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Where it’s hard to be hostile

We investigate the UK’s lax takeover laws and why firms move elsewhere
Jennie Walsh, Friday, March 16th, 2018


Unilever’s decision to locate its new headquarters in Rotterdam, not London, is a damning indictment of the UK’s toothless takeover laws, which do little to prevent hostile bids and asset-stripping takeovers by predatory competitors and vulture capitalists, Unite has said.

 

The consumer goods giant has been mulling the move to the Netherlands, where anti-hostile takeover protection is stronger, since fending off Kraft’s hostile bid for the firm last year.

 

That experience, and the one British engineering firm GKN is currently going through as it tries to rebuff Melrose’s deeply unwelcome advances, some seven years on from Cadbury finally falling to Kraft’s unwanted overtures, appear to have convinced Unilever bosses to find a safer harbour than the UK can provide.

 

The UK’s lax takeover laws sit in stark contrast to the Dutch, where national, social and workforce interests are major deciding factors. The UK regime makes listed companies particularly susceptible to unfriendly approaches as a result of the low use of protection mechanisms to preserve control – known as Control Enhancing Mechanisms (CEMs) – which firms in the Netherlands, France and other European countries make frequent use of to lock-in long-term shareholder investment and reduce the risk of hostile takeovers. UK firms can too, but rarely do. [See graph 1 below]

graph one takeover laws

Tricks of the trade they may be, but CEMs enable so-called privileged shareholders to deploy a range of legal methods to maintain control of the companies they invest in. They include pyramid structures, shareholder agreements, multiple voting rights and ownership ceilings and are usually written into the organisation’s Articles of Association.

 

The aim, with most CEMs, is to recognise and reward the loyalty of long-term shareholders, to encourage further investment.

 

A case in point

Netherlands’ company law is a case in point. It allows for multiple voting rights (just as the UK does), and this has been widely used by Unilever, along with others including ABM Amro, Heineken, ING and Reed Elsevier. The principle of “one share, one vote” also has a legal basis in Holland, and in general Dutch law is used to a far greater extent than the UK uses its laws to set the rules for listed firms.

 

UK law also deems the relationship between shareholders and the company to be contractual. While a basic legal framework binds both parties, they are considered free to determine the details and so the introduction of CEMs, for example, would have to be supported by the majority of shareholders through a vote.

 

The use of CEMs by the majority of companies in the Netherlands, France, Italy, Spain and Sweden is in stark contrast to those in the UK. While some 58 per cent of French companies and 43 per cent of Dutch ones use them, just three per cent of UK firms do, even though they have as much right to put them in their Articles as any other. [See graph 2]

 

graph 2 takeover laws

 

There is also a correlation between the higher use of CEMs in the European Union and lower hostile takeovers and fewer firms controlled by foreign investors.

 

So when it’s said that Theresa May and Philip Hammond are opposed to strengthening the UK’s light-touch takeover regime, which undoubtedly they are, in spite of the Tories’ commitment in the last election to reform the regulatory framework, the reality is that a wide range of tools to resist hostile takeovers is already enshrined in UK company law.

 

A company’s Articles of Association can legally limit the powers of shareholders by differentiating the type of shares and the specific powers and restrictions the shares confer. For example, if a public company, at the initial public offering (IPO) stage of its proposed listing, agrees Articles specifically restricting the powers and influence of “short-term” shareholders who have owned their shares for less than two years, as happens in France, those provisions would be legally binding.

 

Firms that are already listed can also do this, but it is harder as they need the majority of shareholders to consent to changes to the company’s articles. But it is still possible.

 

All listed firms are free to use such provisions as they see fit, in order to manage the control exerted by present and potential future investors.

 

So why don’t they?

 

David Tarren, director of Acuity Analysis, which has carried out analysis of comparative merger and acquisition laws for Unite, said, “UK companies already have a wide degree of flexibility to introduce many CEMs in their Articles, yet most never take advantage of this legal provision.

 

“Shareholders should be asking why companies do not introduce such measures when they are free to do so. It is in everyone’s interests for companies to take a longer-term approach.

 

Reality

“The reality is UK companies don’t introduce CEMs to protect their business because, in too many instances, board members are keen to cash-in when the opportunity arises and our government values the preservation of free-markets above all else – even above job preservation and the retention of key British businesses.”

 

In the 19 weeks in which Kraft pursued Cadbury, one-quarter of Cadbury shares had been sold to hedge-funds and other short-term investors. Preventing such transactions could reduce much of the current opportunistic behaviour, Tarren says.

 

“Putting a stop to that would reduce the impact of short-termism, but the challenge is determining the point in time, ahead of a proposed merger or takeover, at which the acquisition of shares ceases to be permitted.”

 

Acuity’s report, Reform of the UK’s regulations on mergers, takeovers shareholders for the longer–term, comes amid mounting political concern that finance is not serving the real economy and that government response to hostile bids is always too little.

 

A short-term and opportunistic approach is endemic throughout British business, as demonstrated by our country’s weak regulatory framework for mergers and acquisitions and, perhaps to a greater extent, the unwillingness of UK PLCs, and their executives with vested interests in their bonuses and shares, to use CEMs in the long-term interests of companies and the economy as a whole.

 

Ultimately, Theresa May’s continued inaction means there is a very real danger that more companies like Unilever will flee overseas, while UK employers fall prey to hostile bids, leaving the workforce, national and social interests to be sacrificed on the altar of short-term asset-strippers.

 

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