Why Cameron Should Read Up on Takeover Rules

Last Updated May 17, 2010 7:33 AM EDT

Britain's new prime minister wants new rules to require 55 per cent of MPs to dislodge the government. Such a cynical slanting of the playing field couldn't happen in commerce could it? Er, have a look at what the UK Takeover Panel is working on.

The City watchdog this year set up a review to consider whether a corporate takeover should succeed only if holders of at least 66 per cent of shares give approval. It followed the furore resulting from Kraft's controversial bid for Cadbury - a deal that has generated enough heat to melt the chocolate makers' entire stock and which, rightly or wrongly, could dictate the shape of takeovers for years to come.

Whether political or commercial, raising the voting barrier from the traditional '50 per cent plus one' criteria is aimed at preserving the status quo. But the numbers have been misrepresented to minimise the magnitude of the change.

Lifting the hurdle for dissolving parliament from 50 to 55 per cent is not an extra 5 per cent of MPs - 32 out of 650 seats - for instance. If the faction seeking dissolution has to have 55 per cent support, then only 45 per cent can be against. So would take a 10 per cent House of Commons majority to win a dissolution vote, or 65 MPs - more than the whole Liberal-Democrat representation in the House. Put as a ratio, a 45-55 split means achieving a 22 per cent majority.

Yet the hurdle being considered by the Takeover Panel is even more daunting. Demanding 66 per cent support for a hostile bid means holders of just one-third of shares could block a takeover. In practice, the minority could be smaller, because in bids, lost votes or abstentions count as votes for no change: the winner would need two-thirds of all shares in issue, not just two-thirds of those voted.

And just as reforming the rules at Westminster could ensure a government retains office without majority support, new City rules could mean a company remaining independent when a large majority of investors had wanted to accept a bid and could mean the board remaining in control when most shareholders oppose their policies.

Super-majorities do already exist in business: special resolutions at general meetings require the support of 75 per cent of shareholders, for instance, when ordinary resolutions need the backing of just over 50 per cent. But if bids are the ultimate change of control, one share is enough to decide the company's fate.

Simple majorities may be simplistic and a threat to the status quo but they do offer a simple way to govern a company - and possibly a country. The Takeover Panel's inquiry was established in response to a request from Lord Mandelson: now he is no longer business secretary, perhaps - whatever Westminster does - the panel will quietly abandon this potentially radical plan.

(Picture: BISGovUK, CC2.0)