The prospect of a ‘Cadbury Law’ – legal changes that would make it more difficult for foreign firms to takeover successful UK businesses – hit the headlines again recently, with news that Kraft is relocating Cadbury’s UK HQ to Switzerland.
Last week we reported the views of legal experts on changes recommended by the industry-constituted Takeover Panel in October, with the former agreeing that limited measures are necessary to protect target firms and their shareholders from foreign bidders, but that an unduly tough regime risked scaring off investors and harming British business.
But not everyone agrees…
However, in a statement released to FoodManufacture.co.uk, the UK’s largest union Unite responded to the October review by pushing for wider changes to the code, and stressing, “serious concerns about the fact that no-one involved in determining the outcome of a takeover bid is required to take account of the long-term interest of the target company”.
Unite proposes establishing a Takeover Commission to apply a wider public interest test, intended to ensure that employee, supplier and community interests are accounted for in takeovers, not just the views of shareholders who – the union claims – normally only vote according to the price of holdings.
“Whilst shareholders want the highest price for shares, far from this meaning a takeover is in the long term interests of the company, the opposite is often the case, particularly if it means being saddled with more debt,” said Unite.
The debt issue was apposite in the Kraft-Cadbury case, where the US firm borrowed heavily to fund it acquisition, while commentators also worried initially whether Kraft would follow through on Cadbury’s commitment to only buy fairtrade cocoa beans for Dairy Milk bars.
Empower the boardroom
Other measures proposed by Unite include greater consultation with workers on business and financing plans for a target prior to its acquisition, and for employees’ views to be included in company letters to shareholders about any given bid.
Paul Elliot, corporate finance partner, Baker Tily also welcomed panel recommendations for “enhanced disclosure needs” on plans for a target, so that “any negative alterations [as per Cadbury's Somerdale site] – i.e. plans to sack people and close factories down – need to be declared”.
He also supported panel recommendations to allow boards of target firms to consider factors other than bid size alone when choosing whether to accept bids. “So if, for instance, a board has reason to believe the bidder plans to sack staff and close factories down, it’s entitled to say ‘we’ll look elsewhere’.”
Stop hedge funds making a killing?
On barring short-term shareholders from takeover votes, a move Business Secretary Vince Cable seems to favour, former Cadbury chairman Robert Carr was quoted after the Kraft takeover as saying that the 200-year-old firm’s fate had been sealed by the votes of profit-driven individuals who had only owned shares for a few weeks.
But Eliot said that upping the victory threshold for a bid to a two-thirds majority of shareholder voters (a roundly touted figure) meant entering “dangerous legal territory” because it would be inconsistent with Company Law and common shareholder rights.
“You’d have the odd situation where a majority hostile shareholder can pass any ordinary resolution, but can’t vote on whether to accept a bid.”
However, Matthew Fell, director for competitive markets at the CBI, which represents around 240,000 British businesses, said: "There remains a need for a full debate about the role of short-term investors in determining the outcomes of takeover battles."
*This article is part 2/2 of a longer news feature on the potential 'Cadbury Law', with the first part published last Thursday.