eventually lead it to Monsanto.

Sowing a seed

The year 2016 saw a wave of mega mergers in the agricultural-chemical industry which began when Dow Chemical Company (Dow) and E. I. du Pont de Nemours and Company (DuPont) announced merger plans, followed by China National Chemical Corporation and Syngenta AG (Syngenta), prompting Bayer to pursue a similar strategy. On 9 May 2016, Bayer announced its plans to acquire the controversial American agrochemical giant, Monsanto, for US$63 billion9 - making it one of the largest acquisitions to date. The Big Six - Syngenta, Dow, DuPont, Monsanto, Bayer, and BASF SE - which once reigned the agrochemical industry, were rapidly consolidating into the Big Four,10 resulting in a handful of powerful producers monopolising the world's food chain.

The Bayer-Monsanto deal was completed on 7 June 2018 following a laborious antitrust review by regulatory authorities. As a result, the inventor of aspirin now owns the world's largest seed and agricultural chemicals maker. However, it was soon described as one of the worst corporate deals in recent history.

A bouquet of flowers, maybe?

"We will double the size of our agriculture business and create a leading innovation engine in agriculture, positioning us to better serve our customers and unlock the long-term growth potential in the sector."- Werner Baumann, Chairman of Bayer's management board

With Bayer's strength in healthcare, the acquisition was seen to offer it a perfect complementary portfolio as Monsanto was the market leader in agricultural seeds. As patents for Bayer's two top-selling pharmaceutical drugs were due to expire in 2023, the acquisition could help shield a potential fall in future pharmaceutical sales. Bayer was very positive about potential synergies, hoping to boost its core earnings per share within the first year upon completion of the merger. It also set an aggressive double-digit growth target for the third year, forecasting growth in annual revenue of approximately US$1.5 billion.

Sceptics, however, pointed out that Monsanto had to repeatedly adjust its earnings estimates downward in the past

years, and its return on invested capital amounted to a mere seven percent. Some analysts were not optimistic about the likelihood of Bayer achieving its targets, describing Bayer's projected estimates as "very ambitious". Others were hopeful and felt that demand would grow given the exponential growth in world population.

Or a bad harvest?

When he became the Chief Executive Officer (CEO), Werner Baumann assured shareholders that he did not have any "revolutionary" business plan for the foreseeable future. Thus, the news of the major acquisition caught shareholders off-guard as it occurred just half a month into his term as CEO. A corporate governance expert and Bayer investor, Prof. Christian Strenger, said that the Bayer shareholders "went to bed as pharma shareholders and woke up with glyphosate."

When the buyout was announced, investors expressed their disagreement. Many were furious that they had no opportunity to vote on the acquisition. Mounting waves of cancer and agriculture-related lawsuits against Monsanto -most prominently, relating to the Roundup weed killer - were glaring red flags to many Bayer investors. With Bayer's declining sales, the potential litigation expenses that could arise from the acquisition would further elevate Bayer's debt levels.

Its unpopularity among shareholders was also due to the radical shift in the company's business strategy towards agriculture, and potentially limiting its growth in the pharmaceuticals industry from other deals. Asim Rahman, a European equities fund manager at Henderson, which had a 0.7% share, vented that such an acquisition was "a major departure from a strategy of focus and integration of existing acquisitions". Rahman additionally demanded a vote by shareholders on the acquisition to "restore investor trust and ensure support for Bayer's future strategic directions". He felt that without the support of shareholders, the share price would be adversely affected. Many investors feared that Bayer would not only be sucked into Monsanto's legal quagmire, but also suffer reputational damage from being associated with Monsanto, potentially damaging Bayer's own sales. Bayer rejected these complaints as meritless, and said that regulatory authorities, as well as over 800 scientific studies, have backed the safety of glyphosate-based weed killers. Activists continued to question the veracity of those studies. In 2015, the World Health Organisation's International Agency for Research on Cancer concluded that glyphosate is "probably carcinogenic." However, similar assessments have not been issued by European Chemical Agency or the European Food Safety Authority.

