My Lords, I thank the noble Lord for his amendments, the clarity of his introduction and the opportunity to briefly debate the matter of company takeovers. First, in view of his wider points, I will reflect on the changes that the Takeover Panel has made, both recently in response to AstraZeneca/Pfizer, and in response to Cadbury/Kraft earlier in the Parliament, a deal which, as a businesswoman at the time, rather shocked me. I share my noble friend Lord Leigh’s warm words about the strength of the Takeover Panel—we are lucky to have it in this country.
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Noble Lords will recall that the Cadbury/Kraft takeover raised widespread concerns about our takeover regime. It was to tackle those concerns that the panel then consulted and made four key changes. The first was to increase the protection for target companies. Potential bidders now have only 28 days to put up or shut up. The second change was to strengthen target companies’ positions. The code is now explicit. The target boards can consider another longer-term consideration, and not only price. In addition, most inducement fees were banned, and I will come back to that. The third change was to improve transparency by requiring greater disclosure of the bidder’s plans, disclosure of offer-related fees and greater detail on the financing of the offer. The final change was to give greater recognition to employees’ interests. Employer representatives were also given an improved ability to make their views known.
More recently, AstraZeneca/Pfizer raised other concerns about whether companies could really be trusted to honour the commitments they made during a takeover bid. In response, the panel has moved quickly, consulting on and adopting changes to the code which will allow companies to voluntarily make a new form of commitment—called a post-offer undertaking—with which they will be required to comply, subject to expressly stated qualifications or conditions, and which will strengthen the panel’s ability to monitor compliance with such undertakings by enabling the appointment of an independent supervisor and requiring written reports.
All of these changes mark a significant strengthening of our takeover regime. This will continue to make the UK an attractive location for foreign investors while giving shareholders and the wider public the confidence they need that the UK’s takeover framework operates in society’s wider interests. It also underlines the importance of our acting with care to ensure that we do not inadvertently undermine the internationally acclaimed takeover regime, as the noble Lord, Lord Leigh, described it.
To respond to the noble Lord’s question, these changes also meet the ambitions set out at Second Reading by the Secretary of State, which is why we are not proposing legislation in this Bill.
The noble Lord, Lord Mendelsohn, asked what difference these changes would have made, I think in relation to Pfizer. The changes that have been made to the code would have meant that a formal mechanism for giving post-offer undertakings would have existed. Stakeholders would have been clear what undertakings had been given, how they would be monitored and in what circumstances they could be set aside. For instance, Pfizer would not have been able to say that its commitments would be subject to a “material change of circumstances” condition or “subject to its fiduciary duties”. There would have been much greater clarity about what Pfizer’s commitments meant and much greater certainty that they would be honoured.
Turning to the specific amendments, Amendment 60A deals with directors’ duties. The Government agree with the noble Lord’s intention behind the amendment. As we all know, directors should at all times comply with their duties as directors. This includes during takeovers, as directors of both a target company and an acquiring company. Most people who have served as directors are aware of this. I am pleased to reassure the noble Lord that the takeover code already allows for this in practice and that there is therefore no need for further legislation. Section 172 of the Companies Act already makes it clear that directors have a general duty to promote the success of the company. This includes, among other things, having regard to the six matters listed in the amendment. This duty applies at all times, including, obviously, during takeovers. Moreover, rule 25.2 of the code already requires board circulars of offeree companies to explicitly set out the board’s opinion on the offer’s effect on all the company’s interests, including specifically employment.
I accept that this is not the same as requiring a board to set out its views on how its opinion meets every factor listed in Section 172 of the Companies Act but, in forming its opinion, the board will need to consider those factors among other matters and, where appropriate, will be likely to set out its view of how it is affected by the others.
As I alluded to earlier, it is also important to note that the code was amended in 2011 to make explicit that the board of an offeree company is not required to consider the offer price as the determining factor in a bid and can take into account any other factors it thinks relevant. This was to make sure that target companies can take account of factors other than short-term interests in bid situations—in other words, that they act in the best interests of the company. There is an inherent difficulty in making statements that relate to the effect of another party’s—the bidder’s—future conduct. There has to be a real risk that this would simply result in boilerplate disclosures and those of us who have been directors know the risk of that. It is therefore questionable whether, in practical terms, the proposed amendment would result in meaningful disclosures being made by target boards in the majority of cases.
Amendment 60B requires disclosure of success fees by the offeror company. I agree that it is essential that takeover bids should proceed on the basis of their economic fundamentals. For this reason, we welcome the changes made to the takeover code by the Takeover Panel in 2011 to ban inducement fees and other means
of encouraging the target board to do a deal with the bidding company. Alongside these changes, a new requirement was introduced for much greater transparency in the fees that the bidding company would be paying to its professional advisers. A subsequent review in 2012 carried out by the code committee indicated that these changes are generally working well. Success fees may encourage advisers to prioritise deals that they believe will succeed. I accept that, in theory, they may create incentives for advisers to promote deals that may not be in the long-term interests of their clients. The Government are not, however, aware of any evidence that skewed incentives on the part of advisers have recently led to poor bids. Noble Lords will know that we try to be evidence-based in legislating. If the noble Lord has any evidence we would, of course, be interested to receive it. I hope the noble Lord has taken some reassurance from that rather long and comprehensive answer and will agree to withdraw his amendment.