• Kraft’s Bid for Cadbury - A Bittersweet Tale
  • August 2, 2010 | Author: Michael E. Hatchard
  • Law Firm: Skadden, Arps, Slate, Meagher & Flom (UK) LLP - London Office
  • Just as a series of provocative takeovers in the 1960s compelled the main U.K. market participants to establish the U.K. Takeover Code (the Code) and Takeover Panel (the Panel) in 1968, controversial transactions have continued to trigger debate as to the adequacy and efficiency of corporate control regulation in the United Kingdom.

    Kraft’s bid for Cadbury is the most recent example, throwing into question certain aspects of Code regulation of bids for public companies in the U.K. and engendering widespread debate about the central purpose of corporate governance within a system that focuses on the primacy of shareholders’ interests. The Cadbury deal also serves as a useful reminder of the high standard applied by the Code to public statements made during the course of a bid.

    Public Statements Must Meet the Highest Standards of Accuracy

    On May 26, 2010, the Panel released Statement 2010/14, in which it publicly criticized Kraft for statements it made regarding one of Cadbury’s production facilities during the course of its bid. In October 2007, Cadbury designated its Somerdale facility for closure in 2009-2010, as it shifted production to Poland. Kraft said:

    Our [i.e., Kraft’s] current plans contemplate that the U.K. would be a net beneficiary in terms of jobs. For example, we believe we would be in a position to continue to operate the Somerdale facility, which is currently planned to be closed, and to invest in Bournville, thereby preserving U.K. manufacturing jobs.

    Kraft’s statement was first made in September 2009 and was repeated on a number of occasions during the course of the bid. As the deal was hostile, Kraft was not able to carry out due diligence until January 18, 2010, so Kraft only could base that statement on public information. The Panel Statement explains that, at a meeting on January 18 (at which Kraft secured board recommendation for a revised offer), Cadbury indicated to Kraft that it thought it would be difficult to continue to operate the Somerdale facility. Nonetheless, the statement was not retracted, and a revised offer was announced on January 19. On February 2, the offer was declared unconditional, and, on February 9, Kraft announced that, following discussions with Cadbury management, it reluctantly accepted it could not reverse the plans to shut Somerdale.

    The Code sets out certain limited requirements in terms of disclosures to be made by bidders of their strategic plans for the target company and the likely repercussions on employment and the target’s places of business. Kraft’s statement about Somerdale was not required under the Code. However, having chosen to make the statement, Kraft had to ensure that it satisfied the Code’s requirements for care, accuracy and fairness. As the Panel put it, only by Kraft doing so would Cadbury’s board and employee representatives be in a position to comment on such matters, as the Code requires.

    The Panel’s statement describes the two-part test it applies to statements of belief made in the context of a bid. The first part is subjective and requires that the belief be genuinely and honestly held. The second part is objective and questions whether there was a reasonable basis for the belief. The Panel found that Kraft’s statement did not satisfy the second, objective test, and that:

    Kraft should not have made the statements in the form in which it did in circumstances where it did not know the details of Cadbury’s phased closure of Somerdale and its investment in plant and machinery to make products for the U.K. in its new facilities in Poland. Without this information, Kraft’s belief, no matter how well-intentioned, that it could continue to operate the Somerdale facility on a commercial basis was, in the opinion of the Executive, not a belief which Kraft had a reasonable basis for holding.

    General Review of Bid Regulation in the U.K.

    The Cadbury bid has generated a wider debate about how the takeovers should be regulated in the U.K. This debate, which has subsided somewhat since the May 2010 general election, went beyond the Code and questioned, among other things, what duties should be owed by target directors and the responsibilities of institutional shareholders during the course of a bid. Representatives of the previous Labour government said that they would consider restating the nature of director’s duties if it was necessary to make it clear that directors should act as “stewards” and not “auctioneers.” The Financial Reporting Council subsequently issued a draft “Stewardship Code” setting out how institutional shareholders should approach their ownership of shares. Some politicians have suggested extending the government’s authority to approve deals on the basis of a national interest test. Representatives of institutional shareholders have also been vocal, among other things encouraging the government to consider how it might persuade investors to be long on U.K. equities rather than simply complaining that they take a short-term approach.

    In the light of the public debate, the Panel has issued a consultation paper on certain aspects of how the Code operates. However, breaking with its tradition of setting out specific proposals to change the Code, the consultation paper asks market participants for their thoughts on a number of suggestions for possible changes. These include whether:

    • a bidder should be required to obtain a higher percentage acceptance of its offer, rather than the current minimum of 50 percent, plus one share;

    • shareholders trading onto the target register during an offer period should be disenfranchised for the purposes of the bid;

    • greater details should be required for dealings disclosures and the threshold reduced for making such disclosures;

    • more information in relation to the financing of a bid and its effects on the target should be required, and whether target boards should be required to set out their views on the bidder’s intentions in greater detail;

    • independent advice should be given to target shareholders and not only the target board (and whether success fees should be restricted and all fees disclosed);

    • bidder protections should be increased;

    • the Panel’s regime for requiring bidders either to make an offer or walk away for six months (the “put up or shut up” rule) should be changed;

    • deal protection measures should be restricted under the Code as inducement fees (or “break fees”) currently are; and

    • previously removed restrictions on share acquisitions to restrain the speed of acquiring shares in the 15 - 29.99 percent band should be reintroduced.

    The Panel has requested comments by July 27, after which it is expected to issue another paper setting out the responses and its reactions.

    The Immediate Effect of Cadbury

    It is important to note that Cadbury was not a typical company in the eyes of the U.K. public. In addition to producing some of the nation’s most loved confectionaries, the company had deep, historic roots in local communities. Kraft’s statement about Somerdale was prominent and significant within this context and that, as the Panel said, enhanced the importance of the statement.

    There have been no immediate changes to the way takeovers are regulated in the U.K. as a result of Kraft; the U.K. remains one of the most open markets for corporate control in the world. U.K. boards must, however, as a result of Kraft and Prudential’s failed bid for AIA, demonstrate to shareholders that they are taking a robust and critical approach to bids. It will not be lost on them that the Panel has asked in its public consultation whether target boards should be required to explain their views on bids in greater detail. This may compel target boards to press for enhanced disclosure by bidders.