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When takeovers turn hostile - how UK reforms are giving shareholders greater disclosure

Roger Barker, director of corporate governance and professional standards, Institute of Directors

Pfizer appears to have retreated but it's more likely to be a tactical retreat than a full withdrawal, writes Roger Barker*

"Never go on trips with anyone you do not love"
Ernest Hemingway

With the Pfizer bidding for AstraZeneca now ended the US giant pharma company's takeover ambitions for its British counterpart appear to have been halted - but few doubt they'll return.

In this, I suspect they're fooling no one - even Westminster politicians who may have theatrically wiped their respective brows in relief.

It'll have escaped no one's notice that many AstraZeneca shareholders voiced their dismay at the decision by the AstraZeneca board to reject Pfizer's final bid of £55 per share on the grounds Pfizer had undervalued the company.

Pfizer appears to have retreated, as it had to under the Takeover Code, but it's more likely to be a tactical retreat than a full withdrawal.

During the tense final week of discussions between the two companies there was, of course, widespread speculation that Pfizer could attempt a hostile takeover and appeal directly to AstraZeneca's shareholders. Who knows what the outcome would have been then.

Sean Farrell in The Guardian reported a top 10 AstraZeneca investor saying that rejecting Pfizer, "is the single biggest case of value destruction on behalf of shareholders of all time." And they weren't alone.

AstraZeneca chairman Leif Johansson saw it differently, however, stating in The Guardian on 19 May: "From our first meeting in January to our latest discussion yesterday, and in the numerous phone calls in between, Pfizer has failed to make a compelling strategic, business or value case."

The comparison that was most often drawn was that sharpest in the mind - Kraft's hostile takeover of Cadbury's in 2010 and the subsequent relocation of factory production to Poland (despite pre-takeover assurances to the contrary from Kraft).

It highlighted vulnerability of UK companies to predatory foreign businesses; what Chuka Umunna, shadow business minister may have been alluding to when he described the Pfizer bid as a "short term, fast buck mentality".

But things have changed since then. Recognising that the ambitions of offerors had to be better communicated to shareholders along with the potential impact, the Takeover Code has been tightened up, with the latest version published in May 2013.

As a consequence of the Code reforms, boards on either side of the bid now must provide broader disclosure to shareholders to help the latter understand the consequences of the decision they are being asked to make and the choices they must weigh up.

In addition to financial information, including annual/interim results and debt facilities or other instruments entered into in order to finance the offer, the offeror must now clearly advise of its intentions with regard to the future operations of the offeree company and clarify why the offer can be justified long-term.

The offeror must also advise shareholders about the continued employment of staff and management, its strategic plans for the target company and how these plans could impact on company locations along with any redeployment of company fixed assets along with the maintenance of trading facilities.

In reply, the targeted board's communication to shareholders must set out its own objective opinion of the bid including its views on the effects on all the company's interests as well as the strategic plans for the target company and their likely repercussions. Just as importantly, there should also be a statement from an employee representative, as a recognised key stakeholder group, about their impressions of the bid and the likely impact on employment within the company.

Poison pill
The targeted board may give its recommendations within its communication, but it still has an obligation not to frustrate the bid by invoking a defence such as the 'poison pill' or shareholder rights plan now adopted in the US. These rose to prominence following a hostile takeover boom in the US 30 years ago which was blamed for an unwelcome rise in boardroom 'short-termism'.

Poison pills may not be universally welcomed, especially by hedge-fund activists, but they have been ratified by the US courts.

In the UK, poison pills are outlawed by the Takeover Code. An enforced reduction in a shareholder's stake is also prohibited on the basis of pre-emption rights, which seek to ensure that shareholders can maintain a proportionate share of the ownership of a corporation on the occasion of new share issuance. Instead, directors are obliged under the Companies Act 2006 to act in a way they consider in good faith promotes the success of the company for the benefit of all members.

It should be remembered of course that the UK is one of only a handful of countries across the world that permits hostile bidding. It's seen as a key discipline underpinning corporate governance - a somewhat blunt instrument, perhaps, but one which aims to promote the efficient deployment of capital and support strong management performance for shareholders.

But, as was repeatedly pointed out during Pfizer vs AstraZeneca, for all the peace of mind offered by the move towards greater board disclosures, the Code is not legally binding and the offeror may still change whatever pre-takeover guarantees are required for the bid to be accepted, on the basis of, say, changing markets or commercial need. What's more, takeovers throughout history have demonstrated a nasty habit of destroying value rather than creating it. In the final reckoning the whole is not necessarily greater than the sum of its parts.

Meanwhile, employees and the board of AstraZeneca can only wait in some trepidation for the knock on the door which may or may not come.

*Dr. Roger Barker is director of corporate governance and professional standards at the Institute of Directors

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