Despite its critics, Bayer remained confident of the deal. It stood to gain from the entry into the lucrative seed trade and emerge as a key player in a changing landscape where agrochemical companies are racing to consolidate. Monsanto in all but name unless it takes drastic measures to distance itself from the U.S. chemical giant's controversial past."

Bayer's shares plummeted by more than eight percent following the acquisition announcement. Monsanto's own share price barely moved following the announcement, trading at 22% below the offer price and even experienced declines several days after.

Stuck in the mud

An American Depositary Receipt (ADR) is an instrument used by non-U.S. companies to offer and trade their shares in the U.S. bourses. Bayer has ADR listings in the U.S. under the Level I ADR program and is not required to comply with the registration and reporting requirements of the U.S Securities and Exchange Commission. Instead, it is subject to compliance with its home country's listing rules.

Notwithstanding negative investor sentiment surrounding the Monsanto acquisition, Germany's unique corporate governance structure and law allowed the takeover to proceed without mandatory shareholder approval. German Corporate Law (and the German Takeover Act) does not prescribe for shareholders' vote for corporate decisions on mergers and acquisitions, regardless of the takeover size. Such codified statutes take precedence over past judicial rulings, as Germany's legal system follows a civil law system, instead of the common law. German boards have considerable power under German provisions. Instead of shareholder approval, the takeover decision is subject to the scrutiny and review of the acquirer's supervisory board, under Germany's two-tier board structure. Therefore, even with much dissent, Bayer's shareholders appear to have little say in the acquisition. Shareholders may still able to exert their influence on acquisition decisions, such as through shareholder approval required for further share issuance. Nevertheless, German companies are often granted much autonomy. This is

due to a common feature in most German companies - far-reaching general mandates.

Prior to the acquisition, Bayer's shareholders had granted the company a five-year mandate to increase the number of shares by up to 45%, which soon became a major source of funding for the takeover. On 3 June 2016, Bayer's management board released a statement that it would issue 74.6 million new shares to existing shareholders at a price of 81 per share, with the intention to utilise the proceeds for the acquisition. According to Baumann, this became "a significant financing component for the acquisition of Monsanto and the final equity measure associated with this undertaking." Without the need for a new round of shareholders' approval for the new funds raised, Bayer proceeded with the takeover.

Bayer's supervisory board was therefore tasked with one of the most important decisions in the history of the pharmaceutical company. After reportedly questioning and deliberating the value creation involved, the acquisition was unanimously approved.

Leading the charge

Bayer has two separate boards: the 'management board' and the 'supervisory board', as prescribed by the German Corporation Law (Aktienrecht) which came into effect in 1870.

Board of management

Baumann became the new CEO and Chairman of the board of management of Bayer in May 2016. He has been a member of this board since January 2010, with his most recent role prior to his appointment as CEO being the company's Chief Strategy and Portfolio Officer.

At the end of 2018, following the Monsanto acquisition, Bayer's board of management comprised seven executive members, including Chairman Baumann and six other members who are in charge of their respective divisions: Liam Condon (Crop Science), Wolfgang Nickl (Finance), Stefan Oelrich (Pharmaceuticals), Heiko Schipper (Consumer Health), Kemal Malik (Innovation) and Dr. Hartmut Klusik (Human Resources, Technology, Sustainability). Despite the acquisition target being a U.S. company, most executive members do not have experience working in the U.S., with the exception of Nickl - who was a CFO in U.S. IT company, Converge - and Oelrich, who was the vice president of marketing in Bayer's pharmaceuticals division there from 2003 to 2005.

Supervisory board

At the end of 2018, Bayer's supervisory board, headed by Chairman Werner Wenning and Vice Chairman Oliver Zhlke, consisted of 21 non-executive members and five committees: Presidial Committee, Audit Committee, Human Resources Committee, Nomination Committee and Innovation Committee.

