Mergers, acquisitions and takeovers: the takeover of Cadbury by Kraft - Business, Innovation and Skills Committee Contents

4  Government intervention

Short-termism in the market: the Kraft experience

56. The Kraft takeover of Cadbury highlighted the pivotal role played by institutional investors in large takeovers. During this inquiry, both Unite the Union and Professor Bones, from Henley Business School, argued that the Kraft takeover of Cadbury was driven by investors who had no interest in the long-term future of the company. As Jack Dromey, the Deputy Secretary General of Unite put it, the future of Cadbury was decided by "hedge funds in the form of boys wearing red braces who move in to make a quick buck at the time of a British icon's vulnerability."[68]

57. In his written evidence, Professor Bones argued that the basis of short-termism lay in the structure of share-ownership with intermediating stakeholders, namely fund managers having shorter term horizons than the individual shareholders whom the fund managers represented:

    This possible mis-alignment between the interests of the ultimate stakeholders in whose long-term interests the firm should be run, and those of the 'intermediating stakeholders', who may hold shares on their behalf for shorter term motives may result in a less than ideal outcome.

    The obvious example of intermediating stakeholders would be fund managers (whether principal traders, pension fund managers or mutual funds). These intermediate stakeholders buy, hold, and sell stocks not only for reasons of changes in their underlying value, but also for shorter term motives—either bonus arrangements or, more professionally, because they have need for liquidity to finance other investments (or to cover other needs for cash) […]. Long term stakeholders would of course prefer to continue to hold the stock until its value rose again, but they would be overruled by the short term interests of the intermediating stakeholders.[69]

Professor Bones believed this to be a failure in the market because there was every chance that "the price agreed by those who will act on behalf of the ultimate owners of the company (i.e., the individual investors, insurance policy owners and pensioners/
prospective pensioners) will not represent by a long way that which would be agreed in a perfectly informed market."[70]

58. Both Lord Mandelson and Ian Lucas MP, Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills, indicated that the Government was already taking steps to encourage fund managers to act with a longer term perspective in mind.[71] Lord Mandelson told us that he had initiated discussions with institutional shareholders "about how their decisions and behaviour can be linked to long-term interests and value of the companies in which they have holdings".[72] Ian Lucas also told us that concerns about short-termism were being considered as part of a review undertaken by Sir David Walker[73] which "raised important issues relating to the opportunities for institutional investor engagement in the long-term interests of UK companies.[74]

59. Furthermore, Ian Lucas highlighted the fact that the Institutional Shareholders Committee was also developing a new Code with the aim of providing good practice for institutional investors when engaging with the UK-listed companies in which they invest. [75] That consultation is due to finish in mid-April with the results published shortly afterwards.

60. The issue of 'short-termism' in takeovers has recently been given far more prominence by Lord Mandelson. In his speech to the Mansion House he expanded on this theme:

In recent years, the UK Government has carried out a number of significant reforms to encourage the right kind of long-termism among company directors not least the directors' duties in the 2006 Companies Act. We need an equivalent long-termism among company owners, especially institutional shareholders. These company owners need to combine short term activism on company strategy with long term commitments to the development of the companies they own.[76]

61. In putting forward this view, Lord Mandelson returned to the case of the Kraft takeover of Cadbury:

In the case of Cadbury and Kraft, it is hard to ignore the fact that the fate of a company with a long history and many tens of thousands of employees was decided by people who had not owned the company a few weeks earlier, and probably had no intention of owning it a few weeks later.[77]

62. We are deeply concerned by reports that the takeover of Cadbury by Kraft was ultimately decided by institutional investors motivated by short-term profits rather than those investors who had the company's long-term interests at heart. As a template for takeovers, this is not in the interest of UK companies or the UK economy.

63. We welcome the Government's focus on the issue of 'short-termism' in decision-making on the future ownership of UK companies, and its efforts to engage with institutional fund managers as part of the process. However, we are sceptical about the extent to which informal engagement alone can instigate any fundamental change in institutional shareholder behaviour, in particular where there are financial incentives for fund managers and others to act in the short term.

