When Winston Churchill reached a pitch of exasperation with Ramsay Macdonald in the 1930s, he told the story of a child who, on visiting the circus and watching a weak-looking and strangely shaped performer, asked: "Mummy, what is that man for?" I have been asked to address the same question in relation to the Takeover Panel.
The panel is a remarkable institution. A voluntary unincorporated association, exercising public functions, and creating a system of quasi-law in competition with the general framework of company law.
It is a a body that originally claimed to be unamenable to judicial review, and in whose affairs the courts, while rejecting this claim, have nevertheless been reluctant to interfere. Given its voluntary nature it is exposed to attack under Article 86 of the Treaty of Rome if it were to abuse its dominant position as a regulator. But given the public functions it exercises, it is subject – as it has recently recognised – to the obligations that arise in relation to public authorities under the Human Rights Act.
None of this is to decry the merits of the panel. Its rules are sensible, and form the basis of the current draft EU Takeover Directive. Its operations are fast and flexible; and its officials are helpful and courteous. But the House of Commons was on the side of historical inevitability when, in considering what is now the Financial Services and Markets Act 2000, it allocated the ultimate control of market abuse in a takeover context not to the panel, but to the statutory Financial Services Authority.
Under the proposed EU Takeover Directive, it would have been necessary for the Takeover Panel to be given some sort of legal status. However, at least for the present, the Takeover Directive is mired in the sands of an EU conciliation process after the European Parliament voted by a majority to permit 'poison pills' as takeover defence mechanisms.
So the issue of the status of the Takeover Panel should be assessed on first principles. To lawyers, it is repugnant that a public body exercising such significant regulatory power in a commercial context should merely be a voluntary association.
To those who point to the well-established record of the Takeover Panel of dealing flexibly and quickly with issues that arise in the context of takeovers, and thereby derive an argument against statutory establishment, the answer must be that statutory establishment on the one hand, and flexibility and speed on the other, are not inherently mutually incompatible; and the precedent is the Bank of England's equally fast and flexible operation of the Exchange Control regime before its abolition in 1979.
The inherent problem with the panel is that its staff are poachers temporarily turned gamekeepers. This gives them an insider's knowledge of the takeover game; but it does not encourage them to look broadly at the field of activity that they have the responsibility of regulating.
What is that missing broad view? In evidence to the present Company Law Review (CLR), the point has been made that the takeover system is too heavily financially based.
One of the key proposals of the CLR is that listed companies should be obliged to publish annually an Operating and Financial Review (OFR), which would go beyond the traditional form of historic financial reporting to a much more broadly based set of indicators, including a developmental review of a company's business, including market changes, new products and services, and changes in market positioning; a company's purpose, strategy and principal drivers of performance; and the dynamics of a company's business.
There is a specific related proposal by the CLR whose significance has so far been under-appreciated. In the event of a takeover bid, a revised OFR will need to be published; in the case of a recommended offer, this will presumably be a single OFR relating to the proposed enlarged group. This will significantly change the culture of takeovers, because those making offers will no longer be able to get away with anodyne statements; for example, they will have to be much more specific about earnings enhancement or dilution.
The proposal will have a much greater impact on hostile takeovers. The conventional wisdom is that the board of an offeree company that does not welcome a bid should limit its response to the fairness or otherwise of the consideration offered.
For example, the directors of BOC could have chosen to contest the proposed takeover by Air Products. The eventual decision by the US competition authorities demonstrated after the event that there were good grounds for resisting the bid. Yet the board felt obliged to take the advice of lawyers who claimed that it was their duty to shareholders to recommend the bid. Likewise, the directors of Manchester United were advised that they were obliged to recommend without reservation the BSkyB bid for the club, when they (or at least some of them, including Greg Dyke) would have preferred to warn against the undesirability of the fate of a football club becoming the cat's paw of a multinational media enterprise.
Here is the point of conflict. The City code on takeovers and mergers obligates directors of offeree companies to pronounce on the fairness and reasonableness (or otherwise) of the price offered under a hostile bid. That is too often misinterpreted as being the totality of their duties in such a situation, and mis-stated as being such by financial and/or legal advisers. But, under company law – even in its present unreformed state – it is perfectly legitimate for directors of an offeree company to say:
"This is a reasonable price. But the consequences of selling to this bidder at this price will be undesirable for our company, and we recommend against selling."
Their reasons may include the impact upon the industry, its customers, its employees, its community or its future potential.
But this broader view does not fit in with the present takeover game. Nor is it likely that a self-regulatory body will ever have the independence to stand back and look at such wider issues.
Is this an argument for merging the functions of the Takeover Panel into the FSA? Not necessarily. The FSA has enough to do as it is, and there is much to be said for niche expertise. Unless the panel is given the standing that comes with genuine independence, and a composition to go with it, that is inexorably the likely outcome.
Philip Goldenberg is a partner in the corporate finance practice at SJ Berwin & Co.