UK: takeover regulation review - IoD response

The Institute of Directors has today published its submission to the Takeover Panel's review of certain aspects of takeover regulation (about which see here, pdf). In its submission, available here (pdf), the IoD argues that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company. The IoD explains its position as follows:

The IoD believes that a market for corporate control is a valid component of an effective corporate governance system. The threat of hostile takeover can provide a source of discipline for severely underperforming companies and their management. However, takeovers are difficult to implement successfully. Many takeovers do not result in a combined enterprise that is stronger that the sum of its parts. A number of academic studies have shown that contested takeovers, on average, destroy value for the shareholders of the acquiring firm [Cosh and Hughes (2008), Martynova and Renneboog (2008) and Tuch and O'Sullivan (2007)]. Widespread use of takeovers may also encourage a short-termist management approach, both amongst acquisitive companies and companies under threat of takeover. As a result, we view hostile takeovers as a governance mechanism of last resort. The presence of an effective board (containing a high proportion of independent, knowledgeable and challenging non-executive directors) and an ongoing process of engagement between boards and shareholders should be regarded as the main means of ensuring the success of the company over the longer term.

When significant takeover bids do occur, the final say on the commercial viability of the transaction should be a matter for shareholders. Furthermore, for such an important (and potentially risky) corporate event, it is important to ensure that the shareholders on both sides of the transaction are fully supportive of such a step. The Takeover Code provides a fair and transparent mechanism through which to solicit the support of offeree (i.e. target company) shareholders during a hostile takeover bid. However, there is currently no guarantee that a takeover transaction has the support of the offeror (acquiring company) shareholders. The UK model of corporate governance is based on the principle of shareholder monitoring and oversight of corporate activity. In our view, it is consistent with this approach to require that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company".

UK: reform of the takeover regime?

The Guardian newspaper reports that the Secretary of State for the Department for Business, Innovation and Skills - Rt. Hon. Vince Cable MP - is to recommend an overhaul of the UK takeover regime: see here.

UK: Takeover Panel consultations - electronic communications and miscellaneous amendments

The UK's Takeover Panel has published two consultation papers, for which responses are invited by 17 October:

[1] Miscellaneous Code Amendments (2008/2) - the Panel proposes amending Rules 2, 8, 9, 35 and 28. These amendments are intended to clarify the application of existing Code provisions or to codify existing practice in relation to matters which are not currently covered by the Code.

[2] Electronic Communications, Websites and Information Rights (2008/3) - the Panel proposes that the Code should be amended to:

• enable electronic forms of communication to be used to send documents and information to shareholders and certain other relevant persons;
• facilitate and require a wider use of websites by parties to offers; and
• ensure that persons nominated to enjoy “information rights” receive the same information as shareholders. 

UK: Takeover Panel - annual report published

Yesterday the UK's Takeover Panel published its annual report for the year to 31 March 2008. The report provides a summary of statements issued by the Panel as well as statistics concerning resolved takeover and merger proposals. The report also refers to the High Court's decision in Re Expro International Group Plc [2008] EWHC 1543 (Ch) - noted in this post - and states:

In the recent High Court judgment in relation to the offer for Expro International Group Plc, which was effected through a scheme, it was noted that it was not considered desirable for Court procedure to introduce a level of uncertainty into offers which the provisions of the Code had successfully eliminated. On this evidence, it does not appear that there is any current likelihood of the Courts playing a more active role in determining the outcome of offers".

UK: Conservatives propose Chapter 11 style insolvency regime

In a wide-ranging speech delivered today, the leader of the Conservative Party suggests that it may be appropriate to adopt elements of the American Chapter 11 regime. The Rt Hon David Cameron MP stated:

Just as we took action for banks - so too should we take the appropriate action to help all businesses in these difficult times. We want to make sure sound companies don't go into liquidation unnecessarily. Because we all know what liquidation normally means - closure. This isn't good for the companies, many of which are actually fundamentally sound. This isn't good for the banks, who lend these companies money. And it's not good for employees - who face being laid off. So what can we do? I can announce today that we will consult on taking the best aspects of the American Chapter 11 system and give good companies breathing space to allow them to rescue or restructure the business in the face of the credit crunch. This change will ensure that fewer good companies end up in liquidation - and fewer people lose their jobs through no fault of their own. But of course, we cannot - and should not save all companies that fail".