Despite numerous acquisitions under its belt in recent history, Bayer's supervisory board does not have an investment committee specifically focused on mergers and acquisitions. Instead, extraordinary meetings are convened in order for the supervisory board to discuss in detail issues relating to acquisitions. In particular, the supervisory board members convened an extraordinary meeting in November 2018 to assess the status of litigation in connection with glyphosate as well as to address the extent to which these risks had been analysed and assessed prior to the Monsanto acquisition.

Before Bayer acquired Monsanto, the majority of the supervisory board comprised of Germans. You reap what you sow

"Nothing whatsoever has changed in the regulatory status of the product. There is simply very high demand, and has been for many decades for glyphosate. It is an invaluable tool for growers,"- Liam Condon, the head of Bayer's Crop Science division

Within a year after the acquisition, Bayer's share price had fallen by 40% as Monsanto's legal woes stacked up, with over 11,000 U.S. lawsuits relating to the controversial use of glyphosate alone as of May 2019. This heightened investors' fears, as Bayer's gamble saddled itself with a large legal exposure. Bayer's net debt had ballooned to 35.68 billion in 2018, from a mere 3.6 billion in 2017. Since the completion of the Monsanto deal, Bayer's market cap had fallen to US$53 billion - less than what was paid to acquire Monsanto.

After losing one of the first Roundup trials in August 2018, Baumann stressed that the jury's verdict was inconsistent with the scientific-driven conclusions by various regulators. Several government agencies, such as the U.S. Environmental Protection Agency, also reaffirmed the safety of glyphosate.

Baumann reassured investors that the fall in Bayer's share price had been greatly exaggerated, given that the company's management and its business plans still continued to receive full backing from the supervisory board.

Despite the increasing number of Roundup litigation cases, he reiterated that the acquisition "was and is a good idea". Bayer maintained its stance of not reassessing legal risks from Monsanto, saying that Monsanto's conduct was appropriate. It committed to defending all upcoming cases.

However, Bayer soon lost all three trials it was involved in as at end-2019, resulting in a shareholder revolt and further decline in its share price since the first unfavourable verdict in August 2018. With claims adding up to billions of dollars, shareholders became increasingly worried that management did not practise due diligence prior to closing the deal to acquire Monsanto. As of September 2019, the number of plaintiffs had surged past a staggering 18,400.

Bayer's management suffered an embarrassing plunge in approval ratings at the Annual General Meeting (AGM) which was held after the Monsanto acquisition. Investors pressured management to conclude the Roundup litigation cases as soon as possible as they feared the legal and financial implications for the business moving forward.

Lessening the pain

The primary components of the remuneration of members in the board of management of Bayer are fixed annual compensation, short-term variable cash compensation and long-term stock-based cash compensation. Short-term variable cash compensation became particularly salient in 2018, when there was a decline in the value of the long-term stock-based cash compensation for the members of the board of management after Monsanto's acquisition. This caused CEO Baumann's aggregate pay to fall by 17% to 5.3 million. Bayer's supervisory board approved an increase in his cash bonus by 28% to 1.7 million. The supervisory board justified its decision by maintaining that Bayer's operating performance was good in 2018.

However, Bayer faced the wrath of shareholders. Prof. Strenger, a Bayer investor, filed a motion proposing that members of the supervisory board not be discharged of responsibility for their actions in 2018. Institutional Shareholder Services Inc. (ISS) criticised the company's move to increase Baumann's pay without a shareholder resolution at a time when Bayer faced what ISS described as "unprecedented potential financial and reputational damage."

According to Bayer's FY2018 annual report, the short-term variable cash compensation for the board of management is based on sales growth, EBITDA adjusted for special items, and core earnings per share (EPS). Basing remuneration of members of the management board on core EPS could potentially encourage management to undertake large acquisitions which may drive increases in EPS but fail to measure whether the company is earning a sufficient return.

Moreover, short-term variable cash compensation is also determined by a qualitative measure of agreement of 'personal targets' with each member. Attainment on these 'personal targets can increase or decrease the pay-out. Specifically, one of the individual targets agreed to for Baumann, Nickl and Condon as disclosed in the FY2018 annual report included the acquisition and integration of Monsanto.

