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Sixteen Questions from the Cadbury takeover

by Mark Goyder

So many questions arise from this takeover. Some of them are raised by Will Hutton and Philip Blond in today’s FT. But while Hutton and Blond (rightly) worry about the UK national interest, the outcome actually appears to make little sense in terms of the self interest of most of the people involved.

Even if you accept that the stock market should be left to get on with the business of creating long term shareholder value, here are questions that the major participants in that system need to answer.

They are all summarised in one key question: If we accept that an efficient capitalism needs effective stewardship, why are the implications of stewardship ignored in a takeover situation?

Tomorrow’s Company is now creating a forum which will, among other things, be examining these questions. See also the Wall Street Journal piece by Mark Goyder and Philip Goldenberg which explains why boards and investors are not obliged to make decisions by price alone.

Sixteen Questions from the Cadbury takeover

For the board of Cadbury:

  1. Do you accept that your duty of stewardship of the companies applies in a takeover situation? Why did the Cadbury chairman focus so heavily on price in his negotiations and ignore questions about the appropriateness of Kraft as an owner of Cadbury?

  2. In making your recommendation did you consider what was right for the company in the long term, or were you, as some reports suggest, primarily influenced by the advice you received on what your shareholders believed to be the right price?

For fund managers owning shares in Cadbury:

  1. Do you accept that you have a duty of stewardship towards the companies in your portfolio as well as a duty of stewardship towards your clients?

  2. What guided your decision in this case?

  3. Do you have a vested interest in cashing in that could skew your decision? Or do you set that on one side?

  4. Many of you sold your shares to hedge funds at an early stage in the bidding process. Why?

  5. Does the high level of debt taken on by Kraft concern you? Is there a risk of this burden adversely affecting the future wellbeing of Cadbury?

For the pension funds and other beneficial owners of Cadbury:

  1. Do you accept that your duty of stewardship of the companies applies in a takeover situation?

  2. Have you thought about whether, in general, you want to encourage takeovers? Much of the research evidence suggests that most hostile takeovers destroy value. They also create conditions in which managements worry more about the short term share price than long term shareholder value and that this damages investment in talent, R&D and sustainability. The conditions which you lay down can determine how fund managers decide to vote in a takeover bid. Have you given them guidance, either in principle or in particular cases? If not, why not?

  3. Do you believe that future pensioners are served well in a system in which hostile takeover are as common as in the UK? In particular what guidance have you given fund managers on their attitude to such takeover when the current leadership of the company is thought to be competent and when the acquired company is effectively burdened with debt to finance the acquisition (as in the case of Manchester United)?

  4. Are there any circumstances where you would turn down a takeover bid regardless of price because of the inappropriateness of the future owners?

For the UK Government:

  1. The 2006 Companies Act defines the duty of directors as being to the company, but it also specifies the impacts on stakeholder groups other than the shareholders? Are you happy that boards of companies in takeover bids are properly complying with that duty?

  2. The original Company Law Review proposal for an Operating and Financial Review could have been used to require those seeking to bid for a company to set out their plans for the company in the form of a narrative report which covers all the stakeholder categories mentioned by the Companies Act statement of Directors Duties. Should the government not now revise the reporting requirements upon companies and strengthen them so that shareholders and the wider public are given fuller information before any takeover is approved?

  3. Should not all pension funds and beneficial owners be unambiguously required in law to specify their policy on stewardship generally and stewardship in the particular circumstances of a bid?

  4. Should there be a requirement upon fund managers to seek a clear voting mandate from pension funds, especially where investment managers are conflicted or incentivised to accept rather than reject bids?

  5. To discourage irresponsible bidding activity, should the bidding company not have to pay the costs of the bid-for company if the bid fails a successful defence?

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