Dated: 27 July 2010

In its submission today to the Takeover Panel, which is reviewing the regulation of takeover bids following the Cadbury/Kraft deal, the Institute of Directors (IoD) argues for a new requirement that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company.

However, the Takeover Code must continue to support the UK as a leading destination for foreign investment and as a leading location for corporate HQs and operations. For these reasons, the IoD is opposed to a new public interest test for takeovers.

The Takeover Panel’s Review of certain aspects of the regulation of takeover bids closes today.

New rights for the shareholders of the acquiring company

• In our view, all bids for large UK listed companies (e.g. those within the FTSE 350 or with a premium listing on the London Stock Exchange) should be conditional on the approval of the acquiring company’s shareholders, regardless of the domicile of the acquiring firm.

As well as ensuring an alignment with shareholder interests, such a “say on takeovers” would provide wider society with greater assurance that the potential risks and negative externalities of a hostile takeover are justified by the benefits in terms of longer-term value creation.

• Some argue that it is not feasible to demand shareholder approval from the shareholders of a non-UK company because such companies lie outside of the UK’s jurisdiction. We are not convinced by these arguments. It is legitimate for the UK to be able to define the “rules of the game” that apply in respect of a takeover of a UK company.

Changes to the Code that the IoD would be opposed to

• While we have sympathy with the idea that longer-term engaged shareholders of the target company should play a significant role in determining the outcome of a takeover, we are not convinced that raising the acceptance threshold for a takeover offer is the best way to tackle investor passivity.

Such a change would create an anomaly within company law with a simple majority of shareholder votes sufficient to dismiss the board and direct the company but insufficient to decide the outcome of a takeover. This would place decision making over takeovers at variance with the rest of UK company law.

• We do not believe there is a case for limiting votes to those shareholders on the register before the bid (i.e. to exclude short-term investors). There is no merit, per se, in being a long-term holder of a company’s shares. Long-term investors may devote minimal resources to company engagement. In contrast, short-term investors may in certain cases exert a beneficial effect on a company’s governance through an active company dialogue.

• A new public interest test for takeovers.

Commenting on the review of the Takeover Code, Miles Templeman, Director-General of the IoD, said:

“The Takeover Code must continue to support the UK as a leading destination for foreign investment and as a leading location for corporate HQs and operations. It would be undesirable for takeover policy to be perceived as a pretext for protectionism, as part of an industrial strategy, or as the outcome of a political lobbying process. For these reasons, we are opposed to a new public interest test for takeovers.”

“However, takeover policy is not perfect. Beyond the Takeover Code, there is strong case for a new requirement that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company. We think this would be in the interests of shareholders and would also increase the legitimacy of takeover activity in the eyes of employees and other parties with a stake.”

Commenting further, Dr. Roger Barker, Head of Corporate Governance at the IoD, said:

“The launch of a significant takeover bid is a game changing decision for any company. At such a crucial moment, it is important to ensure that shareholders are persuaded by its economic logic. This is best achieved by making all significant takeover transactions conditional on securing the approval of shareholders.

“Such a ‘say on takeovers’ would also provide wider society with greater assurance that the potential risks and negative externalities of a hostile takeover are justified by the benefits”.

To read the IoD’s full submission please click here: https://www.iod.com/takeoverpanel