BREAKINGVIEWS – Political meddling in UK takeovers shortchanges investors

April 12, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are his own —

By Chris Hughes

LONDON, April 12 (Reuters Breakingviews) – Takeover law doesn’t usually rub shoulders with health, education and taxation as a big issue in elections. But spurred on by Kraft’s emotionally-charged takeover of Cadbury, the UK’s ruling Labour party has made reforming M&A a key plank of its agenda for a fourth term in office. Sadly, its heightened interest in the market for corporate control has generated mainly bad ideas.

The worst of the proposals are to make any change of control dependent on two-thirds of shareholder votes, and to examine disenfranchising investors who buy shares after a company has become subject to bid interest. Both ideas violate fundamental principles of shareholder democracy. There is no good reason why a bidder should not control a target company once it gets a simple majority for its offer. Likewise, it is ridiculous to detach voting rights from shares just because a company is in play.

Proposals to make bidders disclose their “long-term plans” for the business and their intended financing techniques are also misguided. Such information is of little use to a target company board when it has to consider whether or not to recommend a cash bid. Directors have a fiduciary duty to shareholders. In such circumstances, the only consideration should be value.

It is harder to quibble with Labour’s plan to extend the “public interest” test for takeovers to infrastructure and utility companies. A government may be legitimately concerned with how an acquisition — possibly highly leveraged — of a water or energy company will affect security of supply. But this is somewhat academic. Most of the UK’s utilities have already been taken over. And security of energy supply in any case depends on ownership of upstream assets. The proposed changes seem to be mainly aimed at Centrica, the UK energy supplier occasionally tipped as a target for Russia’s Gazprom.

The threat of a takeover is a useful way of keeping management on its toes. Labour’s ideas undermine this valuable weapon — if implemented, they could deter some predators from launching bids. The party’s policy wonks seem to have forgotten that takeover rules exist above all to protect the interests of a target company’s shareholders.


— All takeovers of UK companies would require approval by two-thirds of shareholders if the ruling Labour Party wins re-election in the May 6 general election.

— The pledge, made in the party’s election manifesto, is accompanied by a plan to “examine” limiting voting rights to shareholders already invested before a bid emerged.

— The manifesto also proposes to extend the public interest test for takeovers to apply to potential takeovers of infrastructure and utility companies.

— “Too many takeovers turn out to be neither good for the acquiring company or the firm being bought. The system needs reform,” the manifesto said.

— Other proposals include greater disclosure of:

Bidders’ long-term plans for the business they want to acquire

Target company share ownership

M&A financing

advisers’ fees

— In March, the UK Takeover Panel said it was reviewing the provisions of its Takeover Code in the wake of concern at the acquisition of Cadbury by Kraft Foods of the U.S., agreed in February after a bitterly contested battle launched in September.

Labour manifesto:

(Editing by Peter Thal Larsen and David Evans)


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