Is Kraft working for Cadbury? - Business, Innovation and Skills Committee Contents

3  The Takeover Panel decision

The Panel's decision

18.  In its initial takeover proposal of September 2009, Kraft said:

our current plans contemplate that the UK would be a net beneficiary in terms of jobs. For example, we believe we would be in a position to continue to operate the Somerdale facility, which is currently planned to be closed and to invest in Bourneville, thereby preserving UK manufacturing jobs.[24]

The same statement was substantively repeated on three further occasions after September 2009: in November 2009 (in Kraft's firm offer announcement), in December 2009 (in the offer document), and in January 2010 (by reference, in a revised offer document).

19.  However, a week after the takeover, on 9 February 2010, Kraft announced that it would not after all be keeping Cadbury's Somerdale plant open.[25] Kraft said that Cadbury's plans to shut the factory as it transferred production to Poland were "far advanced" and that therefore it was "unrealistic" to reverse them. It was anticipated that the plant would be shut in 2011. In the event, it closed in January 2011.

20.  Following our predecessor Committee's report, the Takeover Panel investigated whether, in the light of its subsequent decision to close the factory, Kraft's initial statements in relation to Somerdale breached the Takeover Code. Rules 19.1 and 19.3, state that:

Each document or advertisement published, or statement made, during the course of an offer must be prepared with the highest standards of care and accuracy and the information given must be adequately and fairly presented. This applies whether it is published by the party directly or by an adviser on its behalf.[26]

Parties to an offer or potential offer and their advisers must take care not to make statements which, while not factually inaccurate, may be misleading or may create uncertainty. In particular, an offeror must not make a statement to the effect that it may improve its offer, or that it may make a change to the structure, conditionality or the nonfinancial terms of its offer, without committing itself to doing so and specifying the improvement or change.[27]

21.  During the Panel's investigation, Kraft argued that it had believed it would be able to use the Polish plant's capacity for production of its own brands, thereby allowing Somerdale to continue in operation for production of Cadbury brands. However, as the Panel's decision stated: "[…] given that Kraft did not know the detail of Cadbury's phased closure of Somerdale and the transfer of production from Somerdale to its new facilities, Kraft was not willing, nor was it in a position, to give any firm commitment in this regard, nor were its plans developed beyond a superficial level. As a result, Kraft chose to make the statement as one of belief." [28]

22.  The decision continued:

The Executive considers that, where a party to an offer makes a statement of belief of the kind made by Kraft, Rule 19.1 requires not only that the party concerned honestly and genuinely holds that belief (a subjective test) but also that it has a reasonable basis for so holding that belief (an objective test).

In this case, in view of the statements' prominence and the significance attached to them by Kraft and Cadbury's employees, and given that they repeatedly raised the prospect of Kraft reversing a high profile and contentious decision taken by Cadbury some two years previously, the Executive considers that particular care was required in relation to the statements regarding the Somerdale facility.[29]

23.  The first of these paragraphs clearly describes a two-part test for compliance: that there is an honest and genuine belief (the subjective test) and that the belief has a reasonable basis (the objective test).

24.  Applying this to Kraft's statements on Somerdale, the Takeover Panel's conclusion was as follows:[30]

The Executive has concluded that the statements made by Kraft regarding the Somerdale facility were not prepared to the standards required by Rule 19.1.

The Executive accepts that Kraft held an honest and genuine belief that it could keep Somerdale operational. Further, in Kraft's view,[31] the publicly available information regarding the timing of the Somerdale closure, together with its own expert operational knowledge in relation to factory closure programmes in the industry, provided it with a reasonable basis for holding that belief.

However, the Executive considers that Kraft should not have made the statements in the form in which it did in circumstances where it did not know the details of Cadbury's phased closure of Somerdale and its investment in plant and machinery to make products for the UK in its new facilities in Poland. Without this information, Kraft's belief, no matter how well-intentioned, that it could continue to operate the Somerdale facility on a commercial basis was, in the opinion of the Executive, not a belief which Kraft had a reasonable basis for holding.

Kraft had an opportunity to take mitigating action once it gained access to representatives of the Cadbury management team, which first occurred on the night of 18/19 January. Kraft was told on that night that the phased closure of Somerdale was well advanced, that money had been committed, and that both equipment and people had been, or were in the process of being, moved out. However, Kraft did not take this opportunity to seek further information from Cadbury in order to establish whether the closure was so far advanced that it was unrealistic to reverse it.

Kraft is hereby criticised for not meeting the standards required under Rule 19.1.

25.  The decision continues by regretting certain omissions of Kraft's investment bankers, although it exonerates them from principal blame.

26.  The Takeover Panel, therefore, accepted that Kraft had an honest and genuine belief and that Kraft believed there was a reasonable basis for it. These are both aspects of the subjective test: the belief was found to be genuine because in Kraft's view it was reasonable. The fact that they are both aspects of the same test is important, for reasons to which we shall return below.

27.  When he gave evidence to our predecessor Committee, Mr Firestone repeatedly asserted that Kraft had a reasonable basis on which to base its statement:

"we had a reasoned basis for it"[32]

"we had a commercial rationale for this statement"[33]

"[w]e made the statement based on sound commercial logic"[34]

"based on what we had read publicly our business rationale was consistent with what we believed to be the state of play".[35]

28.  However, ultimately he conceded there was, in fact, a significant level of uncertainty:

Q 248 Roger Berry: If you did not know the state of the works why on earth did you make that statement?

Mr Firestone: Again, I can only say based on what we had read publicly our business rationale was consistent with what we believed to be the state of play. Indeed, when we made the statement the machinery had not, in fact, gone into the factory. It was wide open at that point in Poland.

