Will one consultation paper equal a rewrite of the takeover rulebook?
Since it was first announced last September, the hostile takeover of Cadbury by Kraft has dominated the M&A market more than any other in recent years. And developments over the past two weeks show that the impact is likely to be felt for some time yet.
Late last month the Takeover Panel took the unusual step of criticising Kraft publicly and, indirectly, its financial adviser Lazard, while last week also saw the publication of a consultation paper on the future regulation of takeover bids.
Although the rebuke was directed specifically at Kraft and, albeit by implication, Lazard, some cynics are also asking about Clifford Chance’s role as the food giant’s legal adviser.
“The panel doesn’t feel it has proper jurisdiction over legal advisers,” says one prominent City M&A partner. “They might look behind the scenes and send a private censure to Clifford Chance. I suspect that no one’s covered themselves in glory here.”
However, The Lawyer understands that Clifford Chance was closely involved in the panel’s investigation of the situation and was not subject to either public or private censure for its conduct.
In short, the panel’s censure of Lazard revolves around a statement made by Kraft to the London Stock Exchange made by Kraft that it would keep Somerdale, a Cadbury factory near Bristol, open, despite the chocolate maker already having earmarked it for closure.
While Kraft was found to have broken one of the rules of the Takeover Code, another provision, rule 24.1, requires that bidders give details of their plans regarding current employees of the target company. The panel concluded that Kraft had acted in good faith by saying it could keep the factory open.
Such mixed signals makes the advisers’ roles tricky, so working out which adviser is ultimately responsible can be far from clear cut.
As one lawyer familiar with the deal explains: “The financial adviser is the one with its head on the block and that’s the way the panel works.
“This [Kraft’s Somerdale statement] is about the verification process, and on that side it’s the law firm that tends to lead.”
So what does this mean for M&A lawyers in the future? Norton Rose corporate finance partner Paul Whitelock, who returned to the firm following a two-year secondment with the Takeover Panel last year, suggests that the historic division between legal and financial advice may be an anachronism, with firms’ advice becoming increasingly strategic.
“It [the panel] holds financial advisers more responsible than lawyers,” he explains. “But it raises an interesting point about whether lawyers will be in play too as they now play a bigger role.”
It is a view supported by another City M&A partner, who says: ”Formally Lazard are held responsible [for the statement], but in practice responsibility is going to be more and more put onto the lawyers.”
With those advisory roles becoming blurred, especially on the larger transactions, responsibility may also be spread; but according to another former Takeover Panel secondee, Eversheds corporate partner Stephen Nash, the onus remains on the client.
“You’d expect legal advisers to be involved in the verification process if a client’s making a statement in a published document,” he says. “But with a statement of belief one needs to rely on the client.”
The furore over Kraft’s apparent transgression, as well as the public outcry at Cadbury’s takeover by an overseas rival, has prompted what many in the City view as a protectionist backlash in the form of last month’s consultation document.
Its first paragraph states explicitly that the review of the panel rules was launched as a reaction to the “widespread commentary and public discussion” of takeover procedure in the wake of the £12bn transaction.
However, a straw poll of law firm partners across the City suggests that many of the suggestions included in the consultation document amount to little more than political sabre rattling.
“I think it’s a bit of a political frolic,” says one corporate partner at a top 10 firm. “No one believes it’s going to change much unless there’s massive pressure from Vince Cable.”
Liberal Democrat Cable has previously been a firm advocate of reforming the rules governing takeovers, but the coalition Government’s new business secretary may run into opposition from his Conservative colleagues, who are thought to favour a lighter touch.
The consultation document includes proposals to disenfranchise short-term shareholders and to increase the threshold of shareholder support required before a takeover can be pushed through.
Such changes would have a serious impact on an M&A market that is still struggling to get a post-recessionary kick-start.
“I think they need to be cautious in considering changes to the rules,” warns Clifford Chance corporate partner Guy Norman, who led the firm’s team acting for Kraft on the Cadbury deal. “There’s a risk of overreacting to the public mood and making changes that are ultimately damaging to the UK system of takeover regulation.”
Among the more likely changes is the shortening of the current 28-day period between the announcement of an intention to bid and the deadline for a formal offer, as well as a similar tightening of the ’put up or shut up’ deadline.
The move prompts the question of whether it would encourage bidders to turn to a small cartel of firms able to offer a large enough team to respond to tighter deadlines.
“Possibly, but that’s happening already,” says the top 10 source. “It’s much more likely to deter M&A activity in general.”
However, with the panel taking the unusual step of not making any specific recommendations in the consultation document, which instead outlines a series of suggestions, the consensus is that the document is paying lip service to demands for increased regulation.
Eversheds’ Nash adds: “What that suggests to me is that the panel is just trying to keep it politically neutral. Some people commenting around Kraft-Cadbury in particular might take a different view, but I’d hope that the panel will conclude that there’s no need for major change.”
There are plenty of M&A lawyers around the City hoping that he is right.