UKSA policy: Mergers, Takeovers, Poison Pills and Competition Law

A common reason for shareholder dissatisfaction is apparent prejudice when an offer for a company is made by a third party. All shareholders can be disadvantaged in comparison with "insiders" such as senior management, who often can crystallise their existing share options at a large profit, and be awarded lots of new ones and uprated salary packages by the acquirer. The role of the independent non-executive directors is to protect shareholders against such abuse, but this is often ineffective (it has even been known for dominant shareholders to remove the independent directors where they were opposed to a takeover as happened recently with Silentnight).

Smaller shareholders can also be disadvantaged when there are large blocks of shares held by individuals or institutions (or by an apparent "concert party"), who may be acting in a specific interest. Often the complaint with institutions is that they simply wish to make a quick exit and ignore the long term fundamental value of the business being sold.

The rules on what should happen, such as the sequence of events, and what can and cannot be done, are complex and designed to protect the interests of all shareholders. However their very complexity can lead to manipulation and misinformation by both the bidders and the defenders (and incumbent management is often very keen not to become redundant as one might expect). It's rather like tax law in some cases - the more the rules are adapted to plug obvious loopholes, the more clever lawyers find ways around them that technically avoid breaches while driving a coach and horses through the principles that were designed to protect all parties.

Another practice by incumbent management (fortunately not yet as common in the UK as it is rampant in the USA and other parts of Europe) is the adoption of "poison pills". These are various devices that make it more difficult for a hostile bid (ie. one without the support of the company's management) to be successful. This can range from adding terms in the Articles that delay voting on the matter, and writing contracts with executives that deliver massive bonuses when the company is sold (see McCarthy & Stone for example), to a promise recently made in the Peoplesoft/Oracle battle to the formers customers that they could cancel software purchases and get their money back if the deal went through). Almost all of these devices are clearly not in the interest of shareholders.

Sometimes management are so keen for their favoured bidder to win a takeover battle, that they agree to pay penalties if the deal does not complete, or some other bidder wins the day. Again it's prejudicial to shareholders interests.

Many of these practices are not illegal as they probably should be (unfortunately one man's "poison pill" is another's "device to ensure measured and fair takeover consultation and protect the interests of other stakeholders").

Competition law also comes into play as many large mergers and acquisitions are nowadays dependent on approval of the competition authorities in one or more legal jurisdictions. The simple invocation of competition law can delay takeovers so much that they are abandoned before they have barely commenced.

One reason why all shareholders should be wary of takeovers, unless you are on the receiving end of a cash offer, is that from academic research it is obvious that most such events do not improve shareholder value for the acquirer. They seem to be more beneficial to the ego building of management, than they are to generating cash profits. So be sceptical of the "synergistic benefits", the "cost rationalisations" that will take place, and the "boundless opportunities" to get into new markets.

Submissions by UKSA on the matters covered above have included the following:
Letter to the DTI, 1994