UK minister wants harder centre to 'Cadbury Law'

Still unhappy with the takeover by the US food giant Kraft of the famous British chocolate maker, Vince Cable wants tougher protection against bids by foreign companies.

Soon after taking over Cadbury in a $10.8 billion deal, Kraft closed a factory it had pledged to keep open. Christopher Furlong / Getty Images

The Cadbury Law may prove to be Britain's first line of defence in future hostile takeovers.

Vince Cable, the UK business secretary, has made the assurance. Mr Cable wants a radical shake-up of Britain's takeover laws to make foreign takeovers of UK companies more difficult after the furore over the US$10.8 billion (Dh39.66bn) hostile buyout of the venerable British chocolate maker by the US food giant Kraft this year.

A government inquiry could result in new legislation, the "Cadbury Law".

Mr Cable's promise, made as he launched a wide-ranging consultation as part of a review on corporate governance last week, is not surprising. He was a vociferous critic of the Kraft deal and was disappointed by recent proposals from the UK takeover panel to tighten its rules after the Cadbury deal.

In particular, he is unhappy about the influence of short-term investors on the outcome of a takeover.

The Kraft acquisition is a case in point. In the days leading to the takeover, short-term investors such as hedge funds bought about 30 per cent of Cadbury, using their votes to force through a deal that made them fat profits from the chocolate maker's soaring share price.

Rubbing salt into the wound, soon after the deal Kraft shut down a Cadbury factory it had pledged to keep open and the Kraft chief executive Irene Rosenfeld received a 40 per cent pay rise, taking her compensation package to $26 million a year.

Ms Rosenfeld's leadership of the successful bid for Cadbury was "exceptional", said the pay committee, which also "noted her commitment to financial discipline".

Changes proposed by the takeover panel include: measures to penalise buyers who renege on commitments made to the target company in the bidding process; forcing banks to publish their fees relating to the takeover; and setting buyers a four-week limit once they have announced their intentions to make a bid or walk away.

The proposals are widely considered to be the most broad-ranging review of takeover rules in decades. But Mr Cable believes the panel did not go far enough.

It could have proposed restricting the voting rights of short-term shareholders "who have just come in to make a quick killing during a takeover bid", and raising the threshold for a "yes" vote from its present level of 50 per cent plus one share.

"On takeovers, I have concerns that too many are driven by short-term financial incentives," Mr Cable told delegates of the Confederation of British Industry (CBI) where he launched the consultation. "The takeover panel has announced some changes. We will seek to go further."

He also wants to look at how executives' pay packages affect their decisions on short-term investments and quarterly reporting to maximise profit. He wants directors and investors to suggest how rules can be changed to encourage companies to concentrate on long-term gains.

Mr Cable's attack on speculators chimes with a barrage of criticisms by industry leaders including Sir Terry Leahy, the chief executive of the UK's most successful retailer Tesco, Richard Lambert, the director-general of the CBI, and Paul Polman, the head of Unilever. Their message is clear: short-term goals driven by short-term investors are bad for business.

"We'd like to see more people who care deciding to invest in the business because they believe in it and its long-term potential, rather than buying a ticket on the stock market to have a bet on whether the stock goes up or down," Sir Terry told the London Business Forum last month.

Even Jack Welch, the former chief executive of General Electric and champion of improving returns to shareholders in the 1980s, has said it was a "dumb idea" to focus so heavily on quarterly profits and share price gains.

Others, however, say short-term shareholders can improve the performance of poorly run companies through their brief strategic campaigns. The length of time an investor holds a share is no indication of greater interest in how the company is run.

Post-financial crisis, the proposals by the UK takeover panel and Mr Cable's two-pronged mission to deter foreign predators and short-term investment may gain support.

But as has been proven time and again, rightly or wrongly, markets and money may still have their wicked way.