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: Takeover Panel publishes annual report

The Takeover Panel published its 2009/10 annual report earlier this week: see here (pdf). Amongst the activities reported is the following concerning financial reform at the European level:

... the Panel’s focus over the last year has been the proposal for a Regulation to establish a European Securities and Markets Authority (“ESMA”), which forms part of the EU’s response to the financial crisis of late 2008. As originally drafted, the Regulation included the Takeovers Directive within the scope of ESMA’s powers, enabling it, potentially, to set Europe-wide standards for regulating bids and even to intervene in individual offers. The Panel has argued that the inclusion of takeover regulation within a regime of harmonised European securities regulation would be inappropriate, not least because takeover regulation must reflect company law, which still varies considerably between Member States. The Executive has devoted considerable efforts to making representations to this effect in Brussels and with its counterparts in other Member States. While negotiations continue between the European Parliament, the Council and the Commission, amendments adopted by the Parliament on 7 July exclude the Takeovers Directive from the scope of ESMA’s powers and it is hoped that, when it is finally established, ESMA will not compromise the existing framework of takeover regulation applied by the Panel".

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: 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: 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.