Takeover Code Proposals Usher in Protectionism

Last Updated Mar 4, 2010 6:18 PM EST

British business has had the Cadbury Code on corporate governance; is it to have a Cadbury Code on takeovers too? Kraft's perfectly legitimate takeover of the UK chocolate company looks like leading to a change in the rules for all future bids as pressure for protectionism grows.

Business secretary Lord Mandelson has produced a manifesto for changing the takeover rules that echoes the criticisms from CBI chief Richard Lambert and the proposals from Cadbury's defeated chairman, Roger Carr. Faced with such concerted calls, the Takeover Panel has ordered a consultation on changing its code.

However content the Panel is with its current code it is unlikely to resist any amendment. So it must sort the silly from the sensible to ensure business is not saddled with new rules based on one famous brand being bought by foreigners.

The idea that shareholders consider the national interest before accepting a bid should go straight to the silly list, not least because most Cadbury shares were held by overseas investors with no reason to protect UK interests. And even if directors had to bow to Britain's interest, shareholders could vote against board recommendations. If ministers really want a National Interest Commission to block bids that damage British brands or jobs, like the Competition Commission protects consumer interests, that is a matter for parliament, not the Takeover Panel.

What is within the panel's remit is the timetable of bids. Mandelson suggests curtailing the phoney war before a formal offer starts the clock but limiting the time a target is under siege also shortens the period for preparing its defence. The panel can be expected to make concessions here, however, if only to encourage targets to be quicker in seeking a 'put up or shut up' order.

And it is under pressure to make changes on voting too. Carr suggested bidders have 60 per cent acceptance before declaring victory; Mandelson proposes 65 per cent. But scrapping the current threshold of '50 per cent plus one share' is dangerous: it allows a minority to outvote the majority. Carr's idea of disenfranchising short-term investors is bad because it similarly distorts decision-making.

But Mandelson may be on sounder ground in suggesting that shareholders of bidding companies vote as well as the target's investors. Kraft shareholder Warren Buffet grumbled about its bid but couldn't block it. Big takeovers, including the disastrous ABN-Amro and HBoS acquisitions, are voted on by the offerers' owners but while this could presumably apply only to UK bidders (and quoted companies, not private-equity funds) requiring approval could concentrate directors' minds. The Prudential's share price gave the thumbs down to the mega-bid for AIA: would its investors vote the same way?

However, all this tampering with the takeover rules is protectionism, whatever the proponents say. Not necessarily protection against foreign ownership but protection from hedge funds and speculators and protection for inefficient companies and bad management. Pretending it is protection for iconic British brands is merely a cover.