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September 2010

Governance – Rethinking Takeover Regulations in UK in the Wake of Kraft’s Conquest of Cadbury

By Uday Chitale
Murtuza Vajihi
Chartered Accountants
Reading Time 4 mins

Accountant Abroad

Workers at the Cadbury plant
in Keynsham, in the west of England, thought they had a sweet deal. In the
middle of a takeover bid for the British confectioner last year, the U.S. food
company Kraft pledged that the factory, earlier slated for closure by Cadbury,
would remain open if it won the company. When the deal wrapped, though, the
pledge soured. Too much of Keynsham’s production had apparently been shifted to
Poland to reverse its closure, Kraft lamented. The plant, after more than 75
years making chocolate, will shut next year, its staff of 400 among the early
casualties of the $ 18 billion deal.

Few hostile bids for a
British firm and a beloved brand have ruffled the country’s business and
political chiefs the way Kraft did. But the debate took a twist. Although the
Americans were excoriated for their U-turn, the pivotal role of short-term
Cadbury investors in handing the firm to Kraft sparked calls for a rethink of
the way takeovers are governed in the U.K.

And that’s exactly what the
Takeover Panel, the independent body that sets the rules for deals involving
U.K. firms, is doing — undertaking a review of the mergers and acquisitions
process with an eye on reform. The government is poised to unveil its own
recommendations for change, Business Secretary Vince Cable said to a
parliamentary committee on July 20.

Few would dispute any
British claim of being the takeover capital of Europe. According to Dealogic,
which tracks global M&A, the U.K. has seen more than twice as many of its
companies bought since 2005 as any of Europe’s other leading economies. Among
the conquests : airport operator BAA bought by Spain’s Ferrovial, British Energy
bought by France’s EDF and iconic car maker Jaguar and steel maker Corus taken
over by India’s Tata Group.

Chalk at least some of that
up to the Anglo-Saxon brand of capitalism, one that European continental
regulators have often resisted. France, for instance, has bluntly protected its
‘national champion’ companies from hostile offers. With boards and the
government less able to meddle in the takeover process in Britain, says Roger
Barker, head of corporate governance at the London- based Institute of
Directors, it is “very much an outlier in terms of the openness of our market
for corporate control.”

To make deals tougher for
acquirers to execute, the Takeover Panel is considering ways to grant
longer-term shareholders in a target firm more power to decide the fate of an
offer. One proposal being considered would see the threshold for an acquisition
increased from 50% plus one of the voting rights to 60% or higher. Another would
disenfranchise investors who buy a target’s shares after an offer has been made
by denying them the right to vote on the bid.

Both ideas have their flaws.
U.K. corporate law permits a shareholder to control a company with 50% plus one
by, for instance, issuing resolutions to dismiss the board and appoint a new
one. That such a stake would no longer grant ownership seems incongruous.
Depriving newer investors of the right to vote on a takeover, meanwhile, makes
presumptions about their motives and desirability that won’t always be fair.
After all, the reason there are short-term shareholders is that some long-term
shareholders sell out. They are voting with their feet. Disenfranchising on
those grounds, says Michael McKersie — an assistant director at the Association
of British Insurers, which represents major investors in U.K. stocks — “is just
a form of discrimination.”

Other proposals, though, are
less fraught. Giving shareholders in a bidding company a say in the process
seems sensible, since those left holding stock in the combined entity have far
more to lose from a poorly judged acquisition. Big deals involving a British
buyer sometimes require approval from the bidding company’s shareholders. For
instance if Kraft were a U.K. company, it would have needed shareholders to
approve the move for buying out Cadbury.

The City is not anticipating
revolutionary change within the Takeover Panel’s recommendations. Any radical
measures to ensure that deals are decided on the basis of long-term-shareholder
value rather than short-term speculation, would be more likely to come from the
government. The Institute of Directors’ Barker, for one, is betting on the
government to take some significant action. Officials are already mulling plans
to subject big deals to greater regulatory scrutiny before an offer has
officially been tabled. That’s far too late to help workers at the Cadbury plant
in Keynsham. But it just might make the deal’s aftertaste a touch less bitter !

(Source : Time, 16-8-2010)

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