When toughened Code doesn’t apply

David Hellier
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WHILE the Eurozone crisis is still dominating the agenda in the City, there are signs of returning interest in mergers and acquisitions, with some saying a mega deal on the scale of Kraft and Cadbury is not that far away.

Opinions might vary about the benefits of bids and deals but they are the meat and drink of an investment banker’s work and the recent scarcity of them has added to the pressure felt by many in the City.

Late Sunday night came news that the board of AIM-listed European Goldfield had recommended a £1.5bn merger the Canadian miner Eldorado Gold.

And yesterday shares in Gulf Keystone Petroleum rose more than 20 per cent on speculation – only that at this stage – that it is about to receive a bid from Exxon.

As well as being a sign of renewed activity, or in Gulf’s case a sign of renewed expectation of activity, there is another reason to find these cases interesting.

Both companies have their shares listed in London but neither of them are governed by the City’s toughened up Takeover Code.

When Kraft won its battle for Cadbury there followed a public debate, spearheaded by former Cadbury chairman Sir Roger Carr, of the rules that govern takeovers in the City and what followed was a toughening up of the Takeover Code.

Hence the “put up or shut up” rules were tightened to flush out bidders; the drawing up of break fees was prohibited; and hedge funds were forced to become more public about their stakes in companies that were being bid for.

While investors might have been led by the strength of the debate to feel they are now afforded greater protection in the share market, this is not always the case because a number of companies, mainly outside the FTSE 100, do not find themselves governed by the Code because they are not registered in London.

Hence, in the case of European Goldfields, which is registered in Yukon, Canada, the board negotiated a £47m break fee with Eldorado which ensures a payment to either side if bid talks are broken off for the sake of pursuing a higher offer.

European Goldfields argues that break fees, which are perfectly acceptable in Canada, are useful in pinning a serious bidder down. But they also provide a disincentive for the board to look for a higher offer, which could be counterproductive in this case, for example, when the likes of Goldman Sachs are saying that the current bid is too low.

The case of Gulf Keystone Petroleum is a different issue but again involves the remit of the Takeover Panel. Yesterday, as shares rose more than 20 per cent on rumours of a bid from Exxon, the company remained silent until 16.10 before issuing a statement to say it was not in takeover discussions after rumours swept the market.

Bermuda is where Gulf Keystone Petroleum is registered. Had it been London, I have no doubt the Panel would have forced out a statement much earlier to help advise shareholders what to do next (see p.8).

Other companies subject to bids at the moment include Omega Insurance and Hardy Underwriting, neither of which fall under the Panel’s remit.

Time to rethink, perhaps. david.hellier@cityam.com
Allister Heath is away.