Dated: 22 April 2010

The Institute of Directors (IoD) would like to make the following statement on Takeover policy in light of the debate that has followed the Kraft takeover of Cadbury and the publication of election manifestos by the main political parties.

The IoD believes that it is vital that the UK’s Takeover rules continue to sustain the UK as a leading destination for foreign investment and as a leading location for corporate HQs and operations, and are not amended in a way that would discriminate against foreign buyers.

However, we do believe there is a case for reforming certain aspects of the existing rules.

Hostile Takeovers should be a last resort

• We believe the threat of hostile takeover provides a source of discipline for severely underperforming companies and their management.
• However, many takeovers do not result in a combined enterprise that is stronger that the sum of its parts. A number of academic studies have shown that contested takeovers, on average, destroy value for the shareholders of the acquiring firm.
• Widespread use of takeovers can encourage a short-termist management approach, both amongst acquisitive companies and companies under threat of takeover.
• We believe that hostile takeovers should primarily be used as a last resort. The main governance mechanism for motivating change within companies should be an ongoing process of engagement between boards and major shareholders.

Hostile Takeovers should be approved with two-thirds majority support in both companies

• The approval of takeovers is a matter for shareholders. However, for such an important corporate event – which is likely to exert a crucial impact on all of the companies involved – it is important to ensure that as many shareholders as possible are fully supportive of such a step.
• So while we agree with the Government that the threshold for approval of a hostile takeover should be raised to a shareholder majority of two-thirds (rather than a simple majority, as at present), we think this should be applied to the acquiring company, as well.
• We agree with the Government that companies should be more transparent about their long-term plans for the business they want to acquire. Shareholders of both companies involved in a takeover situation need this information in order to make an informed decision about whether the takeover is a good idea.
• We disagree with the Government that there is a case for limiting votes to those on the register before the bid should be examined. All current shareholders owning voting shares should be allowed to vote. Long-term holders are not necessarily more deserving of a vote in a takeover situation than those that have more recently acquired ownership rights. However, the FRC’s proposed Stewardship Code should strongly discourage the borrowing of shares for the purpose of voting.

Blocking powers should be limited to where there are competition concerns or to cases of national security

• We disagree with the Liberal Democrat proposal that a public interest test should be applied on broader range of factors than just competition. There may be some limited circumstances where blocking a takeover is justified on grounds of national interest. However, such a decision should be based on strict criteria which are defined and applied by an independent body. These criteria should be non-protectionist and should minimise any impact on the functioning of markets.
• We are also dubious about the Government’s proposal to extend the public interest test so that it is applied to potential takeovers of infrastructure and utility companies. To win our support this would need to be defined and applied by an independent public body based on strict national security criteria that is non-protectionist and not subject to political manipulation.

Commenting, Miles Templeman, Director-General of the Institute of Directors, said:

“We would be very concerned if the Government had powers to block or approve takeovers except in exceptional cases of national security, or where there are implications for the competitiveness of markets. If those powers were acquired and then misused, the UK’s status as a leading destination for foreign investment and location for corporate HQs and operations would be at risk.”

“It is important to ensure that as many shareholders as possible are fully supportive of a takeovers. So we agree with the Government that there should be a higher threshold of support for securing a change of ownership. However, this higher voting threshold should not only apply to the shareholders of the company being acquired. It should also apply to the shareholders of the acquiring company.”