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In this regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.

Ash Mehta                       

Horses don’t always run

The Takeover Panel may be a thoroughbred but why does it sometimes stay in the stable

Smiles are appearing again amongst corporate finance firms in the City. September has been a strong month for corporate finance fees with over £200 million being raised or planned to be raised through secondary fundraisings.

 On top of that, M&A activity seems to be on the way back as evidenced by Kraft’s “bid” of £10.2 billion for Cadbury. This may well signal the beginning of a raft of M&A activity in the City; as in many cases, what begins in the FTSE-100 often filters down into the small cap arena. That may already be happening, with full-listed Consort Medical recently bidding £16.5 million for AIM-quoted Medical House. 

Central to the orderly management of the bid and defence processes during M&A activity is the Takeover Panel. The “Panel” was formed in 1968 and for most of its existence it has operated on a gentlemen’s agreement with no statutory powers but an ability to effectively blackball City advisers who don’t abide by its rules and decisions. Despite that lack of explicit power, it has built a reputation and international recognition for its flexible and pragmatic approach in takeover situations. In 2006, it finally acquired statutory powers, via the Companies Act 2006, being designated a supervisory authority, by the then DTI, in response to an EU directive.

The Takeover Panel’s activities are governed by the Takeover Code (“Code”) which it publishes on its website. The primary purpose of the Code is to ensure that shareholders are treated fairly and get the information they need to decide on the merits of a takeover and that shareholders of the same class are treated equally by an offeror. The Code does not cover issues such as the commercial or competition aspects of a takeover.

The Code, as you’d expect, is fairly comprehensive and runs to 282 pages covering a whole range of topics in detail. So, you’d think that as a private shareholder you would be well protected under the Code against being disadvantaged by an offeror. This is something of particular concern if M&A activity does indeed filter down to the AIM list, because the offeror for an AIM company might well be the company’s management team. This is especially possible now at a time when valuations are still depressed and management teams may be able to see light at the end of the recession tunnel and be considering buying “their” companies back on the cheap before the expected upturn arrives.

However, don’t be too pleased about the comfort that the Code provides you because if the AIM company in which you are a shareholder is subject to a bid you may not be covered.

Why? The situation has cropped up a number of times where an overseas company on AIM is not covered by the Code because it is not resident in the UK. This is described in section 3 of the Code as companies which do not have their “place of central control and management in the United Kingdom, Channel Islands or the Isle of Man” are not subject to the Code.

For example, in the past there have been incidents where shareholders have been surprised, or should I say distressed, to find that they are not afforded protection under the Code because their company’s control and management is not in the UK. The most notorious of these was the 40% stake purchased by Roman Abramovich in Highland Gold. Under the Code, any purchase over 29.9% would trigger an automatic bid for the remainder of the shares but as Highland Gold was not subject to the Code, Mr Abramovich effectively secured control of the company without paying a controlling premium price to all of the shareholders. In another case, ProfMedia, a media group controlled by another Russian oligarch Vladimir Potanin, was able to purchase 55% of AIM-quoted Rambler Media, again without having to make an offer to all shareholders.

So, what’s the answer? Well, you could avoid investing in companies that have their head office overseas. But in an interesting conversation I had with a member of the Panel, I managed to extract some information that even avoiding such companies may not protect you. 

From the Horses Mouth

I asked the member, let’s call that person “TP”, about the confusion over which “overseas” companies were covered and which were not. I expected to be told that it was dependent on where the head office is based (not necessarily where the company is registered), but it’s actually more convoluted than that. The “place of central control and management of a company”, TP told me, is where the majority of its directors are resident.

I don’t know about most private investors but I’m not that intimate with the directors of companies I hold AIM shares in. Certainly not intimate enough to ask them where they are resident, and I suspect if I asked them they probably wouldn’t tell me (or even understand the significance of the question!). So in an era of increasing transparency why would the Takeover Panel use such an opaque criterion to decide which companies are covered and which aren’t?

I figured it must be down to some obscure misdrafting perhaps in the Companies Act 2006 or even in the FSA’s regulations, and asked whether it was down to the FSA or the government to make the changes necessary to make the scope more transparent. “Oh no, we’ve got the ability to change it”, TP replied somewhat nonchalantly. I was too stunned by the response to ask why they didn’t.

..the AIM company in

which you are a

shareholder may not be covered

....it's actually more convoluted than that

I was too stunned by the response to ask why they didn't

In summary, we have two problems. Firstly, not all AIM-quoted companies in the UK are covered by the Code. Secondly, of those companies, it’s often difficult to know which are and which aren’t. With increased mobility and remote working these days, there is nothing to stop a director of a company moving home from the UK to say France or Spain or the US tipping their company from being covered to not being covered by the Code, and you as a private shareholder would be none the wiser.

During the last year or so with M&A activity having all but disappeared, the Panel has been kept busy reviewing its role and activities; in March 2009 a new edition of the Code was published and there is currently a consultation underway on disclosure requirements during a takeover period.

Whilst M&A activity is still low and before the upturn comes, the Panel might like to spend some time considering clarification of the scope of the Code to cover overseas AIM-quoted companies, or at least having clear criteria which shareholders can use to understand whether a company would or would not be covered by the Code. If the AIM company you hold shares in was subject to a bid, would the thoroughbred Panel be a runner or would it stay in the stable? You wouldn’t want to bet on it would you?

You wouldn’t want to

bet on it would you?

ash@orchardgrowth.com

Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.

 © Ash Mehta

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