Takeover Panel becomes an arm of government

Friday, 6th October 2017 10:22 - by Eric Chalker

Most private investors are probably only vaguely aware of The Takeover Panel.  It is generally thought of as acting as umpire when a merger or acquisition has been proposed, in order to ensure fair treatment for interested parties.  At the behest of the government, it is now preparing to be a judge as well, which some might think will interfere unwarrantably with investors’ rights to obtain best value for money when disposing of their investments.

The immediate issue is the ‘public consultation paper’ published by the Panel on 19^th September.  That this was immediately welcomed by Greg Clark, secretary of state for business, is a clear indication of government involvement in the proposals, some of which are of a political nature.  This might at first glance be thought to be no bad thing, but this is at the top of a slippery slope.  Once governments start to interfere with property rights (here, the ownership of company shares), there will always be a temptation to go further.

The Takeover Panel is already a very imperfect instrument of fairness, as I describe below.  If, instead of improving its service to investors, it bends to the government of the day, it may not be long before, like the once independent Financial Reporting Council, it becomes an arm of government, subject to prevailing political attitudes.

What are the Panel’s political proposals? 

The Panel is proposing that a takeover ‘offeror’ should be required to state:

• its intentions for the offeree company’s research and development functions;
• its intentions with regard to the balance of the skills and functions of the offeree’s employees and management;
• the likely repercussions of its strategic plans on the location of the offeree company’s headquarters and headquarters functions.

These will be in addition to requirements already in the Takeover Code as a result of an EU 2004 Directive, to reveal in general terms an offeror’s intentions for the business, its employees and its pension schemes.  Responsible investors would want such information before handing a business over to new owners to ensure that customers, employees and pensioners were not to be unduly prejudiced, but the new requirements are of a much more specific nature.  There is a clear implication that statements which are not specific enough will be rejected and it is that judgemental process which will make The Takeover Panel an arm of the government.

Potential acquirers might find this inhibiting and it does not take a great effort to think of other specific matters that a different government might require to be stated: that is the slippery slope. 

How might these affect takeovers?

The reason for investing in company shares is to profit from the company’s success, by the dividends it pays, the rising value of its shares, or their acquisition by another investor.  Whether the shares are to be sold when a bid is made for the whole company ought to be for each investor individually to decide, not forced one way or the other by the wishes of others.  Investors’ circumstances differ and while some may welcome a bid others will think it does not represent fair value. 

It is already the case that holding shares in nominee accounts, as many private investors are obliged to do, considerably weakens their ability to stop a takeover at too low a price, or even to know that a bid process is taking place.  Now they face the risk that government interference, via The Takeover Panel, will impose such conditions and restrictions on potential acquirers that they offer lower prices or don’t bid at all.  This may mean over time that company shares in general have less value.

Hypocrisy exposed

It was previously the case that the Panel publicly declared that its “central objective (was) to ensure fair treatment for all.”  This was never true, because the Panel all but completely disregarded investors holding shares through nominees, thus excluding the majority of private investors from its purview.  The Panel considers they count for nothing, except for a tiny minority granted ‘information rights’ under Part 9 of the Companies Act by a handful of companies and nominee providers.  The Takeover Code does not protect the vast majority of private investors using nominee accounts.

Because, as the Panel was repeatedly told, its ‘central objective’ was so blatantly untrue, it has been quietly changed, but while the Panel may now feel more comfortable, it has ducked the real issue.  It now states that “its central objective is to ensure fair treatment for all shareholders in takeover bids.”  Note the word ‘shareholders’: it is the nominee provider which is the shareholder, not the beneficial investor.  So, with its snooty City nose pointed skywards, the Panel still ignores the ordinary investor, makes no requirements for him or her to be provided with information about a takeover or merger and cares not that anything intended for shareholders which does reach them will leave less than the requisite time to consider it.

As I have previously described (“Takeover of ARM Holdings” 5^th Sep 2016), the situation is seriously worse for private investors when a takeover is being conducted by a ‘scheme of arrangement’ under Part 26 of the Companies Act.  These takeovers are given full effect by vote, only shareholders can vote and requisite majorities of shares voted carry the day, regardless of how few shares are voted.  I have always regarded this as scandalous and struggle to believe it is what Parliament intended.

While remedying the situation is ultimately the responsibility of Parliament, the Takeover Panel could ameliorate the situation by requiring the parties to a proposed scheme of arrangement to make every effort to inform investors in nominee accounts.  It shows no interest in these investors, though, yet is ready to amend the Code to serve interests which in nature are party-political.  Shameful.

Eric Chalker, UK Shareholders’ Association Policy Co-ordinator & Director, 2012-2016

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.