Possible areas for reform

64. In his speech to the Mansion House, Lord Mandelson set out a number of options for reform of regulations governing mergers and takeovers. These options included:

  • Raising the voting threshold for securing a change of ownership to two-thirds;
  • Lowering the requirement of disclosure of share ownership during a bid from 1% to 0.5% so companies can see who is building stakes on the register;
  • Giving bidders less time to "put up or shut up" so that the phoney takeover war ends more quickly and properly evidenced bids must be tabled;
  • Requiring bidders to set out publicly how they intend to finance their bids not just on day one, but over the long term, and their plans for the acquired company, including details of how they intend to make cost savings;
  • Requiring greater transparency on advisors' fees and incentives; and
  • Requiring all companies making significant bids in this country to put their plans to their own shareholders for scrutiny.[78]

65. In its written submission, Unite added to that list. It recommended:

  • An extension of TUPE protections to cover mergers and takeovers by share transfer; and
  • The right for workers' representatives to negotiate protection of investment, jobs and terms and conditions.

66. The Union also argued in favour of a reform of shareholder rights to restrict voting rights to those shareholders who had owned shares for at least a year at a time of any bid.[79] Ian Lucas MP pointed out that companies are already empowered to give preferential status to long-term shareholders under the Companies Act 2006:

    Many of the things that have been done in terms of giving preferential status to long-term shareholders could take place now in the UK under the Companies Act 2006, but the situation is that companies decide not to introduce that form of provision within their articles of association. The powers are there already. The issue is not so much to do with whether the legislative framework exists; it is more a matter of culture. One of the interesting aspects of UK businesses is that we tend to have a broader shareholder base than, say, companies in Germany.[80]

67. The CBI agreed broadly with Lord Mandelsons's recommendations but made the point that raising the voting threshold from 50.1% to two thirds of the shares might not by itself make much difference if the bid was recommended and, if it was not, the aggressor could fire the board, unless the rules for directors' appointments were also changed.[81] On the other side, representatives in the City have warned that the Government should not intervene in the Code. One said:

    If there was a politicisation of the code, it would be a disaster. The fact we have a Code policed by practitioners instead of civil servants is one of London's last remaining strengths as a financial centre. The Code has proved itself time and again to work very well, and the panel has been shown in the past to be able to adapt to best practice.[82]

68. We also note that the Takeover Panel is conducting a consultation on reform of its Takeover Code. That consultation is due to close on 21 May 2010.[83]

69. We welcome the fact that the Government is considering a review of the rules and legislation governing takeovers in the United Kingdom. We also welcome the current consultation by the Takeover Panel on its City Code on Takeovers and Mergers. Such consideration of the underlying issues must not be seen as protectionism against foreign takeovers but as seeking to ensure that all takeover activity, whether entirely domestic or by foreign companies, is conducted in the interests of the UK economy.


70. Under the current legislation, the Secretary of State for Business, Innovation and Skills may only intervene in takeovers by foreign companies in very specific circumstances. There are presently three public interest considerations specified in the Enterprise Act 2002 as legitimate bases for Ministerial intervention. These are:

  • national security;
  • media plurality, quality and standards; and
  • the stability of the UK financial system.[84]

It is also possible for the Government to intervene in mergers that fall under the EC Merger Regulation; generally being those larger merger cases that affect trade in more than one EC member state. European law currently specifies two grounds on which public interest interventions are possible: public security (equivalent to national security) and plurality and quality in the media.[85]

71. Professor Bones argued for "far greater specificity of the intentions of [the] potential acquirer regarding strategic assets of national importance" and that the "commitments the acquirer would be prepared to make in terms of identified strategic assets" should also be considered.[86] He also recommended that while Government intervention should not be aimed to "stop the deal going through" there would be benefits gained from it imposing conditions on an acquisition, regarding the protection of strategic assets (skill bases and centres of R&D).[87] He pointed out that in strategically important sectors such as energy, foreign owners were controlled through regulators such as Ofgem, but by contrast, there was no equivalent regulation covering manufacturing, in particular over what foreign owners could or could not do with assets of strategic importance.[88]

72. Ian Lucas MP confirmed that a power to attach conditions relating to the relocation of manufacturing and Research and Development during any takeover would be "part of the debate."[89] However, in supplementary evidence he told us that broadening the intervention criteria to include the national interest would require legislative change:

