The UK Takeover Regulation Report (Assessment)

Introduction

Companies engage in takeovers with the objective of increasing their value. Different nations have diverse legislations that guide or regulate takeovers. In the UK, Shikha reveals that takeover regulations take a shareholder-oriented approach.¹ Indeed, shareholders reserve the right and authority to permit managers to engage in any defensive tactics for a takeover bid. In fact, in the UK legislation, the City Code on Takeovers and Mergers only comes into play when a bid already exists. In support of this assertion, Jindra and Moeller state, “ban on defensive tactics by managers in the UK makes it easier for hostile bids to succeed”.²

Hence, the existence of a bid gives room for managers to deploy less stringent regulations before the actualisation of a takeover bid. Despite this possibility, the UK still believes that its takeover regulations encourage economic growth. From this position, by reviewing the literature on hostile takeovers and considering typical takeover cases between Cadbury Plc and Kraft Food Inc., this paper argues that the UK’s takeover regulations are detrimental to its long-term economic growth and that urgent reforms are needed to address this situation.

The Main Argument

The link between takeover laws and economic growth is apparent upon considering the argument that any takeover arrangement, including mergers and acquisitions, focus on increasing the value of stock prices. This arrangement creates a positive image of a firm’s performance, hence attracting more investments. Asker, Farre-Mensa, and Ljungqvist support this assertion observing that corporate takeovers should serve the principal purpose of improving stock prices and the stock market performance of various businesses that are involved in takeovers through a merger or acquisition.³ However, despite the substantial stock price increment after a takeover, Erel, Jang, and Weisbach assert that the acquirers suffer negative market performance in the long-term.⁴

In other words, based on their implication on the long-term economic growth, takeover laws in the UK do not consider the underlying effects on the firm taking over a given organisation. Indeed, whether the acquiring firm gains more than the one taken over or the vice versa, it is apparent that financial resources flow within the UK economy, especially where such arrangements do not involve a foreign company. Nevertheless, ill-motivated takeovers are disadvantageous to long-term economic growth. This claim implies that laws in the UK should ensure that ill-focused takeovers do not occur.

Misinformed takeovers that have been experienced in the UK have cost the country huge financial resources. For example, the 1996 hostile takeover worth 11.6 billion USD involving Wells Fargo and First Interstate Bancorp resulted in a merger where various company executives left followed by evidence of various accounting errors in the corporations’ accounts, which left regrettable problems to customers as Shenoy reveals.⁵ Amid these challenges, the UK regulations still give room for hostile takeovers. Indeed, considering the experience between Wells Fargo and First Interstate Bancorp, hostile takeovers are detrimental to long-term economic growth.

The U.S. legislation constitutes an important benchmark for ensuring that takeover laws do not impair the anticipated long-term economic growth. For example, managers in the UK can deploy various defensive tactics that help in keeping away any hostile takeover bids. The use of poison pills entails one of the best approaches to accomplishing this goal. According to Anand, the poison pill dilutes any potential hostile takeover bid in case a bidder obtained higher target stocks than initially specified.⁶

Hence, successful deployment of the poison pill strategy to keep off hostile bids requires managers and the board of directors to have the discretion to resist any hostile takeover bid. Indeed, instead of providing a playground for a hostile bidder, it is far better if the UK takeover regulation promotes good relationships with the favoured bidders. As Gatti observes, lock-up provisions and breakup fees can help to achieve this noble concern.⁷ In fact, many states around the globe have adopted anti-takeover laws with the sole purpose of slowing or preventing unwanted takeovers.

According to Rowoldt and Starke, provisions such as the fair-price plan, managers taking control of shareholders’ interest, and eliminating voting rights for bidders unless approval from shareholders left after the takeover is made help managers in resisting any hostile takeover.⁸ In fact, Hasani and Liu inform how the provision of fair prices limits “a bidder’s flexibility to effect a subsequent combination after acquiring control”.⁹

However, the UK forbids poison pills or any managerial involvements aimed at frustrating takeover bids unless where shareholders present an approval. Takeovers seek to enhance synergies. However, Callaghan argues that they increase returns on shareholders but to the disadvantage of employees and creditors in the UK.¹⁰ For example, a merger results in the laying off of some employees, a situation that Worthy claims have consequences on their future purchasing power and hence detrimental to the UK’s long-term economic growth.¹¹

