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Takeover panel review is wise and thoughtful

CORPORATE PARTNER, WHITE & CASE

THE consultation document issued by the Takeover Panel shortly after the panel’s censure of Kraft over its successful hostile takeover of Cadbury, unusually does not contain changes to the Takeover Code recommended by the panel. Rather, the Takeover Panel is “seeking to provide a forum in which suggestions for possible changes may be debated”, by setting out those suggestions for the reform of the Takeover Code put forward by commentators, plus a few thoughts of its own. The panel is rightly trying to ensure that it remains at the centre of any debate on the issues.

The angst expressed by certain politicians and industrialists at the time of the Kraft takeover centred around three key issues: Kraft’s closure of Cadbury’s Somerdale factory in favour of one in Poland, despite reassurances against this; the ease with which a major British company was taken over; and that some shareholders who eventually accepted Kraft’s bid had bought shares after the takeover process began. By criticising Kraft over the first issue and separately consulting on the second and third, the panel is demonstrating that they are different points. The commentators had combined an industrial policy issue with a shareholder control issue.

HIGHER HURDLES
The second issue is one of public policy: should there be higher hurdles to “important” British companies being taken over? The Takeover Panel’s job is not to protect the British economy: that falls to government. The panel’s careful introduction to the consultation paper, setting out its role in words that will be familiar to this newspaper’s readers, should steer any responsibility for industrial policy to government, where it belongs.

The third criticism of the Kraft takeover, which the consultation paper is setting out for debate, is that some shareholders who accepted the offer had purchased their shares after the takeover deal was announced. The commentators wanted to exclude latecomers from affecting the outcome of a takeover. That aim divided shareholders into “short-term” and “long-term” shareholders, creating a false divide between groups of shareholders.

The divide is false because the commentators at the time were looking to long-term shareholders to protect a major British company while not expecting short-term shareholders to act on that basis. Both groups have a single aim: to achieve a favourable financial result for their own investors, be they institutional or retail. The suggestions of the commentators, which include imposing a supermajority (say 67 per cent or 75 per cent) threshold for takeovers to be allowed and the withholding of voting rights for shareholders who purchased shares after a takeover bid was launched, will only undermine shareholder democracy (majority rule) and shareholder equality (by distinguishing between “good” and “bad” shareholders).

As the consultation paper gently shows, these suggestions would have much wider and probably undesirable consequences and require changes to UK and European law, fundamentally because they are inconsistent with the principles of shareholder democracy.

The other ideas in the consultation paper are thoughtful, if rather technical, but largely would have little effect on the result the commentators wanted. One particular suggestion merits further thought in the panel’s open forum: should bidders by pushed into disclosing more about their future plans than they currently do in practice? That change might allow some interest groups, such as employees, to have a greater influence on the outcome of a takeover. It is a proper subject for debate as to whether that would produce better results in takeovers; the panel noted that Cadbury had already decided to close Somerdale long before the bid.

The major suggestions in the consultation paper are there because the commentators raised them, not because the panel recommends them. They would be a mistake and would undermine shareholder democracy in the UK market and the UK’s long-earned reputation for fairness and predictability. If there is a need for greater protection for major British companies, that is a matter for industrial policy, not takeover mechanics, and should be debated and legislated for accordingly.