    Any proposed new consideration to be specified in the Enterprise Act would need to be approved by a resolution of each House of Parliament. In addition, if it was to be relied upon also in European merger cases, it would need clearance by the European Commission. They would have to be satisfied that the consideration was legitimate and compatible with the objectives of the European Treaty, in particular in relation to the free movement of capital.[90]

73. Lord Mandelson remained unconvinced that providing Government with the power to intervene in the public interest was either necessary or desirable. He feared that:

    in those circumstances a government's judgment and intervention could be too exposed to political lobbying and short-term populist pressures which are unable to make an assessment of long-term growth and value that might come from the move. It might give rise to capricious decision-making of one sort or another, depending on the ministers and their official advisers, and it can lead to a loss of transparency and a loss of predictability which at the moment makes the current UK regime open to investors from which, I just underline, we benefit a great deal.[91]

In his Mansion House speech, Lord Mandelson added that "Britain benefits from inward investment and an open market for corporate control internationally. A political test for policing foreign ownership runs the risk of becoming protectionist and protectionism is not in our interests."[92]

74. Any reform of takeovers in the United Kingdom has to recognise that foreign direct investment is of great benefit to the UK economy. We agree with the Secretary of State that an extension of his powers to intervene would come with a risk that the takeover process would be determined by political lobbying rather than economic fundamentals. However, we believe that the Government should consider how other countries act to protect key national assets while at the same time retaining a liberal investment climate. In particular, it should consider how aspects of Research and Development which are in the United Kingdom's national interest may be protected in the event of foreign ownership.

75. While we have not taken sufficient evidence at this stage to enable us to come to a view on the merits or otherwise of extending the powers of intervention by the Secretary of State, we strongly believe that this issue should be considered as part of the wider debate on takeover regulations.


76. The takeover of Cadbury by Kraft has highlighted a number of important issues in respect of the way in which foreign takeovers of UK companies are conducted. It has been the catalyst for a wider debate, both in Government and in the City, about how takeovers are conducted. In highlighting the Kraft takeover of Cadbury, we have contributed to that debate which now needs to continue, and with urgency. Time does not allow us to consider the wider proposals for reform in detail but it is clear that the Companies Act 2006 has not resolved these major issues in corporate governance. We urge our successor Committee to consider this Report as a starting point from which to conduct a detailed inquiry into these important issues and into the role of shareholders and managers of companies more generally. Recent experience of the behaviour of boards and shareholders in situations ranging from the fall of RBS to the Kraft acquisition of Cadbury indicate that it is time to reconsider many aspects of corporate governance.

68   Q 39 Back

69   Ev 50 Back

70   Ev 50 Back

71   Q 69, Oral Evidence given by Rt Hon Lord Mandelson, First Secretary of State, Pat McFadden MP, Minister of State, Department for Business, Innovation and Skills; HC 299-i, 19 January 2010, Q 8 Back

72   Oral Evidence given by Rt Hon Lord Mandelson, First Secretary of State, Pat McFadden MP, Minister of State, Department for Business, Innovation and Skills; HC 299-i, 19 January 2010, Q 8 Back

73   The Terms of Reference of the Walker Review of Corporate Governance of UK Banking Industry which was completed in November 2009 including looking at the role of institutional shareholders in engaging effectively with companies and monitoring of boards. Back

74   Q 69 Back

75   Q 82 Back

76   Lord Mandelson's Mansion House Speech, 1 March 2010;

77   Lord Mandelson's Mansion House Speech, 1 March 2010 Back

78   Lord Mandelson's Mansion House Speech, 1 March 2010 Back

79   Ev 54 Back

80   Q 88 Back

81   The Times, Britain must decide whether to welcome allcomers, 3 March 2010 Back

82   The Financial Times, Prospect of stiffer rules for buying UK groups, 25 February 2010 Back

83 Back

84   Ev 48 Back

85   Ev 48 Back

86   Q 7 Back

87   Q 12 Back

88   Q 16 Back

89   Q 89 Back

90   Ev 48 Back

91   Oral Evidence given by Rt Hon Lord Mandelson, First Secretary of State, Pat McFadden MP, Minister of State, Department for Business, Innovation and Skills; HC 299-i, 19 January 2010, Q 13 Back

92   Lord Mandelson, Mansion House Speech, 1 March 2010 Back

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