Annex B: Summary of analysis of the policy
proposal to disenfranchise short-term shareholders during a takeover
bid
1. This note summarises the analysis of proposals
to disenfranchise short-term shareholders during a takeover bid.
This includes analysis undertaken by the Kay Review and separately
by the Takeover Panel as part of a review of aspects of the UK
regulation of takeovers in 2010.
2. The Government supports the aim of ensuring
the interests of those seeking short-term returns from a merger
or acquisition do not override the long-term interests of the
companies involved. As such we do not oppose measures which reduce
the influence of short-term shareholders in a takeover bid in
principle.
3. The Takeover Panel's review helpfully summarised
the arguments commonly made in favour of this proposal[8]:
"…it has been argued that the purpose
of "disenfranchising" shares in the offeree company
that are acquired during the offer period is to ensure that the
outcome of takeover bids is determined by the core shareholder
base, not by short term speculative investors who may acquire
shares in order to facilitate the takeover. It is argued that
ensuring that only those who are registered shareholders at the
start of the offer period are eligible to "vote"[9]
on the takeover proposal would allow long term shareholders to
accept the offer based on the long term interests of the company,
without being "squeezed out" by speculators.
In addition, it is argued that the "disenfranchisement"
of shares acquired during an offer period might have the effect
of reducing acquisitions of offeree company shares by short term
shareholders, by virtue of the fact that any shares acquired would
not count towards satisfaction of the acceptance condition, and
that reduced demand would lead to shares in the offeree company
trading at lower prices (and at a larger discount to the offer
price). As a result, existing shareholders would be deterred from
engaging in "top-slicing" (i.e. selling a proportion
of their shareholding as a hedge against the possibility of the
bid failing) and a higher proportion of the register would remain
in the hands of long term shareholders, who might be prepared
to forego the short term gain available under the offer in favour
of the prospect of long term value creation.
4. The Takeover Panel's assessment also identified
a variety of arguments against such proposals, as well as a variety
of other considerations and consequences in their consultation.
In light of these issues, and in the face of strong opposition
from stakeholders supporting the principle of "one share,
one vote", they decided not to introduce them in the Takeover
Code.
5. The Government has similarly concluded that
it would not be practical or effective to disenfranchise short-term
shareholders during a takeover bid, for a variety of reasons.
Drawing on the assessment made by the Takeover Panel and the Government's
own analysis the most significant problems are described below:
i. First, there are practical problems identifying
which shares have been disenfranchised, because shares in the
UK are not individually identifiable. This is best illustrated
with an example. Suppose a shareholder has owned 100 shares for
4 years and then purchases a further 10 shares during the period
when short-term shareholders are disenfranchised, bringing his
total shareholding to 110 shares. Because these shares are not
distinguishable, if then sold 10 shares, a practical problem would
arise in determining whether those 10 shares were deemed to be
short-term or long-term holdings. It has been suggested that this
problem could be overcome by applying a standard rule, but such
a rule would be difficult to operate in an international market,
with intra-day trading needing to be taken into account, but with
share trading balances only struck at the end of the day.
ii. Similarly, because many shares are held by
nominees, the underlying ownership of the shares might change
without any change in the name of the register. In combination
with the problem above this would make operating, and indeed enforcing,
a disenfranchisement rule practically impossible.
iii. Furthermore, it would be easy to avoid disenfranchisement.
Disenfranchisement would create an incentive not to trade in shares,
but rather to trade off market in the economic interest in, and
control of, the shares, which would be very difficult to police.
The Government is currently consulting on measures to improve
the transparency around the underlying beneficial ownership of
companies, and we would be very concerned about measures which
would encourage people to hide the deals they were doing in this
way.
iv. It is also far from clear that disenfranchising
short-term traders during a takeover bid would have the desired
effect of strengthening the hand of those investors focused on
the long term interests of the target (or acquiring company).
Arbitrageurs will often seek to obtain a speculative position
in a company before a takeover bid, and so would not be affected.
Moreover, disenfranchising new shareholders to influence acceptance
of a bid would prevent long-term shareholders seeking to reject
a takeover from strengthening their opposition by acquiring more
shares.
v. Additionally, contrary to the argument outlined
in the extract above, removing the rights of shareholders to influence
acceptance of a bid would arguably reduce the demand for a company
shares, resulting in a lower share price and meaning hostile takeovers
might be more likely to succeed.
vi. The disenfranchisement of shares acquired
during a takeover bid could result in the decision as to the success
or failure of a takeover bid being concentrated in the hands of
one or a small group of shareholders in the target company. While
in some circumstances these shareholders might preserve the long-term
interests of the company against a potentially damaging hostile
bid, there is no guarantee that this would be the case: it might
instead distort the price such shareholders were able to achieve,
destroying value, or enable the entrenchment of existing management
against the interests of other shareholders.
vii. Finally, disenfranchisement of shares acquired
during a takeover bid would appear to run counter to the provisions
of the Takeover Bids Directive, replicated in the UK Takeover
Code, that all holders of the securities of an offeree company
of the same class must be afforded equivalent treatment. While
this might be overcome if all shares were required to be held
for a certain qualifying period before the attached rights could
be exercised, the other issues noted above, and possibly other
wider implications, would still arise.
6. The Kay Review also considered this issue
and did not favour measures to disenfranchise short-term shareholders
during a takeover bid. Professor Kay concluded that the presence
of short-term "arbitrageurs" is not the central issue
because they can only control shares that others have recently
sold to them. He found existing shareholders are often willing
to accept offers, even if they believe the offer price does not
represent the long-term value of the shares, because they are
too often focussed on short-term relative returns. He therefore
proposed that the best and only means to prevent this is to encourage
more asset managers to adopt investment approaches based on stewardship
and the pursuit of absolute long-term returns.
7. The Government would welcome comments on the
attached note, and would welcome in particular suggestions about
how the issues identified in the note, which prevent such policy
measures being workable, could be overcome
8 The Takeover Panel review of certain aspects of the
regulation of takeover bids: Consultation Paper, June 2010. Available
at: http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201002.pdf Back
9
It is important to note that shareholders only vote on a resolution
to accept a takeover where it is achieved by a scheme of arrangement.
In the case of a contractual takeover bid, shareholders "vote"
only in the sense that they accept the offer to sell their shares. Back
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