Exacerbating Bayer's contentious remuneration decision was the early termination of Klusik and Malik at the end of 2019. Both left the board of management without replacements after an announcement that the size of the board would be reduced to five members in order to cut costs - the responsibility of innovation being split among the divisional heads of Crop Science, Pharmaceuticals and Consumer Health, and with Baumann assuming the duty of labour director. As part of the early termination agreement, Malik was provided a severance payment totalling 8.71 million, including fixed compensation of 1.63 million, short-term compensation of 1.71 million, and newly granted stock-based cash compensation entitlements from tranches to be issued in 2020 and 2021 amounting to 2.48 million.

Shareholders' revolt

In the April 2019 AGM, the unhappiness of shareholders was clearly seen from the shareholders' vote of no confidence. After 12 hours of venting their frustrations, shareholders made Baumann the first CEO of a major German company in decades to lose the support of the majority of shareholders in such a vote. A total of 55.5% of shareholders voted against supporting Baumann and his current team. Voting against "Entlastrung" or discharge is one of the strongest forms of protests for investors under German law. However, the vote is not legally binding. Additionally, only 66% of shareholders voted to discharge the board.

Bayer's largest shareholder, fund manager BlackRock Inc., refused to support Bayer's management, and likewise asset management firm, Deka Investment GmBH (Deka Investment), which was among Bayer's largest German investors. Ingo Speich, head of sustainability and corporate governance at Deka Investment, commented: "The vote

is a disgrace. To be gambling away the trust of so many investors within such a short time has historic proportions." Temasek Holdings (Temasek) - Singapore's sovereign wealth fund - and Norway's oil fund, Bayer's next two largest investors after BlackRock, however, declined to reveal their plans. Proxy advisory firms ISS and Glass Lewis both recommended that Bayer shareholders should not vote in favour of management. Despite the vote being non legally binding, it made Baumann and his team conscious of the rampant shareholder dissatisfaction. The Chairman of the supervisory board, Wenning, also made it clear that the vote was being taken very seriously by the board and efforts were underway to gain back the trust of the shareholders.

Several reasons were cited for the investor backlash. One explanation was that many investors were of the opinion that Bayer's management did not conduct proper due diligence prior to the Monsanto acquisition, and subsequently made the wrong call. Shareholders were concerned that the acquisition had burdened the company with years of litigation, thereby affecting its share price. Another grievance was the lack of effort made by Bayer to disclose the standalone performance progress of Monsanto and its crop business pre-acquisition. They further emphasised that information availability and disclosure of non-material information is an area which Bayer could improve on. Yet another explanation was the inappropriate handling of its litigation issues. Bayer focused on discrediting the scientific evidence, rather than adopting a more risk-based approach to minimise losses and regain its reputation. For example, Baumann told employees that Monsanto might be unpopular in Europe, but does not suffer the same bad reputation in the U.S., and that Monsanto is a "very, very reputable company."

Prior to the acquisition closing, in April 2018, Temasek had acquired an additional 3.6% stake in Bayer, contributing to Bayer's planned takeover of Monsanto. Baumann attributed the increased Temasek stake to the affirmation of Bayer's business strategy, the acquisition of Monsanto, and perceived strong growth prospects of Monsanto. The head of Temasek Europe told a German paper that it was interested in making German acquisitions and cited agriculture, pharma and biotech as target industries in August 2018. Further, at a press conference in 2019, Temasek's head for the Americas and agribusiness, John Vaske, commented that Bayer was taking the litigation "seriously and doing the things that they need to do to be mindful of it". He also reaffirmed that confidence in Bayer is still high.

Faced with pressure from activist shareholders, a sixth committee of the supervisory board was established in 2019 - the Glyphosate Litigation Committee - in order to deal with the multi-billion dollar glyphosate litigation issue. The Glyphosate Litigation Committee was made up of eight Supervisory board members - Wenning (Chairman), Zhlke, Dr. Paul Achleitner, Andr van Broich, Dr. Thomas Elsner, Colleen A. Goggins, Petra Reinbold-Knape, and Prof. Dr.

