Small Business, Enterprise and Employment Bill
Debate between Lord Leigh of Hurley and Lord Mendelsohn
Lord Mendelsohn
I shall speak also to Amendment 60B. The Bill offers us a tremendous opportunity to look at directors’ duties. It is a useful time to examine some of the areas which have been a matter of public debate and which have a bearing on our deliberations. We have tabled two probing amendments for consideration.
At Second Reading in the other place, the Secretary of State raised concerns about whether in mergers and takeovers there are the correct provisions in the code under which companies act. Indeed, public concern over the takeover of Cadburys by Kraft and the AstraZeneca/Pfizer situation led the Secretary of State at that time to say that this Bill would address those matters.
Since that time, the Takeover Panel has been hard at work bringing forward a tightening of directors’ duties in respect of takeovers and of undertakings made during takeovers. The Takeover Panel has long said that a target company’s directors may take factors other than price into account. We are all aware that very often the commentary has been that there is always pressure to focus on price alone. The Takeover Panel has now amended the code to make that point explicit and to allow boards not to consider the offer price as the determining factor. This is progress, but we retain concerns that are not assuaged. This offers boards partial protection when the price alone does not meet all the considerations for the long-term interests of the company or its shareholders.
In relation to binding undertakings, the Takeover Panel’s suggestions are to be welcomed. We agree with a distinction being drawn between post-offer undertakings, which are binding, and intention statements, which are not. Intention statements are required to be accurate statements of the parties’ intentions at the time they are made and to be based on reasonable grounds. The panel will require clarity by companies making an offer, which should help boards to consider their duties properly when evaluating bids made by those companies.
It would be useful if the Minister could provide us with her assessment of whether the changes made by the Takeover Panel are suitable and adequate and whether they meet all the action planned within the context of the ambition set out by the Secretary of State in his comments at Second Reading. It would be interesting to have the Minister’s assessment of the extent to which the Government consider that if such additions were in place at the time they would have dealt with AstraZeneca/Pfizer and Kraft/Cadbury situations and what impact they would have had on them.
Amendment 60A probes these matters further. The current position is governed by note 1 to Rule 25(2) of the takeover code. Our amendments suggest an alternative framework on which we seek the Government’s views. As it is currently defined in negative terms, the code does not limit the factors or provide a framework under which the board may consider these matters. While not limiting them, we propose factors that should be positively taken into account. We are keen to hear the Government’s views on such a formulation.
Amendment 60B takes forward an existing arrangement that incentive payments should be identified. As the shadow Secretary of State said in another place, there are clear cases and concerns that the lucrative nature of advising on such arrangements creates incentives which may not be desirable and lead to poor outcomes. Our change would amend the current situation, which is that they are identified in the offer document. That is in the code under Rule 24(16). We make clear the need to disclose in full payments which are contingent on the outcome. This will provide for an accurate reflection of what is paid, as opposed to the current arrangements, which relate only to fees and expenses.
I would be grateful to know whether the Government would be minded to change the current rules to ensure proper transparency. In addition, although this is not in the amendment we have proposed, we would be interested in whether the Government would be sympathetic to finding the right place for the reporting of such payments—the actual payments made, that is the fees, expenses and incentive payments—to be made in the context of a transaction. I beg to move.
Lord Leigh of Hurley
I am not sure that it is in the register of interests but I further disclose that I used to sit on the Takeover Panel appeal committee some eight years ago, as the alternate to the president of the Institute of Chartered Accountants and in my capacity as the chairman of the Corporate Finance Faculty—finally, I stand up in your Lordships’ House to speak on my one area of expertise. Having said that, the vast majority of my time is spent working with private companies rather than public companies, but I thank the noble Lord, Lord Mendelsohn, most sincerely for raising a matter on which I can speak.
I take this moment to commend the Takeover Panel on the role it undertakes in City life and in the UK economy. It is an extraordinary organisation, which works extremely effectively and well, and which is genuinely the envy of the world. When overseas—in particular, American—potential purchasers of UK companies come to these shores, and the nature and working of the Takeover Panel is explained to them, they are absolutely amazed. They cannot understand how it is we can have such a system, where an organisation exists without any real power and without any real teeth but simply survives through the ability to cold-shoulder an adviser. It is a phenomenon which defies real explanation. Many people would be extremely reluctant to see the good workings of the Takeover Panel interrupted by legislation in any way.
In particular, Rule 24.16(a) provides that an offer document must contain an estimate of, first,
“the aggregate fees and expenses expected to be incurred”—
as has been suggested—and then, separately, a breakdown of those fees and expenses by category, including,
“financial and corporate broking advice”.
Rule 24.16(b) provides that:
“Where any fee is variable between defined limits, a range must be given in respect of the aggregate fees and expenses … setting out the expected maximum and minimum amounts”.
The takeover code already requires the matters specified in Amendment 60B and covers all situations where the payment of such fees would be contingent on the outcome of the offer. It specifies the conditions under which they are payable and the estimated value or range of those payments. We have taken the trouble to look at the last 10 documents that were live in respect of such takeovers, and they all included the fees, costs and expenses—some of those seem high, but contingent fees will be high. They are all there, in the documentation. It may be that Amendment 60P is not required as envisaged.