Monday, April 12, 2010

Two cheers for Labour's Cadbury law

The Labour party in the UK has announced a “Cadbury Law” as part of its election manifesto. This was motivated by the aftermath of the Kraft takeover of Cadbury. It has many good and some bad features and can potentially be a model for takeover law in many countries.

The broad proposals are as follows

- M&A transactions have to be approved by a two thirds majority and not just a simple majority.
- People (read hedge funds) who buy shares in the target after a bid is announced would be barred from voting
- A “national interest test” is being considered to prevent foreign takeovers in vital industries” – defence, utility, infrastructure being thought of as “vital”

In the red corner in fervent defense of these proposals are the Labour party, obviously, the Confederation of British Industry and Unite – the powerful Trade Union.

In the blue corner, opposed vehemently to this are the Conservative Party, obviously, and the Association of British Insurers. Silent, but presumably in this camp are all the hedge funds, speculators and assorted punters. Silent and sitting neutral are Britain’s Takeover panel (the body that oversees takeovers) and presumably the Liberal party.

I am vigorously in support of the first two proposals and strongly against the third. Hence the two, rather than three cheers.

Firstly I completely support the requirement for two third’s majority. That is a principle that is fundamental in many political democracies. Game changing issues require two third’s majority; simple issues can be passed with a simple majority. Something as fundamental as a takeover, that could potentially extinguish a company should not be taken lightly. It requires a broader support that a simple majority. The argument that such a provision will make takeovers difficult in the UK and that it would protect failing management is humbug. If the case is strong, it will achieve two third’s majority. If its weak, it doesn’t deserve to pass. No consistently failing management can achieve a blocking 34% support.

I defy any rational person to challenge the second proposal. This blogger has railed in the past against the practice of hedge funds buying up huge stakes in targets, clamouring for an increase in the bid and then forcing the target to accept the bid so that they can cash out profits – all under the threat of law suits if they did otherwise. These speculators deserve no sympathy and certainly not voting rights.

Unfortunately Labour has sullied its hand with the spurious “national interest” proposal. This is daft. There is no national interest in roads or power or for that matter BA. This proposal is just a throwback to the days of the public sector, where without competition, Britain’s dinosaurs were just awful. And we have the old problem of defining what is a British fund or a British bidder. This proposal deserves to be trashed into the dustbin.

Notice that an election manifesto contains such well thought out issues, which you may agree or disagree with, but indicates the level of maturity of Britain’s politics. Contrast this with India’s homegrown variety of elephant statues, free colour TV, loan write offs, free power, sacks of cash ….. Or with China’s complete absence of debate on any policy ….