The Liberal Democrats' Treasury Spokesman, Vince Cable MP, has already offered criticism; in his view (published here):

Chapter 11 allows people who have mismanaged their companies to continue to run them free from their debt and pensions obligations. Chapter 11 not only rewards failure, but as the debacle of the US airline industry showed, it distorts the market and can be used as a cynical ploy for executives to weasel their way out of paying the pensions owed to their employees"

These comments do, of course, assume a great deal about the eventual form of any proposals developed by the Conservatives. The Financial Times newspaper reports that the Conservative Party's advisors

...have focused on three areas: an "automatic stay of enforcement" of debt by creditors, granted for a renewable period of a few months, while management stays and tries to negotiate a restructuring; priority funding for distressed companies, to whom lenders could give money in exchange for "super priority" over other unsecured creditors; and binding measures agreed by court and a majority of creditors to stop "unscrupulous" creditors from vetoing desirable restructurings".

UK: schemes of arrangement, certainty and the Takeover Code

In Re Expro International Group plc [2008] EWHC 1543 (Ch), the High Court considered an application for sanction of a scheme of arrangement under Part 26 of the Companies Act (2006).  The scheme's purpose was a takeover. The UK Takeover Code provides, in appendix 7, that its provisions "apply to an offer effected by means of a scheme of arrangement in the same way as they apply to an offer effected by means of a contractual offer".  Re Expro is an important case because of the trial judge's observations regarding the application of the Takeover Code and the role of the Panel in takeovers effected through a scheme of arrangement.  The trial judge, David Richards J., observed (at para. [55]):

I have approached this application by the shareholders ... entirely on its own merits and in accordance with the established principles applicable to the consideration of schemes of arrangement. I nonetheless should say that I have concern that there should, if possible, be a common approach to the conduct of bids, whether they are structured as an offer or as a scheme. I would not think it desirable that the court procedure involved in a scheme should allow in an undesirable level of uncertainty which the provisions of the Code have successfully reduced or eliminated in the case of ordinary offers" 

Notes:

[a] The judgment has not yet been published on BAILII although it is available on Lawtel (a subscription service).  Update (10 July 2008): the decision is now available on BAILII - see here. 

[b] The decision has been widely reported in the business press: see here and here. 

UK: takeovers - more from the BIS Secretary of State

The new Secretary of State for Business, Innovation and Skills - the Rt Hon Dr Vince Cable MP - delivered a speech yesterday in which he set out in general terms the work programme for his department and his approach in this regard: see here. He touched upon takeover regulation and, against the background of the Takeover Panel's consultation paper on the Takeover Code, observed:

Too many takeovers in the UK fail even by the limited criterion of shareholder value – and often with serious implications for the people who work for the firms on both sides. For me this is not about foreign or domestic ownership – it draws no distinction between the two ...

So it is not about protectionism or strategic industries. It is certainly not about protecting bad management by blocking takeovers. It is about changing the way in which unfettered short term speculation can have damaging long term consequences. It is also about responsibility. It is renewing a sense that a company is an enterprise, not just a set of paper assets. It is about insisting that running a company and owning shares in a company should be an important responsibility, and never more so than when a company changes hands. This is an important issue for me because I think in many ways it captures something simple and important about the economy we want to build".

UK: the regulation of takeovers - Takeover Panel consultation paper published

The Takeover Panel Code Committee has published a wide-ranging consultation paper titled Review of Certain Aspects of the Regulation of Takeover Bids: see here (pdf).

The issues discussed include: the minimum threshold of acceptance for a bid by the offeree company shareholders (is the current “50% plus one” too low?); whether voting rights should be withheld from shares in an offeree company acquired during the course of an offer period; the level of information provided by offerors in relation to the financing of takeover bids; and whether protections similar to those afforded by the Code to offeree company shareholders should be afforded to shareholders in an offeror company.

The consultation paper is unusual because the Committee has departed from its usual practice of setting out proposals and draft amendments to the Code. The Committee has, instead, set out background information for each of the issues and the arguments for and against possible change, in order to instigate further debate. Further consultation papers will be published should the debate establish that there is a case for change in respect of the issues covered.

