Last night, this was extended through a significant call for rethinking the takeover rules, to throw "some extra grit" in the system, and for rules which incentivise the "stewardship" responsibilities of company directors. Mandelson argued that the Kraft takeover of Cadbury showed the need for reform of the current rules:
Nobody believes that poorly performing management should be protected. But the open secret of the last two decades is that mergers too often fail to create any long term value at all, except perhaps for the advisors and those who arbitrage the share price of a company in play.
A lot of M&A advisors must be sleeping badly in that knowledge. Or maybe not.
And it seems to me that given that a takeover can have huge implications for workforces and communities as well as investors, this is an area where good governance, and active and responsible shareholding, are absolutely critical. I do believe that there is a strong case for throwing some extra grit in the system.
This is true for us in particular because the UK has a very open market for corporate control, arguably the most open in the world. And it is in our interest to make sure that this openness is producing sound outcomes.
In the case of Cadbury and Kraft it is hard to ignore the fact that the fate of a company with a long history and many tens of thousands of employees was decided by people who had not owned the company a few weeks earlier, and probably had no intention of owning it a few weeks later.
Company Directors engaged in takeovers clearly have a legal duty to shareholders. For the Directors of the target this is often interpreted as meaning a duty to accept any price that exceeds their own assessment of the future valuation of the company.
However, 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.
These were the Business Secretary's specific proposals for reform of the takeover code.
I welcome last week’s decision of the Takeover Panel to consult on the provisions of the Takeover Code, following Roger Carr’s sensible suggestions reflecting his Cadbury/Kraft experience. I believe that there is a case for:
- Raising the voting threshold for securing a change of ownership to two thirds;
- Lowering the requirement for disclosure of share ownership during a bid from 1% to 0.5% so companies can see who is building up stakes on their register
- Giving bidders less time to “put up or shut up” so that the phoney takeover war ends more quickly and properly evidenced bids must be tabled.
- Requiring bidders to set out publicly how they intend to finance their bids not just on day one, but over the long term, and their plans for the acquired company, including details of how they intend to make cost savings; and;
- Requiring greater transparency on advisors’ fees and incentives.
I also think there is a case for requiring all companies making significant bids in this country to put their plans to their own shareholders for scrutiny. Kraft after all had to bend over backwards to avoid asking Warren Buffet for his binding opinion, although I think we all got his message.
None of these measures would necessarily have prevented Cadbury changing hands – that is not the point. They would have enabled the owners of both companies more actively to scrutinize the transaction, and better weigh the long term prospects for the merged company.
Mandelson said he was open to a debate about wider reform proposals, though expressed his caution about the TUC's call for a "public interest test" that a takeover is in the “long-term interest” of a company, as Adam Lent sets out on the TUC Touchstone blog.
Mandelson stressed that the focus should be on corporate stewardship and long-term ownership, not the fact of domestic or foreign ownership (though the TUC proposals do not seek to make distinctions on that basis.
Some people have gone further and suggested that we need a new form of public interest test to guard British companies against foreign acquisition. I am happy to have an open debate about this, but I think we need to be very cautious about this.
Britain benefits from inward investment and an open market for corporate control internationally. A political test for policing foreign ownership runs the risk of becoming protectionist, and protectionism is not in our interests.
We already have certain EU and UK rules that protect the public interest in a change of corporate control. A public interest test already applies to questions of competition, public security, media pluralism and - in the UK - financial stability.
These rules have evolved over time – most recently to absorb the concept of financial stability. They are not immutable, and as I said I am open to debate. But we must not get drawn into a narrow debate about foreign ownership, which is not the issue. More important is the need for reform to promote corporate stewardship and long term engagement and ownership amongst shareholders, boards and their directors.