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: 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".

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.

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: Takeover Code - updated edition published

An updated edition of the Takeover Code comes into force today, reflecting amendments adopted by the Code Committee in Response Statement 2009/1 (here, pdf) and made by Instrument 2009/6 (here, pdf). For further information, and a summary of the amendments, see here (pdf).

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: 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).

UK: the Companies Act (2006) final implementation

In March 1998 the Department for Trade and Industry published Modern Company Law for a Competitive Economy, the consultation paper which launched the reform of company law which culminated today in the final implementation of the Companies Act (2006). 

Whilst much of the 2006 Act has already been implemented, the provisions coming into force today include, inter alia, those concerning company formation, capacity and name; the company's constitution; company members and share capital; the annual return and company charges. For a general overview, see the implementation timetable published by the Department for Business, Innovation and Skills. Specific guidance has recently been published by DBIS concerning the changes to constitutional documents and the model articles. Further information is also available in the FAQ section of the DBIS website. 

Reflecting the final implementation of the 2006 Act, a revised edition of the Takeover Code code comes force today. Changes have also been made to the FSA Handbook. Certain provisions of earlier Acts - including the Companies Act (1985) and Companies Act (1989) - remain in force: see here for an overview.

UK: the Takeover Code - revised edition

A revised edition of the Takeover Code came into force yesterday, reflecting the amendments contained in instrument 2009/5. Further information is available here (pdf).

UK: Takeover Code amendments

A revised edition of the Takeover Code comes into force on 1 October 2009 and will reflect the final implementation of the Companies Act (2006). The amendments are in Panel Instrument 2009/3. The new edition of the Code will be published on 1 October. 

UK: shareholder activism - Takeover Panel statement

The Takeover Panel has issued Practice Statement 26: Shareholder Activism, in response to concerns that certain provisions of the Takeover Code prevent co-operation by fund managers and institutional shareholders. The Takeover Panel Executive does not share these concerns and Practice Statement 26 describes the way in which the Executive interprets and applies the Code provisions in question.