The Secretary of State for the Department for Business, Innovation and Skills - the Rt Hon Dr Vince Cable MP - welcomed the publication of the consultation paper and stated:

Getting the UK takeover framework right for the future is an important step in Government efforts to renew and reform the way markets work. This is not about economic nationalism. Open markets have made a huge contribution to growth in the UK over the past 30 years and must continue to do so in the future. We welcome foreign investors but we want all shareholders to be empowered, the takeover process to be more transparent, directors to think about their wider long term legal duties, and takeovers to be decided on the basis of long term shareholder value rather than short-term speculation. The Takeover Panel's work can play an important part in realising these goals".

Australia: ASIC's power to continue civil proceedings

The Federal Court of Australia has given judgment in Carey v Australian Securities and Investments Commission (ASIC) [2008] FCA 963, an interesting decision concerning ASIC's powers under Section 50 of the Australian Securities and Investments Commission Act (2001). The case concerned ASIC's decision to take over proceedings for breach of directors' duites commenced by a liquidator. One of the directors against whom proceedings had been brought, Mr Carey, argued that ASIC did not have the power to continue the action under Section 50. The Federal Court agreed, however, as Finkelstein J. observed (para. 6):

...in the circumstances of this case, the answer is somewhat academic. The parties accept that if Mr Carey’s view prevails ASIC can and will simply begin new proceedings in the name of each plaintiff. Moreover, I have pointed out to the parties that in such event, I would, most likely, make an order deeming each step taken in the existing proceedings to have been taken in the new proceedings"

This said, as Prof. Ian Ramsay has noted, there is a clear case for considering whether ASIC should be permitted to take over some proceedings, not least because of the likely cost savings. 

For further information see:

Background | The judgment | ASIC | Federal Court of Australia | 

UK: Rule 19.1 of the Takeover Code and public criticism for Kraft

The Takeover Panel Executive has publicly criticised Kraft Foods Inc for its failure to meet the standard required under Rule 19.1 of the Takeover Code in respect of statements made in the course of its takeover bid for Cadbury plc: see here (pdf). Public criticism is one of the disciplinary measures available to the Panel; a public criticism was last issued in 2007.

Rule 19.1 provides that "[e]ach document or advertisement published, or statement made, during the course of an offer must be prepared with the highest standards of care and accuracy and the information given must be adequately and fairly presented". During the course of its bid for Cadbury plc, Kraft had stated, on the basis of an honest and genuine belief, that it could keep operational one of Cadbury's factories (Somerdale).

In its statement, the Executive observed that Rule 19.1 was of "great importance" and "fundamental to ensuring the orderly conduct of takeovers" and that where a party to an offer makes a statement of belief of the kind made by Kraft, Rule 19.1 required "not only that the party concerned honestly and genuinely holds that belief (a subjective test) but also that it has a reasonable basis for so holding that belief (an objective test)".

The Executive accepted that Kraft held an honest and genuine belief that it could keep Somerdale operational. However, the Panel found that Kraft did not have a reasonable basis for holding this view because it did not know the details of Cadbury’s phased closure of Somerdale. Moreover, Kraft did not seek further information, or take the opportunity to take mitigating action in respect of its statements, when it learned, from Cadbury representatives, that the phased closure of Somerdale was well advanced.

Jersey: statutory basis for the UK Takeover Panel

Takeovers in Jersey are currently governed by the UK Takeover Code and Takeover Panel but this arrangement is informal.  This will soon change: draft legislation - the Companies (Takeovers and Mergers Panel) (Jersey) Law - has been published and its purpose is to place the UK Takeover Panel's role on a statutory footing.  This will bring Jersey into line with the United Kingdom, where Part 28 of the Companies Act (2006) governs the Panel's operation.  The Panel has only recently been placed on a statutory footing in the UK, following the implementation of the European Takeover Directive (2004/25/EC).  For further information, see this press release from the Takeover Panel or this press release from the States of Jersey.

