15 Nov 2011

In praise of takeover tweakery

by Karen Evans-Cullen

Australian Takeovers Panel president Kathleen Farrell must have been quietly pleased to read the recent news from England.

As part of the collective uproar over the 2010 Kraft takeover of Cadbury, the UK Takeover Panel has proposed new rules that will discourage takeover activity. The UK Government's Business Secretary responded that he wanted "to take what the Takeover Panel has done – and it is positive – and probably go rather further".

This must be music to Ms Farrell's ears. Shortly after her appointment earlier this year, she warned against our panel's blindly adopting policies from its UK counterpart.

One of her targets was the UK's "put up or shut up" rule, which the UK Panel now wants to beef up. However, even she must have been surprised when, as well as demanding greater disclosure from bidders and targets, the panel proposed a ban on break fees and other deal protection measures.

Nothing could more clearly indicate the massive conceptual differences between UK and Australian takeover regulation.

The UK panel is the judge, jury and executioner on UK takeovers – and it gets to write the takeover rules as well.

By contrast, Australian takeovers law is written by Parliament and applied by our Takeovers Panel. The result has been an enviable mix of policy certainty and situational flexibility. The ground rules and basic policy are clearly set out in Chapter 6 of the Corporations Act; the panel applies those rules and policy to each dispute that comes before it.

As a result, we have no black letter prohibition or control on break fees. Instead, the panel examines complaints about break fees on a case by case basis, evaluating each by reference to the shareholder protection policies enunciated in Chapter 6.

By virtue of its quasi-legislative role, the UK panel does not have that flexibility. As a result, UK bidders and target boards are now facing the prospect of a ban on deal protections that, in most cases, operate to the benefit of target shareholders.

Another notable feature of the UK system is the policy confusion that surrounds takeovers. Kraft's takeover of Cadbury inflamed both the left and the right of British politics. The left and the trades unions were outraged by Kraft's closure of a Cadbury's factory in contradiction of earlier assurances. The right were up in arms about the loss of an English icon to a giant American corporation.

The result has been a sustained push for a "Cadbury's Law".

In the ideal world of its proponents, a Cadbury's law would apparently protect British business against "predatory" foreign takeovers, protect British workers against job losses and inhibit the ability of shareholders of British companies to sell their shares to the highest bidder.

How much of that actually falls within the legitimate remit of the UK Panel is unclear. Nevertheless, the panel's proposals seemingly include the possibility of sanctions for bidders who go back on their word and sack workers within 12 months of a takeover. Rightly or wrongly, this is apparently seen in some quarters as a disincentive to foreign bidders (presumably on the basis that British bidders are more soft-hearted than foreign ones).

The UK panel did stop short of recommending some particularly far-fetched suggestions. These included a proposal that only shareholders who have held shares for more than 12 months should get to determine the outcome of a bid. The proposals still on the table do however give the UK panel a much broader policy responsibility than would ever be contemplated in Australia.

Australia has a clearly delineated process for evaluating takeovers. The Takeovers Panel looks at the sharemarket and shareholder effects, the Australian Competition and Consumer Commission examines the competition effects and the Foreign Investment Review Board applies a broad national interest test.

For all the carping about its procedural intricacies, there can be no doubt that this minimises regulatory overlap and clarifies the relevant underlying policies. This, in turn, discourages rent-seeking under the guise of irrelevant policy considerations.

None of this is to say that we in Australia have the perfect takeover system. Like the UK, we have some historical quirks that probably need to be addressed. Two obvious candidates for early attention are the bifurcation of mergers and acquisitions into schemes of arrangement and Chapter 6 takeovers, and the uncertainty surrounding "truth in takeovers".

These are, however, policy concerns of a relatively small order. We are, by luck or design, a long way from the public policy obscurantism typified by the Guardian's editorialising that "the [UK] panel's big recommendation to stop corporate predators was – gasp! – greater transparency and other such tweakery".

Public policy debate on takeovers has reached a low point when transparency can be so loftily dismissed.

This was written by Karen Evans-Cullen and was first published in Australian Financial Review Dealbook on 2 November 2010

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.