Norbert Winkeljohann. While none of the members are legal experts, Bayer hired a high-profile U.S. lawyer, John H. Beisner, to advise the supervisory board.

Bayer announced the appointment of Ertharin Cousin as a new member in its supervisory board on 1 October 2019, succeeding another member, Thomas Ebeling. Cousin, a prominent U.S. agriculture expert, has international recognition in the area of nutrition and agriculture, having served as an executive director of the United Nations World Food Programme for five years. Bayer opined that her appointment gives its supervisory board the added support it required in light of the growing significance of its Crop Science business.

Was the board reckless?

Close to two years after the acquisition, shareholders' discontent remained. In 2020, a Californian shareholder of Bayer, Rebecca R. Haussmann, sued Bayer's top executives for a breach of duty of "prudence" and "loyalty" to the company and investors. Defendants included Baumann and Wenning, among other high-ranking management and supervisors. The lawsuit sought compensatory damages for the shareholders and to revert all compensation paid to the managers and supervisors who had a hand in the Monsanto acquisition. Details of the lawsuit included the lack of due diligence by Bayer's management in evaluating the material risk from Roundup and not quantifying the potential financial impact to the company. Even if due diligence was conducted, the plaintiff argued that Monsanto had "every incentive to minimise the Roundup risk" in an effort to ensure that the acquisition materialised, and thus additional risk analysis was required.

Supervisory board chairman Wenning announced that he would resign at the AGM in April 2020. The 73-year-old said that "we have made and continue to make progress in handling the legal issues in the U.S. That's why now is a good time to hand over to my successor." His role would be taken up by Winkeljohann, former head of auditing firm PricewaterhouseCoopers Europe SE. Some shareholders interpreted Wenning's departure as the start of "a new era", as well as a sign that a litigation settlement was near.

Bayer remained adamant that sufficient due diligence and risk assessment was conducted prior to the completion of the deal. In its FY2017 annual report, it published its risk assessment regarding the planned acquisition. However, no litigation risk exposure was explicitly mentioned in the risk assessment.

Bowing to shareholder pressure, Bayer announced plans to undertake a voluntary special audit of Bayer's due diligence procedures in February 2020. The purpose of this special audit was to review Bayer's rules for evaluating mergers and acquisitions, with the company hoping that a favourable outcome would dismiss any due diligence issues on the part of management with regard to the Monsanto acquisition. This initiative was first broached at the 2019 AGM but only garnered 25.7% of shareholders' votes and was hence not accepted. However, with the number of Roundup litigations swelling up to approximately 48,600 lawsuits on 6 February 2020, the management board was pressured to accept the special audit.

The independent audit was conducted by Dr. Hans-Joachim Bcking of the University of Frankfurt. Dr. Bcking mainly specialises in corporate governance, auditing and corporate social responsibility in his research, among others. Following completion of the audit, Dr. Bcking declared that Bayer's "internal specifications and requirements for conducting due diligence in material M&A transactions are appropriate". He also said that the internal reporting lines and due diligence procedures were adequately monitored. Bayer aimed to release the audit report on its website by the end of March 2020,112 before the AGM in April 2020.

Legal opinions on the role of the board of management with regards to the acquisition also pointed to lack of negligence on the part of Baumann's team. Dr. Ralph Wollburg of Linklaters and Prof. Dr. Mathias Habersack of the University of Munich, who prepared the legal opinions at the end of 2018 and early 2019, concluded that the board of management did indeed act with due care when considering the acquisition.

The enquiry found that Bayer's "board of management complied with their duties as members of a corporate body." In particular, the report stated that "the board of management carried out an extremely in-depth analysis of the information and aspects relevant to the transaction".