Canada: directors' duties during a takeover

The Quebec Court of Appeal has delivered an important and controversial opinion concerning the duties of directors during a takeover. In BCE inc. (Arrangement relatif à), 2008 QCCA 935 (available in PDF here) the court unanimously rejected the position adopted by the board of a target company (in reliance on the famous Revlon case from Delaware: 506 A. 2d 173, Del. Sup. Ct. 1986) that its overriding duty was to maximise shareholder value and obtain the highest value for the shareholders.  The court held:

It is clear from the principles enunciated by the Supreme Court in Peoples [Department Stores Inc. (Trustee of) v. Wisethat 2004 SCC 68] that at no time do the directors have an overriding duty to act only in the best interests of the shareholders and to ignore the adverse effect on the interests of the debentureholders" (para. [99], emphasis in the original).

In Canada, the directors of a corporation have a more extensive duty. This more extensive duty embodied in the statutory duty of care encompasses, depending on the circumstances of the case, giving consideration to the interests of all stakeholders, which, in this case includes the debentureholders. They must have regard, inter alia, to the reasonable expectations of the debentureholders, and those may be more extensive than merely respecting their contractual legal rights" (para. [107]).

BCE, the target company, has begun appeal proceedings: the Canadian Supreme Court will hear the motion to appeal on June 17. For further background information see here.

NB: For further discussion of Revlon, see: Kraakman, R. and Black, B., "Delaware's Takeover Law: The Uncertain Search for Hidden Value", (2002) 95 Northwestern University Law Review, 521-566, available on SSRN here.

UK: the IoD on takeover rule reform and the stewardship code

The Institute of Directors is calling for reform of the UK takeover rules: see here. The Institute argues, amongst other things, that a greater role should be given to the shareholders of the bidding company and advocates a rule that would require hostile takeovers to be approved by a two-thirds majority of shareholders in the target and bidding companies.

The Institute has also published its submission to the FRC's consultation on the stewardship code for institutional investors - see here - and has called for much greater engagement between institutional investors and boards where the investor holds more than one per cent of the company's market capitalisation. The Institute also argues that the stewardship code should deal explicitly with share lending and that it should recognise that it is bad practice to borrow shares for the purpose of shareholder voting.

UK: election 2010 - the Labour Party manifesto

The Labour Party published its election manifesto today: see here (pdf). Chapter 1, page 8, sets out several proposals under the heading of corporate governance reform:

To build strong businesses we need skilled managers, accountable boards, and committed shareholders – all with a culture of long-term commitment. We will strengthen the 2006 Companies Act where necessary better to reflect these principles. The UK’s Stewardship Code for institutional shareholders should be strengthened and we will require institutional shareholders to declare how they vote and for banks to put their remuneration policies to shareholders for explicit approval.

Too many takeovers turn out to be neither good for the acquiring company or the firm being bought. The system needs reform. Companies should be more transparent about their long-term plans for the business they want to acquire. There needs to be more disclosure of who owns shares, a requirement for bidders to set out how they will finance their bids and greater transparency on advisers’ fees.

There should be a higher threshold of support – two-thirds of shareholders – for securing a change of ownership and the case for limiting votes to those on the register before the bid should be examined".

These proposals are, inevitably, vague and imprecise in places and they raise many questions, particularly concerning the manner in which the proposed takeover reforms will be achieved. Despite the statement that the takeover process requires reform, there is nothing to suggest that a future Labour Government would be prepared to challenge the shareholders' central position in the UK corporate governance framework. Can changes to the rules regarding takeovers be made without also considering the wider governance framework?

A greater role for shareholders regarding banks' remuneration policy is envisaged in the manifesto although it is not clear how the proposal for "banks to put their remuneration policies to shareholders for explicit approval" would be different from the advisory vote currently required by Section 439 of the Companies Act (2006). What does explicit approval mean in this regard?

Elsewhere there is a clear commitment - "we will require institutional shareholders to declare how they vote" - which suggests that a future Labour Government would exercise the power available to it under Section 1277 of the Companies Act (2006). With regard to institutions, the manifesto refers to strengthening the UK's Stewardship Code, although the consultation on the content of this Code has not yet been completed by the Financial Reporting Council. The FRC is considering whether the Stewardship Code should be based on the Code on the Responsibilities of Institutional Investors issued by the Institutional Shareholders’ Committee (ISC). The manifesto reference to strengthening the Stewardship Code may well mean the ISC Code, but this would be to pre-empt the results of the FRC's consultation.

