Calls for reform of takeover laws

15/07/2010

In light of the recent hostile takeover of the British household name Cadbury plc (Cadbury) by US Company Kraft Foods Inc (Kraft), the subject of hostile takeovers and how companies can fend an unwanted bidder off has become a much discussed topic of conversation. The hostile takeover of Cadbury has been widely publicised, especially the initial resistance by Cadbury shareholders to the takeover. Critics have argued that Kraft was able to string the takeover process out long enough so that Cadbury's shareholder register became filled with short-term investors, such as hedge funds, who would be willing to accept any bid to make a quick profit, with arguably no regard to the business's long term prospects or value. It has also raised a number of issues regarding the UK takeover regime generally. In the end, a sufficient percentage of Cadbury shareholders accepted the offer and "squeezed out" the remaining minority shareholders, allowing the takeover bid to complete.

Fuelled by the Cadbury takeover, the public debate has now reached a key stage which coincided with the election earlier this year and has given rise to a great deal of political and public discussion, with the key questions around the proposed various reforms to takeover laws being:

• Lord Mandelson whilst Business Secretary, argued that there may be a case for raising the voting threshold required to approve a hostile bid to two-thirds, as opposed to the simple majority that is currently required. This suggestion however (which has become known as Cadbury's law) has received a mixed response, with critics (such as the Association of British Insurers) arguing that raising the threshold on takeovers could result in underperforming boards being protected in their positions.
• a question linked to the above point is whether only long- term shareholders should have the right to decide whether a company is taken over and how best the process is achieved. The Liberal Democrat and Labour Parties jointly proposed in their 2010 manifesto that only the long-term shareholder base of a company should determine its acquisition, as opposed to short-term shareholders such as hedge funds, whose considerations may be driven by short term profit.
• whether bidders should be required to set out publicly how they intend to finance their bids over the long term and how they intend to make savings.
• whether bidders should be given less time to commit formally to the offer so as to reduce the length of time a takeover bid takes to complete.

Whether or not these issues will resolved remains to be seen, but to date it is clear that although some commentators are in favour of protecting companies from hostile bids, others would prefer takeover laws to remain the same so as to allow the shareholders of the company in question (rather than the board) to determine the outcome of a takeover bid. The Takeover Panel is presently conducting a consultation on the current rules, with another review having been promised by the coalition Government. The Business Secretary, Vince Cable has however, to date indicated that he is in favour of a Cadbury Law.

Contact: ritapadam@city-law.net

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