The UK’s regulations on takeovers and mergers allow hostile takeovers to occur. Indeed, between 1990 and 2005, Armour and Skeel confirm that 0.85% of the mergers in the UK were hostile compared to 0.57% in the U.S.¹² To this extent, a major argument that the UK’s takeover regulations are unfavourable to the country’s long-term economic growth emerges. This situation calls for an urgent transformation in the UK. Arguing that rules 9, 21, and 23 of the UK City Code create a scenario that increases the possibility of hostile takeovers occurring does not imply that one is anti-business. Here, the primary concern is that hostile takeovers cause short-termism, which has a detrimental impact on the UK’s long-term economic growth and hence the need for reforms to restore sanity in the UK’s takeover regulations.

Considering various regulations applicable to different jurisdictions, different mechanisms may be adopted to ensure that takeovers do not interfere with a country’s long-term economic growth due to hostilities in the bidding processes. For example, Bates and Becher reveal how regulations in the U.S. permit flexibility in the bidding process by not prescribing a mandatory proposal, as witnessed in the UK.¹³

According to Armour and Skeel, a mandatory bid requires “bidders who acquire a large block of target shares to make an offer for all of the targeted companies’ shares”.¹⁴ This plan has the implications of dictating the price of all other shares to the extent that a bidder can only pay an equal price for every share acquired. Consequently, as Greene points out, it is likely that shareholders would not have an opportunity to sell all shares in case a given bidder acquires a company.¹⁵ This situation is disadvantageous to the long-term financial development in jurisdictions such as the UK where many takeover deals take place with target companies having no capability to deploy defensive tactics to frustrate the takeover offers.

In any organisation, the management has a delegated duty from shareholders to execute a company’s affairs on their behalf. Reducing their capability to frustrate any takeovers that might have negative impacts in the future is tantamount to exposing shareholders to hostile experiences. For instance, a reduction in the share value implies that even other stakeholders, including suppliers, find business less attractive since the net flow of financial resources is reduced. The resulting impaired purchasing capability is detrimental to the UK’s long-term economic growth.

Evidence to Support the Main Argument

In support of the above argument, damages to the UK’s long-term economic growth are evident in the regulations’ inability to provide room for managers to take part in turning down any offensive bid through defensive tactics, yet they are the main repositories of the company’s information. The objective of such a denial is to ensure that shareholders have access to all information necessary during bidding decision-making processes.

As the true owners, Hannigan asserts that shareholders have the obligation and right to determine the future of their company.¹⁶ However, in line with Kershaw’s views, takeovers, especially through mergers and acquisitions, lead to some employees’ lay-offs and the cutting of some business lines with suppliers.¹⁷ The net effect is the reduction of the purchasing power of a significant portion of the people who initially relied on the operations of companies forming the merger for income as Liu reveals.¹⁸ Since such revenue is redistributed to the economy, in this case, the UK, any hostile bid should be avoided.

The case of Cadbury Plc and Kraft Food Incorporation underlines the need for changing takeover regulations in the UK. Dulo observes, “For Cadbury plc, the Takeover Panel issued a public criticism of Kraft Food Incorporation for certain statements made by Kraft about the future of Cadbury’s Somerdale factory in the context of its offer for Cadbury”.¹⁹ In fact, consistent with this assertion, the statements failed in meeting information accuracy requirements as stated under regulation 19.1 of the UK City Code.

This situation points to the need for changing the UK’s takeover regulations to allow bidders to provide additional and detailed information on takeover bid financing, including any emerging effects and implications. It is important for various boards of target corporations to state their views, including the bidders’ intentions. In fact, according to Tsagas, even the case Cadbury Plc prompted the UK’s takeover panel to consider potential areas that required alterations in the regulations.²⁰ The case also evidences that short-term investors can proactively participate in pushing for bid acceptance without due consideration of the long-term economic implications of their actions.

Kraft’s short-term investors played an active role in accepting a condition of 50 per cent plus one. Temporary shareholders bought shares after it came to public attention that an imminent possible offer was underway. According to the Companies Act of 2006 Section 983, through the voting power, as per their shareholding, such shareholders influenced the outcomes of the offers.²¹ As argued in the literature review section, managers in the UK have no permission to participate in tactics that may frustrate a bid unless authorised by shareholders. Consequently, according to the rules presented in the UK Takeover Code, short-term shareholders who have no sufficient experience in a firm’s performance are required to authorise managers to take such initiatives to protect them from future losses.²²

However, considering the positive anticipation of the increased stock market prices, such shareholders are unlikely to do so. Nevertheless, an urgent change of the UK’s regulations on takeover and mergers is necessary to effectively manage the powers of new shareholders who buy shares just before takeover offers are made as Manne observes. For example, even without diverting from shareholder-oriented regulations, the disfranchisement of shareholders is necessary.²³ This strategy can ensure that only shareholders who hold shares before an offer is announced are allowed to take part in the voting, thereby effectively contributing to an appropriate acceptance threshold in line with the UK’s economic growth plan.