Chair: So you guessed, that is the bottom line.

Q249 Roger Berry: You have just admitted you knew the uncertainty about the future.

Mr Firestone: Yes.

29.  What is not uncertain, however, is the Takeover Panel's decision on the second and much more important test, the objective test. It states that the belief was not one that Kraft had an objectively reasonable basis for holding. Kraft therefore failed the objective test, and for that reason was criticised; because its statements lacked an adequate basis in fact.

30.  When he gave evidence to us, Mr Firestone put great emphasis on the Takeover Panel's decision on the subjective test. He argued that the Takeover Panel decision had three elements: a test of good faith, a test of subjective belief or basis, and the objective test.[36] This served his interests, because it enabled him to claim, as Kraft had already claimed in its press releases issued after the decision, that the Panel had found in its favour on two out of three elements—those concerned with Kraft's good faith and belief. However, he overlooked the point that having a good faith belief, and believing one has reasonable grounds for it, are, if not the same thing, at least both subjective matters. The Takeover Panel applied two tests, not three.

31.  Continuing with this defence he asserted that:

They [the Takeover Panel] agreed that there was a commercial rationale for saying that we would use the Polish facilities for Eastern European production, and use the Somerdale of Keynsham facility for UK production […] They accepted that that was a reasonable commercial rationale."[37]

32.  This is only a partially accurate reflection of the Takeover Panel's decision. The decision was that Kraft believed that there was a commercial rationale, not that there actually was such a rationale.

33.  What Kraft seem to be trying to derive from the decision is that it was all right for them to believe they could keep Somerdale open provided their belief was genuine and based on a reasonable theory. But that is not what the Panel said. The attempt to argue otherwise, and the whole construct around there being three elements to the Panel decision, were therefore misleading, as in our opinion were the press releases that Kraft issued at the time.

34.  Mr Firestone's interpretation of the Takeover Panel findings is worrying for another reason, in that he used it to further justify Ms Rosenfeld's non-appearance before the Committee. We asked him whether the decision was a sufficiently serious issue to merit her appearance, and his answer, "Not in and of itself, no, sir",[38] drew support from his interpretation of the decision. This is just not good enough. Breaches of the Takeover Code are serious both in and of themselves and because in the present case the consequence has been a major review of the Code. We would have thought that that, again, justified some attention from the Kraft Chairman and Chief Executive Officer.

35.  Neither Mr Bond nor Mr Bunker would accept that Kraft's corporate reputation had been damaged by the Somerdale episode, arguing that "Kraft [was] not well known in the UK"[39] and that "We are not an arrogant corporation."[40] Eventually, Mr Firestone intervened to say: "We certainly understand that reputations are fragile, and I certainly recognise that the controversy over Somerdale was a negative."[41] This prevarication by our panel gave the impression that there remains a level of denial about the Takeover Panel's decision which is not in the interests either of Kraft or its employees. It also demonstrated why we wished to have the Chief Executive Officer before us. The authority derived from her position would have avoided this confusion.

36.  The Takeover Panel decision found that Kraft did not have an objectively reasonable basis for its statements on Somerdale, vindicating the view of our predecessor Committee that Kraft acted both irresponsibly and unwisely in making its original statement on Somerdale. A company of Kraft's size and experience ought to have acted with better judgement.

37.  The Takeover Panel criticism of Kraft was a serious matter. The Committee totally rejects the interpretation of the Panel's decision by Mr Firestone and presumably by Ms Rosenfeld herself. The Panel decision alone merited the appearance of Kraft's CEO before the Committee.

Changes to the Takeover Code

38.  The Takeover Panel has now published its proposed changes to the Takeover Code for consultation.[42] These include a new proposed note to Rule 19.1:

Statements of intention

A party to an offer must adhere to any public statement it makes during the offer period, whether in a document, an announcement or otherwise, relating to any course of action it intends to take, or not take, after the end of the offer period. Where no time period for the implementation, or non-implementation, of the course of action is specified, the statement must normally be adhered to for a period of at least 12 months from the date on which the offer becomes or is declared wholly unconditional.

39.  In addition, there are proposals to strengthen the 'put up or shut up' regime so that virtual bids must be clarified within a four-week timeframe, to prohibit break fees in many situations, to publicise adviser fees and to place greater emphasis on the views of employees. The Government is also conducting a review in this area and we expect the Government to publish further details of its proposals during the summer.[43]

40.  Based on the experience of the Cadbury takeover, we believe there is a strong case for making pre-takeover statements about matters such as whether factories will be kept open binding for a defined period. We therefore welcome the proposed changes to the Takeover Code in that respect. The proposals on the timeframe for bids are also worth singling out as particularly welcome.

41.  We recommend that the Government use the Kraft Takeover of Cadbury as a valuable case study when the Government comes to formulate its policy in this area, and we look forward to scrutinising its policies when they are published.

24   Proposal document dated 7 September 2009 Back

25   See company press release accessible via Back

26   Rule 19.1 Back

27   Rule 19.3 Back

28, page 3, paragraph 3 Back

29   Ibid., page 4, paragraphs 2 and 3 Back

30   Ibid., page 4, paragraph 5ff Back

31   Emphasis added Back

32   16 March 2010, Q 234 Back

33   Q 236, ibidBack

34   Q 241, ibidBack

35   Q 248, ibidBack

36   Q 51 Back

37   Q 51 Back

38   Q 29 Back

39   Q 63 Back

40   Q 68 Back

41   Q 69 Back

42 Back

43 Back

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Prepared 23 May 2011