Is the 30% market purchase limit too generous?
Never is the corporate world more fiercely competitive than during takeover battles. Ensuring fair play for the bidder, the target company and its shareholders falls to the Takeover Panel. The rules allow a bidder to buy up to 30% of the target company's shares in the market.
The bidder just needs a further 20% in bid acceptances, and the target is his. Critics believe the 30% limit is too high, making it too easy for the hostile bidder to win control. Do the City's takeover rules make life too easy for hostile bidders? Should they be revised?
David Morris, former chairman of Northern Electric, is a critic of the present takeover rules. Last December Northern succumbed to a hostile bid from CE Electric, an American grouping led by CalEnergy, which won its battle when late acceptances tipped it over the 50% marker. The takeover rules allowed CalEnergy to buy a holding on the market which was far too high, Morris argues. 'The limit should be restricted to such a level so as not to give effective control,' he says.
'I have suggested 15%.'
Morris believes the current rules can penalise target company shareholders.
'It's possible for the bidder to reach that level (30%) without shareholders receiving any information of note from the company as a bidder,' he says.
This, he claims, flies in the face of the spirit of the takeover code.
'One of (the code's) principles is that shareholders should be fully informed.'
Though there is some sympathy in the City for reducing the 30% threshold, no obvious alternative stands out. Michael Higgins, partner in KPMG corporate finance, sums up the problem: 'Whether you opt for 30%, 29%, or 25%, that's a judgment call. The takeover code applies to a vast range of companies, from small unlisted plcs to international conglomerates. There are circumstances where 30% is about right. It's impossible to draw a blanket conclusion.'
One suggested solution would be to apply different percentage thresholds to different types of company, distinguishing between, for example, a £310 million turnover operation with limited stock liquidity and a FTSE-100 company with highly liquid stock. Though technically appealing, such a regime would be difficult to implement. 'Different rules can cause huge confusion,' warns Higgins. A more radical reform would ban bidders from making any market purchases after making an offer, as in the US. This proposal wins little support. Morris himself says: 'I am not in favour of zero. It's reasonable that a company's management can be challenged instantly in the marketplace and zero (purchases) would prevent that.'
One senior corporate finance head believes that, despite frequent complaints from defeated parties, there is no convincing argument to change the current threshold. 'It is natural for the losers in takeover battles to blame the rules and want them changed,' he says.
But without a more united call for a lower limit, the 30% threshold looks secure. 'These rules have stood the test of time,' the senior finance head explains, and a review just a few years ago by a Confederation of British Industry committee found no need for change.
The Takeover Panel, in spite of the rumours to the contrary, denies any plans to reduce the 30% limit. 'We are satisfied that our rules operate in an appropriate manner in that area,' says deputy director-general Noel Hinton. But he accepts that they could be revised if City opinion demanded. 'Our rules are never immutable,' he says. 'Life is subject to a process of change. Regulators are no different.'.