The report also claimed that with regards to the specific glyphosate litigation exposure, the "regulatory issues and liability risks in connection with glyphosate, amongst other things, were the subject of these in-depth analyses and discussions". It also asserted that from a scientific perspective and according to the assessments by regulatory authorities worldwide, there was no evidence of a link between the claimants' cancers and their exposures to glyphosate. The board of management thus relied on these scientific findings and felt that the liability risks were low. The report said that Bayer's management board felt that "the considerable opportunities associated with the acquisition of Monsanto were greater than the risk of material liability arising from glyphosate-related lawsuits". The report also mentioned that the board of management conducted analysis, and discussed the development of the risks of glyphosate-related lawsuits and the economic performance of Monsanto and Bayer, during the entire period between the conclusion of the merger agreement and the closing of the takeover. Although the report did not explicitly mention any risk governance framework used to evaluate the acquisition, the report held that proper due diligence was conducted by Bayer's board of management and that it did fulfil its duties. The independent report was consistent with the risk assessment regarding the Monsanto acquisition published in Bayer's FY2017 annual report. However, the risk assessments were conducted at a time when only 120 lawsuits were filed, and courts had not given their verdicts on the matter. The number of lawsuits have since ballooned into tens of thousands.

An independent review was also conducted regarding the legal advice which Bayer commissioned prior to the acquisition, concerning the potential litigation risks associated with glyphosate and Monsanto's Roundup products. The review was conducted by James B. Irwin, a practising lawyer and mass-torts expert. It concluded that the legal opinions sought had appropriately analysed the risks involved.

The results of the above reviews and audits were published on Bayer's website to appease shareholders. A green nightmare?

Bayer claimed that "sustainability and business must go hand in hand" in its 2019 sustainability report. It acknowledged the company's prominence and how its actions could steer the industry towards or away from improving sustainability. With investors placing increasing importance on environmental, social and governance (ESG) factors in their investment decisions, companies are incentivised to take steps to adopt sustainable business practices. Bayer takes pride in having a purpose of "science for a better life", but that was called into question with its decision to acquire Monsanto, commonly dubbed by critics as "the world's most evil company".

In addressing the acquisition of Monsanto in its 2016 annual report, Bayer reaffirmed its continued commitment to sustainability and to the United Nations' Sustainable Development Goals (SDG).

"Health for all, hunger for none" - deception or reality?

Monsanto is the creator of genetically modified (GM) herbicides and insecticides, many of which have been found to be harmful to bees and responsible for the rapidly declining bee population, despite Monsanto's claims that its products are harmless to animals. Bayer adopted these claims following its acquisition of Monsanto despite strong evidence to the contrary.

The extensive use of Roundup has also been claimed to have led to the unfortunate birth of "superweeds", weeds that have developed resistance to herbicides and threaten the survival of crops. The Poison Papers Project details how Monsanto continued to produce and profit from toxic industrial chemicals despite its knowledge of its impact

on the environment and human health. In terms of sustainability reporting, Monsanto does not report its greenhouse gas and carbon dioxide emission levels, which seems to contradict Bayer's declaration of commitment to tackling climate change and provision of green solutions.

Throughout its tumultuous history, Monsanto has been involved in a slew of incidents that solidified its image of a company which is profit-driven at the expense of social responsibility. The release of internal documents showed Monsanto's prior knowledge of possible carcinogenic properties of its Roundup weed killer, yet it continued to market the product as harmless.

Monsanto requires farmers who buy its seeds to sign an agreement prohibiting them from replanting the seeds after the first harvest, effectively locking in its profits from these farmers. Monsanto has filed multiple lawsuits against farmers who were found to have violated the agreement. It has also been the subject of much criticism for its obsession with monopolising the food market. These events provide a stark contrast from what Bayer claims to value - Bayer asserts its dedication to helping smallholder farmers secure a sustainable source of income through agriculture.

The Monsanto Papers revealed Monsanto's practice of ghost-writing research articles in order to influence research published about the effects of its products - in particular, the Roundup weed killer. Monsanto was also revealed to have relations with certain individuals in the research field who would help it to publish "independent" articles proving that Roundup is harmless.