Counter-Argument

Without the consent of shareholders, Armour and Skeel assert that managers cannot utilise defensive tactics in takeover negotiations that have a net effect of frustrating the actualisation of a bid.²⁴ This situation raises the question of whether the UK’s takeover regulations consider the role of managers as the shareholders’ appointed agents who make decisions on behalf of their employers. Arguably, managers have better access to all critical organisational information necessary during bid negotiations.

Hence, making it mandatory for shareholders to consent to the use of defensive tactics implies that managers are denied their role in making and implementing vital strategic decisions that benefit the owners of companies, which are undergoing takeovers. A possible counter-argument is that many managers fail to comply with corporate governance principles and instead engage in defensive tactics with the objective of achieving personal interest to the disadvantage of shareholders.

A major counter-argument is that the UK has established mechanisms for ensuring that coercive bids do not occur. For example, as evidenced by Johnston, one can claim that the City Code on takeovers and mergers entails several written down rules and regulations that guide acquisitions in the UK.²⁵

A panel administers these rules. Armour and Skeel insist that the panel’s composition should be approved via being seconded by various members of professional communities whom the rules and regulations seek to control.²⁶ The UK foresees a situation where disputes can arise. Therefore, it bestows the panel team with the power to respond to disputes in real-time and a flexible manner. According to Johnston, this approach differs from that of the U.S where Delaware Courts have the duty of governing takeovers.²⁷

The UK City Code focuses on protecting the interest of shareholders during takeovers. Amid this difference, the UK takeover policies impose compulsory proposal requirements that preventing acquirers from engaging in coercive bids. This way, the UK takeover laws may be viewed as preventing the possibility of hostile takeovers that impair the country’s long-term economic growth.

Criticising the Counter-Argument

The counter-argument may be refuted. The UK and the U.S. have similar corporate governance systems. However, regulations on takeovers in the two jurisdictions take different routes. The U.S. Delaware system permits managers to manoeuvre by employing defensive tactics without seeking consent from shareholders. This plan works well in America, a situation that raises the question of what may be wrong with the UK adopting a similar approach in its takeover regulations. For example, through the poison pills, Deakin and Slinger assert that scenarios such as the influence of short-term shareholders on bid-offer outcomes may be avoided.²⁸

In fact, mergers and acquisition deals are detrimental to the long-term economic growth in the UK akin to the possibility of laying off some employees and cutting links with several suppliers. This situation is worse upon considering a scenario where the acquiring firm has some hidden intentions, yet short-term investors have to give managers the authority to engage in defensive tactics aimed at frustrating a hostile bid through their share voting powers.

A proposal to disfranchise short-term shareholders’ voting power faces a counterargument that they bought shares from long-term investors during the offer period. Therefore, disfranchising them erodes their rights for taking control of the affairs of their company extended to them by long-term shareholders. In other words, according to Gatti, disfranchisement negatively influences the principle of uninterrupted capital flows, hence rendering the concept of one share for one vote useless.²⁹

Summation and Conclusion

Different jurisdictions adopt diverse approaches to regulate takeovers. For example, although the U.S. adopts the Delaware system, the UK has a team that administers various regulations on takeovers and mergers. This difference exists amid the two jurisdictions having similar corporate law systems. The disparity has a detrimental effect on the UK’s system to the extent that it is more susceptible to hostile takeovers compared to America.

The paper has suggested the need to curtail the possibilities of hostile takeovers in the effort to ensure that acquisitions and mergers produce positive effects to shareholders, employees, and any other parties such as suppliers. The paper has argued that takeovers should not have negative spillover effects that disadvantage all concerned parties to the detriment of the overall economic growth as witnessed in the UK.

Bibliography

Anand, Anita, ‘The Future of Position Pills in Canada: Are Takeover Bid Reforms Needed?’ (2015) 61 McGill LJ1.

