Vince Cable writes…Strengthening confidence in the UK’s takeover laws

London Stock Exchange photo by Jam_90sThe attempted but abortive Pfizer takeover bid for AstraZeneca has triggered a timely political debate in the UK about whether the safeguards in mergers and takeover legislation are adequate – especially when significant research and development assets are at stake.  It is now clear to me that some changes should be made.

The UK’s traditional openness to investment has served us well, and is increasingly important in a global economy.  We have rightly resisted the lure of protectionism. The European and domestic competition regimes within which we operate were designed to ensure that mergers do not lead to monopolies and cartels.

Takeovers are also subject to the Takeover Panel rules.  The tougher Takeover Code rules that I encouraged in 2010 may already be having an impact on investment decisions, encouraging more long-termism in how boards think about mergers. But is this enough?

I believe that changes must be made so the enforcement of commitments made during the takeover process is more effective.  The issue arose in the case of the Pfizer bid of how their public commitments to British R&D and manufacturing could be made meaningful and binding.  I want such commitments to be clear, unambiguous and with no wriggle room.  I also want us to do more to ensure that, in the few cases where the commitments are not honoured, companies can be hit hard with tough financial penalties. I am considering whether legislation is required to enforce this.

I also believe that changes should be made to the Takeover Code. The Takeover Panel is looking at how to enhance its ability to monitor and enforce more effectively commitments given by a company.  I have encouraged them to move swiftly to take whatever steps they consider necessary to enable them to intervene quickly and decisively to ensure companies keep to their word.  I believe, for example, that this must include considering dropping the existing “material change of conditions” get-out clause, for binding commitments.

More broadly, the Pfizer case has ignited public debate about whether to introduce legislation for a new ‘public interest test’ going beyond the three grounds for intervention enshrined in the current legislation: media plurality, national security, and financial stability.  The arguments against new legislation were made by my Labour predecessor, Lord Mandelson, who articulated the standard arguments for an open market in corporate ownership: the need to avoid the perception and reality of protectionism; the risk of capricious political interference in business decisions; the potentially negative signal to inward investors. Some of the UK’s most successful and valued industrial companies are foreign owned and entered via the takeover route – Tata’s acquisition of Jaguar Land Rover or Fujitsu/ICL or Nestle/Rowntree. AstraZeneca itself is a result of a cross border merger between parts of ICI and a Swedish company.

There are however good as well as bad reasons for worrying about the impact of some takeovers. The work which Professor John Kay did for me on equity markets pointed to prevalent short term behaviour which was not in the long term interests of investors, businesses or the wider public. Economic research has suggested that acquisitions are often value destroying even if lucrative for executives and agents. There may also be legitimate concerns, for example over critical infrastructure; supply chains that are crucial to the UK’s areas of comparative advantage; the motives of the acquiring company (e.g. tax avoidance); or the impacts on the R&D and science bases, a lot of which is publicly funded.

Some would say: Why doesn’t the government simply do what my French opposite number, Monsieur Montebourg has done (in the context of extracting key commitments in a GE bid for Alstom) and bring in wide ranging powers to intervene in takeovers. However, EU rules apply to mergers and takeovers and the legality of recent French activity remains to be seen. The European Commission, quite reasonably, may worry that in some member states a more interventionist regime could be abused for protectionist reasons.

That doesn’t mean however that nothing can or should be done.  What happens if bidders will not undertake satisfactory commitments to protect the national interest or if negotiations fail? That is the context in which a so-called public interest test could properly arise. There is no justification for a wider ranging power. It would open the door to politically inspired interventions in takeovers; and undermine our commitment to openness and to oppose protectionism.  But as Liberal Democrats, we see a role for a narrow, specific intervention, compatible with our European legal framework, used as a last resort rather than a first response. To pursue a military analogy, we need a laser guided smart missile, not a cluster bomb.

Valuable lessons have been learnt from the Pfizer bid for AstraZeneca. A rush to protectionist legislation is definitely to be avoided. But laissez-faire isn’t a sensible option either. My aim is to strengthen confidence in the robustness of the UK’s takeover framework, whilst also maintaining the UK’s traditional openness to business.

Photo by jam_90s

* Sir Vince Cable is MP for Twickenham and was leader of the Liberal Democrats from 2017 until 2019.

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  • Eddie Sammon 13th Jul '14 - 2:08pm

    I’ve read every word and I have a concern. This is mainly:

    “dropping the existing “material change of conditions” get-out clause”.

    Companies should not be “hit hard with tough financial penalties” if external factors have made the investment a lot more risky, such as a foreign affairs, economic or climate crisis. Companies should also not be kicked for any potential failures of politicians.

    Perhaps the word “material” could be changed to “severe”, or something like that, but a degree of flexibility needs to be maintained.

  • Richard Dean 13th Jul '14 - 3:32pm

    The problem arises because the value of the target is perceived to be different by one group, the government, compared to another, the suitor. A complication is that a different government might put a huge different value on the target.

    The free-market solution is for the first group, the government, to put in a rival bid. In this sense government would be acting unfairly in using legislation instead. Is it not an established fact that messing with a free-market ends up causing as much trouble as it’s intended to avoid? In the long-term the free market always wins!

    The situation as regards research funding looks like a mess caused by government. If research is funded, there needs to be bind agreements about who gets the benefits.

  • Julian Tisi 27th Aug '14 - 2:37pm

    I have just read this article which I missed first time round, as it was linked from another article just published.

    I think this is an excellent and balanced analysis, particularly your overall conclusion.

    Just one comment: I think you’re right to highlight that some “acquisitions are often value destroying even if lucrative for executives and agents”. I think this is especially likely in so-called “friendly” takeovers where directors are incentivised wrongly. Some Boards still deliver “transaction” bonuses for Execs at the completion of a deal. This is surely one of the surest ways to incentivise bad deals. As a shareholder of either the acquiring or acquired company you would like to believe that the Board has come to its decision on whether or not to sell / invest based on their genuine perception on what would be best for long term shareholder value. If Directors are incentivised to go ahead witha transaction irrespective of value, it’s more likely that they will. Perhaps these sort of bonuses should be banned outright?

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