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.
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
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.
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,
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
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.
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." 
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
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:
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,
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"
"we had a commercial rationale for this statement"
"[w]e made the statement based on sound commercial
"based on what we had read publicly our business
rationale was consistent with what we believed to be the state
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.
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 elementsthose 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
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."
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",
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
and that "We are not an arrogant
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."
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.
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.
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
See company press release accessible via http://phx.corporate-ir.net/phoenix.zhtml?c=129070&p=irol-sec&secCat01.15_rs=151&secCat01.15_rc=10 Back
Rule 19.1 Back
Rule 19.3 Back
page 3, paragraph 3 Back
Ibid., page 4, paragraphs 2 and 3 Back
Ibid., page 4, paragraph 5ff Back
Emphasis added Back
16 March 2010, Q 234 Back
Q 236, ibid. Back
Q 241, ibid. Back
Q 248, ibid. Back
Q 51 Back
Q 51 Back
Q 29 Back
Q 63 Back
Q 68 Back
Q 69 Back