Armour, John, and David Skeel, ‘Who Writes the Rules for Hostile Takeovers, and Why?” The Peculiar Divergence of US and UK Takeover Regulation’, (2007) 95 Georgetown Law Journal 1727.

Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist, ‘Corporate Investment and Stock Market Listing: A Puzzle?’ (2015) 28 Review of Financial Studies 342.

Bates, Thomas, and David Becher, ‘Bid Resistance by Takeover Targets: Managerial Bargaining or Bad Faith?’ (2017) 53 Journal of Financial and Quantitative Analysis 837.

Callaghan, Helen, Who Cares About Financialisation? (Max Planck Institute 2013).

Deakin, Simon, and Giles Slinger, ‘Hostile Takeovers, Corporate Law, and the Theory of the Firm’ (1997) 24 Journal of Law and Society 124.

Dulo, Donna, ‘Unmanned Aircraft: The Rising Risk of Hostile Takeover’ (2015) 34 IEEE Technology and Society Magazine 17.

Erel, Isil, Yeejin Jang, and Michael Weisbach, ‘Do Acquisitions Relieve Target Firm’s Financial Constraints?’ (2015) 70 Journal of Finance 289.

Gatti, Matteo, ‘The Power to Decide On Takeovers: Directors or Shareholders, What Difference Does It Make?’ (2014) 20 Fordham Journal of Corporate and Financial Law 73.

Greene, Daniel, ‘Valuations in Corporate Takeovers and Financial Constraints on Private Targets’ (2017) 52 Journal of Financial and Quantitative Analysis 1343.

Hannigan, Brenda, Company Law (4th edn, OUP 2015).

Hasani, Mohd, and Kai Liu, ‘A Legal Perspective of Hostile Takeover Defensive Measures in China and Malaysia’ (2014) 35 Bus LR 54.

Johnston, Andrew, ‘Takeover Regulation: Historical and Theoretical Perspectives on the City Code’ (2007) 66 Cambridge Law Journal 422.

Johnston, Andrew, ‘Takeovers’ in Peter Cane, Joanne Conaghan (eds), The New Oxford Companion to Law (OUP, 2008) 1152.

Jindra, Jan, and Thomas Moeller, ‘Target Financial Independence and Takeover Pricing’ (2015) 38 Journal of Financial Research 379.

Kershaw, David, Company Law in Context: Text and Materials (2nd edn, OUP 2012).

Liu, Baixiao, ‘The Disciplinary Role of Failed Takeover Attempts’ (2016) 39(1) Journal of Financial Research 63.

Manne, Henry, ‘Mergers and the Market for Corporate Control’ (1965) 73 Journal of Political Economy 110.

Rowoldt, Maximilian, and Dennis Starke, ‘The Role of Governments in Hostile Takeovers-Evidence from Regulation, Anti-Takeover Provisions, and Government Interventions’ (2016) 47 Intl Rev Law Econ 1.

Shenoy, Jaideep, ‘An Examination of the Efficiency, Foreclosure, and Collusion Rationales for Vertical Takeovers’ (2012) 58 Management Science 1482.

Shikha, Neeti, ‘Takeover Through Scheme of Arrangement: A Changing Trend in UK’ (2013) 38 The Journal for Decision Makers 87.

Tsagas, Georgina, ‘Long-Term Vision for UK Firms; Revisiting the Target Director’s Advisory Role since the Takeover of Cadbury’s PLC’ (2014) 14 Journal of Corporate Law Studies 241.

Worthy, Ben, ‘Ending in Failure? The Performance of ‘Takeover’ Prime Ministers 1916-2016’ (2016) 87 Public Quarterly 509.

Companies Act of 2006, ss983.

The UK Takeover Code.