Further, Monsanto was found to have established an intelligence centre to disparage journalists and activists who pose a threat to its branding. One well-known case involved Carey Gillam, an investigative journalist who wrote a book to expose Monsanto's exploitation of its industry. It was discovered through declassified documents that Monsanto manipulated research results and fabricated poor reviews in order to discredit the book. Bayer's corporate compliance policy details 10 principles that the company pledges to abide by, including uprightness in business dealings, acting with social and ecological responsibility, and competing equitably. However, Monsanto's track record goes against much of what Bayer claims to stand for.

Responsible investing or hot air?

When Bayer first announced its plans to take over Monsanto in 2016, several minority shareholders such as Henderson Group were opposed to the high price Bayer was offering and demanded a shareholders' vote, although it fell on deaf ears. These minority shareholders stated that a shareholders' vote was necessary to restore investor trust in Bayer and confirm support for its business strategy.

Bayer's larger institutional investors, in contrast, seemed to have taken a comparatively passive position about the acquisition. BlackRock was Monsanto's second largest institutional shareholder and Bayer's largest shareholder at the time of the takeover deal. Its substantial shareholding in Monsanto cast doubt on its genuine commitment to ESG despite being a signatory to the United Nation's Principles for Responsible Investing (UN PRI) and claims of being guided by sustainability principles. BlackRock is also a signatory of the U.K. Stewardship Code, listing environmental and social issues as one of the key themes in its corporate governance engagement principles. Vanguard Group, Monsanto's largest institutional investor, is also a UN PRI signatory. It was reported that the Vanguard Group and BlackRock Inc., as Monsanto's largest shareholders, would net approximately US$3.9 billion and US$3.5 billion, respectively.

Temasek, through its purchase of an additional stake in Bayer in 2018, substantially aided in the funding of the takeover. Its share purchase was a clear affirmation for Bayer's acquisition, raising some eyebrows as Temasek is government-owned and claims to champion sustainable and ethical investing.

Epilogue

The aftermath of the acquisition is clear - Bayer has been rated a 5 for controversy and 'severe' for risk. Bayer is also aware of the negative impact of Monsanto's tainted reputation, as seen from the management decision that the Monsanto name would not be part of the company's portfolio. Condon, the president of Bayer's Crop Science division, cited this removal as part of Bayer's effort to rebuild public trust in the company. Evidently, Bayer was aware of Monsanto's troubled image and the acquisition was not a case of acute misinformation. Fortunately for Bayer, management's efforts at regaining shareholders' support seemed to have succeeded. At its 2020 AGM held on 28 April 2020, 92.6% of the valid votes cast were in favour of ratifying the executive board's business conduct during 2019, despite a settlement with plaintiffs yet to be negotiated.

In May 2020, Bayer reached verbal agreements to resolve a substantial portion of an estimated 125,000 U.S. cancer lawsuits over use of its Roundup weedkiller, as part of a US$10 billion plan. Bayer's share price increased by as much as 4.6% on 25 May 2020.

In the words of the late world heavyweight boxer Bob Fitzsimmons, "the bigger they are, the harder they fall". One wonders if Bayer will recover fully from the legal and reputational fallout from the Monsanto acquisition.

Case Analysis Questions

1. What are the key responsibilities of a supervisory board or board of directors in merger and acquisition decisions?

2. What could Bayer's management board and supervisory board have done prior to the acquisition of Monsanto to avoid the issues after acquisition?

3. Discuss the pros and cons of the scenario below, and how companies can practise good corporate governance under this scenario.

(a) A lack of requirement for shareholder approval for acquisition decisions and a sole reliance on the supervisory board to approve acquisitions.

4. What are the key risks associated with large acquisitions such as Bayer's acquisition of Monsanto? What additional risks are involved when acquisitions involve companies in different industries and countries?

5. Are current efforts by Bayer adequate in improving corporate governance relating to acquisitions? Assess the importance of setting up an investment committee or merger and acquisition committee in Bayer.

6. To what extent do you think institutional shareholders can influence the commitment of a company like Bayer to incorporate ESG factors when making business decisions? Critically evaluate the action or inaction of institutional shareholders of Bayer and Monsanto, and whether they should have done more.