UK debates proposed law for takeovers

S Kalyana Ramanathan / London April 14, 2010 UK’s ruling Labour government has kick-started a debate over a new takeover rule that has now come to be known as the “Cadbury law”. The Labour party in its General Election 2010 manifesto has suggested that it may bring in a new super-majority rule for corporate take overs. Once this legislation comes into effect it would mean prospective buyers of British companies must secure two thirds of the shareholders consent to complete any successful takeover. This proposed law has been informally given the name ‘Cadbury law’ following the recent successful takeover of Cadbury by American counterpart Kraft Foods — a deal that caused considerable resentment among select local communities. The law aims to discourage small pockets of investors (like hedge funds) from attempting to cash in on short-term windfalls by buying and selling stake in large British companies. The Labour party manifesto said it seeks to “encourage a culture of long-term commitment to sustainable company growth, requiring a super-majority of two-thirds of shareholders in corporate takeovers.” It is not yet clear if this rule will be made a universal code for all possible takeovers or would it be restricted only to critical industries in the utility and infrastructure sectors. The voice of British industry CBI, gave a guarded response reacting to this proposal. Responding to this new proposal, John Cridland, deputy director general told the The Guardian newspaper, that it was time the national interest test was reviewed. The UK faced risks that it had not a decade or so ago, such as cyber-attacks, he said. “Are there parts of the national infrastructure which are so critical to the wellbeing of the nation that need a different treatment to an entirely open market? It’s an idea worth examining. The devil is in the detail,” said Cridland. Quite predictably, the unions welcomed the Labour party proposal. Unite (the union) deputy general secretary, Jack Dromey, said: “It was wrong that Kraft — a debt-laden American multinational — took over Cadbury, a successful British business. Labour’s ‘Cadbury law’ will help protect successful British companies against predatory bids and plundering by hedge funds making a fast buck.” The proposed change is likely to be met with some resistance among investing groups. The Association of British Insurers (ABI) said, “Changes to the rules on takeovers must promote good governance and be technically workable. Any plans to require shareholders to vote by a two-thirds majority in company takeovers may fail this test, and entrench weak boards.” There is also a general fear among investors that such a stringent rule might be interpreted as a protectionist move by British politicians, particualrly ABI members who constitute over 90 per cent of the insurance market in the UK and 20 per cent across the EU. They control assets equivalent to a quarter of the UK’s capital. ABI describes itself as the risk managers of the UK’s economy and society. It may however be recalled that the three biggest takeovers of British companies by India’s Tata Group — Tetley Tea, Corus steel and car maker Jaguar Land Rover — would have passed the test of the new Cadbury law, as they were all complete takeovers, with the Tata Group securing 100 per cent interest in these companies.