Footnotes

1. Neeti Shikha, ‘Takeover Through Scheme of Arrangement: A Changing Trend in the UK’ (2013) 38 The Journal for Decision Makers 87, 88.
2. Jan Jindra, and Thomas Moeller, ‘Target Financial Independence and Takeover Pricing’ (2015) 38 Journal of Financial Research 379, 383.
3. John Asker, Joan Farre-Mensa, and Alexander Ljungqvist, ‘Corporate Investment and Stock Market Listing: A Puzzle?’ (2015) 28 Review of Financial Studies 342, 347.
4. Isil Erel, Yeejin Jang, and Michael Weisbach, ‘Do Acquisitions Relieve Target Firm’s Financial Constraints?’ (2015) 70 Journal of Finance 289, 295.
5. Jaideep Shenoy, ‘An Examination of the Efficiency, Foreclosure, and Collusion Rationales for Vertical Takeovers’ (2012) 58 Management Science 1482, 1484.
6. Anita Anand, ‘The Future of Position Pills in Canada: Are Takeover Bid Reforms Needed?’ (2015) 61 McGill LJ1, 14.
7. Matteo Gatti, ‘The Power to Decide On Takeovers: Directors or Shareholders, What Difference Does It Make?’ (2014) 20 Fordham Journal of Corporate and Financial Law 73, 75.
8. Maximilian Rowoldt, and Dennis Starke, ‘The Role of Governments in Hostile Takeovers-Evidence from Regulation, Anti-Takeover Provisions, and Government Interventions’ (2016) 47 Intl Rev Law Econ 1, 8.
9. Mohd Hasani, and Kai Liu, ‘A Legal Perspective of Hostile Takeover Defensive Measures in China and Malaysia’ (2014) 35 Bus LR 54, 55.
10. Helen Callaghan, Who Cares About Financialisation? (Max Planck Institute 2013) 32.
11. Ben Worthy, ‘Ending in Failure? The Performance of ‘Takeover’ Prime Ministers 1916-2016’ (2016) 87 Public Quarterly 509, 511.
12. John Armour, and David Skeel, ‘Who Writes the Rules for Hostile Takeovers, and Why?” The Peculiar Divergence of US and UK Takeover Regulation’, (2007) 95 Georgetown Law Journal 1727, 1739.
13. Thomas Bates, and David Becher, ‘Bid Resistance by Takeover Targets: Managerial Bargaining or Bad Faith?’ (2017) 53 Journal of Financial and Quantitative Analysis 837, 839.
14. John Armour, and David Skeel, ‘Who Writes the Rules for Hostile Takeovers, and Why?” The Peculiar Divergence of US and UK Takeover Regulation’, (2007) 95 Georgetown Law Journal 1727, 1729.
15. Daniel Greene, ‘Valuations in Corporate Takeovers and Financial Constraints on Private Targets’ (2017) 52 Journal of Financial and Quantitative Analysis 1343, 1345.
16. Brenda Hannigan, Company Law (4th edn, OUP 2015) 23.
17. David Kershaw, Company Law in Context: Text and Materials (2nd edn, OUP 2012) 7.
18. Baixiao Liu, ‘The Disciplinary Role of Failed Takeover Attempts’ (2016) 39(1) Journal of Financial Research 63, 64.
19. Donna Dulo, ‘Unmanned Aircraft: The Rising Risk of Hostile Takeover’ (2015) 34 IEEE Technology and Society Magazine 17.
20. Georgina Tsagas, ‘Long-Term Vision for UK Firms; Revisiting the Target Director’s Advisory Role since the Takeover of Cadbury’s PLC’ (2014) 14 Journal of Corporate Law Studies 241, 243.
21. Companies Act of 2006, ss983.
22. The UK Takeover Code.
23. Henry Manne, ‘Mergers and the Market for Corporate Control’ (1965) 73 Journal of Political Economy 110.
24. John Armour, and David Skeel, ‘Who Writes the Rules for Hostile Takeovers, and Why?” The Peculiar Divergence of US and UK Takeover Regulation’, (2007) 95 Georgetown Law Journal 1727, 1729.
25. Andrew Johnston, ‘Takeover Regulation: Historical and Theoretical Perspectives on the City Code’ (2007) 66 Cambridge Law Journal 422.
26. John Armour, and David Skeel, ‘Who Writes the Rules for Hostile Takeovers, and Why?” The Peculiar Divergence of US and UK Takeover Regulation’, (2007) 95 Georgetown Law Journal 1727, 1729.
27. Andrew Johnston, ‘Takeovers’ in Peter Cane, Joanne Conaghan (eds), The New Oxford Companion to Law (OUP, 2008) 1152.
28. Simon Deakin and Giles Slinger, ‘Hostile Takeovers, Corporate Law, and the Theory of the Firm’ (1997) 24 Journal of Law and Society 124.
29. Matteo Gatti, ‘The Power to Decide On Takeovers: Directors or Shareholders, What Difference Does It Make?’ (2014) 20 Fordham Journal of Corporate and Financial Law 73, 132.