UK: BIS Committee calls for wide-ranging review of corporate governance

The Business, Innovation and Skills Committee yesterday published its report Mergers, acquisitions and takeovers: the takeover of Cadbury by Kraft. The report is available here (html) and here (pdf). The Committee concluded its report with this recommendation for its successor:

The takeover of Cadbury by Kraft has highlighted a number of important issues in respect of the way in which foreign takeovers of UK companies are conducted. It has been the catalyst for a wider debate, both in Government and in the City, about how takeovers are conducted. In highlighting the Kraft takeover of Cadbury, we have contributed to that debate which now needs to continue, and with urgency. Time does not allow us to consider the wider proposals for reform in detail but it is clear that the Companies Act 2006 has not resolved these major issues in corporate governance. We urge our successor Committee to consider this Report as a starting point from which to conduct a detailed inquiry into these important issues and into the role of shareholders and managers of companies more generally. Recent experience of the behaviour of boards and shareholders in situations ranging from the fall of RBS to the Kraft acquisition of Cadbury indicate that it is time to reconsider many aspects of corporate governance".

UK: Takeover Panel Code Committee consultation

Last Friday the Takeover Panel Code Committee published a consultation paper containing proposed amendments to the Takeover Code with respect to profit forecasts, asset valuations, and merger benefit statements which are made before or during an offer: see here (pdf). The purpose of the amendments, the Code Committee states, is to improve the Code's consistency and coherency.

UK: Lord Mandelson calls for takeover reform

Today's Financial Times newspaper reports the comments of the Secretary of State for Business, Innovation and Skills, Lord Mandelson, with regard to the rules governing the conduct of takeovers in the UK. The comments were given in a speech delivered yesterday at the Mansion House in London. A transcript of the speech is not yet available on the BIS website.

According to the report, Lord Mandelson welcomed the Takeover Panel's review of the Takeover Code and argued for reform to reflect the "values of the long-term or organic growth and value creation over the temptations of excessive leverage and the fast buck".

Update: a copy of the speech is available here. It is more wide-ranging than takeovers and there is discussion of the duties of directors under the Companies Act (2006), about which Lord Mandelson stated:

... the Companies Act sets out the duties of directors to consider the best outcome for a company in the long term, considering the interests of all the stakeholders – employees, suppliers, and its brands and capabilities. Getting a higher price in a takeover may not be perfect proxy for that. It seems to me that we need to have a debate about how these various duties should be understood in the fast-moving circumstances of a takeover, when some of the company’s newest shareholders may not have a long term commitment to the company. Obviously we need Directors equipped to be stewards rather than just auctioneers. If this requires re-stating the 2006 Companies Act, then I am willing to do that".

UK: Takeover Panel begins review of the Takeover Code

The Takeover Panel Code Committee has announced the start of a review of the Takeover Code, in the light of what it describes as "recent commentary and public discussion, and suggestions for consideration from the Secretary of State for Business, Innovation and Skills and others". The Committee states that a consultation paper will be published "as soon as practicable". Meanwhile, further information about its review is available here (pdf).

Europe: does Community law provide a general principle of equal treatment for shareholders?

The European Court of Justice (Fourth Chamber) has given its judgment in Audiolux SA v Groupe Bruxelles Lambert SA (Case C-101/08, 15 October 2009). The court held - in a reference for a preliminary ruling under Article 234 of the EC Treaty from the Cour de cassation in Luxembourg - that Community law does not provide a general principle of equality of treatment for shareholders. More specifically, the court ruled:

Community law does not include any general principle of law under which minority shareholders are protected by an obligation on the dominant shareholder, when acquiring or exercising control of a company, to offer to buy their shares under the same conditions as those agreed when a shareholding conferring or strengthening the control of the dominant shareholder was acquired".

UK: hedge funds and takeovers

Today's Times newspaper reports the comments of the outgoing Cadbury chairman, Roger Carr, regarding the role hedge funds during takeovers. Mr Carr is reported as arguing that a minimum of 60% of shareholders should be required to approve a takeover and that restrictions should be imposed on the voting rights of hedge funds in the takeover context.