UK: takeover regulation review - IoD response

The Institute of Directors has today published its submission to the Takeover Panel's review of certain aspects of takeover regulation (about which see here, pdf). In its submission, available here (pdf), the IoD argues that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company. The IoD explains its position as follows:

The IoD believes that a market for corporate control is a valid component of an effective corporate governance system. The threat of hostile takeover can provide a source of discipline for severely underperforming companies and their management. However, takeovers are difficult to implement successfully. Many takeovers do not result in a combined enterprise that is stronger that the sum of its parts. A number of academic studies have shown that contested takeovers, on average, destroy value for the shareholders of the acquiring firm [Cosh and Hughes (2008), Martynova and Renneboog (2008) and Tuch and O'Sullivan (2007)]. Widespread use of takeovers may also encourage a short-termist management approach, both amongst acquisitive companies and companies under threat of takeover. As a result, we view hostile takeovers as a governance mechanism of last resort. The presence of an effective board (containing a high proportion of independent, knowledgeable and challenging non-executive directors) and an ongoing process of engagement between boards and shareholders should be regarded as the main means of ensuring the success of the company over the longer term.

When significant takeover bids do occur, the final say on the commercial viability of the transaction should be a matter for shareholders. Furthermore, for such an important (and potentially risky) corporate event, it is important to ensure that the shareholders on both sides of the transaction are fully supportive of such a step. The Takeover Code provides a fair and transparent mechanism through which to solicit the support of offeree (i.e. target company) shareholders during a hostile takeover bid. However, there is currently no guarantee that a takeover transaction has the support of the offeror (acquiring company) shareholders. The UK model of corporate governance is based on the principle of shareholder monitoring and oversight of corporate activity. In our view, it is consistent with this approach to require that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company".