Change the tax code not the Takeover Code to encourage long termism

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By Damian Reece, Head of Business


Published: 11:19PM GMT 08 Feb 2010

In his sights is the City Code on Takeovers and Mergers. The Code, and the
Takeover Panel which administers it, are seen by some as hampering long-term
business building and value creation, while rewarding short-term
speculation.

It’s a hottish topic for politicians too because it strikes a populist chord –
UK assets are being carried off to all points of the compass because
speculators can play the Code, making it easy for bidders to trade British
companies for a quick buck. It’s damaging to the UK economy and UK jobs,
goes the argument. At its centre is really a debate about the best way to
encourage long-termism in the UK.

Industrialists such as Carr fear the Code allows bidders to lay siege to a
target company for months before being forced to make a formal, fully
financed offer. This leaves plenty of time for short-term arbitrage funds to
buy a target company’s shares in expectation of a deal going through, thus
making a quick and easy return. If enough “arbs” buy shares the
deal becomes self-fulfilling as they can easily help deliver the 50pc plus
one share needed for control to change hands.

There is probably sense in the Panel considering whether, in this age of
instant electronic communication, the formal bid timetable should be
shortened. But it is up to a target company’s management to ask the Panel
for a “put up or shut up” notice which forces a bidder’s hand and
triggers the formal clock to start ticking. However, it’s often existing
shareholders who want management to spend time carefully considering a bid
and canvassing opinion before taking action. And for every arb who buys,
another long-term shareholder must sell.

New rules will force investors with 1pc to disclose holdings whether they deal
or not and disclose positions in both bidder and target company, whether
using shares or derivatives.

But 1pc seems high and there’s a good case for lowering that to 0.5pc. More
radical is the view that a change of ownership should require more than just
winning 50.1pc of a business. For such an important event it’s suggested a
bidder require 60pc-75pc of the share register to win.

This goes too far. It distorts the notion and nature of what ownership is and
simply hands control to minorities. It would destroy a huge amount of value
in UK companies overnight.

No, to encourage long-termism, and discourage shareholders from selling out to
speculators, rather than tinker with the Takeover Code, more effective would
be a change to the tax code. Politicians could satisfy their own short-term
ambitions by rewarding long-term investment through lower capital gains tax
on a sliding scale. The same thing could be applied to income tax on
dividends. It would be a vote winner and reward long-termism, while fending
off the plague of speculation.

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