Business View: Can managers look after investors when they're looking to buy their company?

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The Independent Online

Having read through a couple of dozen statements by companies being taken private in the past few months, I have decided to produce a standard form letter that might be of a little more use to shareholders than the existing "the company has received a bid approach ..." guff which tends to be emitted.

Having read through a couple of dozen statements by companies being taken private in the past few months, I have decided to produce a standard form letter that might be of a little more use to shareholders than the existing "the company has received a bid approach ..." guff which tends to be emitted.

"As the chief executive of [fill in your company here], I must reveal that we have received a takeover offer. It's from me, actually, backed by some old mates of mine who have gone into the private equity industry and made quite a lot of dosh. They point out that I could make a similar pile and not have to worry about troublesome shareholders moaning about my salary/contract/pension and lack of compliance with the bleeding Higgs report.

"My chums and I have been chatting for quite a while, though not really in talks as such or else I would have had to disclose this to you. Meanwhile, I've been running the company to the best of my ability, though not necessarily with the explicit objective of keeping the share price up, as this rather goes against my interests.

"Of course, the board, who were mostly appointed by me, will pore all over any proposal I put and will ultimately hire some rather expensive merchant bank to tell them it is a fair deal. And, by the way, we've paid a few thousand pounds of shareholders' money to our lawyers to say everything is above board, so that's OK as well.

"I hope shareholders will support selling the company to me in a way that they never really supported the share price while I've been running the company on your behalf."

To be serious, the current crop of "take privates" are causing a bit of a regulatory dilemma. If you are the person making the bid approach, as well as the person running the company, when do you tell the shareholders? And how are you to run the business while you are negotiating the deal to buy it? After all, you are supposed to be trying to do things to push up the share price. Yet pushing up the share price is the last thing you want to do, as it means you will have to pay more for the company.

Take the Debenhams situation. Permira, the dreadfully named financiers, first called up the department store's chief executive, Belinda Earl, for a chat in February. It then had a talk with the chairman, Peter Jarvis, and indicated what it might like to pay for the group. The independent directors then met, decided this was not enough (despite it being much more than Debenhams' share price) and told Permira to go away.

Meanwhile, Debenhams' share price went up and down like a yo-yo and Ms Earl said "No one is talking to us", which was technically correct as Permira was licking its wounds. But then Permira came back, asked for permission to negotiate with Ms Earl, and as the price was right, Debenhams said OK.

As the land lies at the moment, all of this is fine and above board. As is the deal Elliott Bernerd is cooking up at property group Chelsfield. He is offering £850m for the company. The timing is interesting, coming a few weeks after the group wrote off its entire investment in Global Switch, the internet hosting business, and the day after the Government backed London's Olympic bid (the athletics stadium will be next door to Chelsfield's Stratford regeneration project). The City clearly does not value Chelsfield as highly as Mr Bernerd does. And no prizes for guessing who I'd bet is right.

These are scores of similar deals floating around the City at the moment. But there is no set procedure for handling the appalling conflicts of interest caused when a manager, employed by the shareholders to run their business, decides he or she wants to be the owner of that business.

Sure, the Financial Services Authority has rules about when directors should disclose that they are in bid talks, and the Takeover Panel has rules about how a takeover is conducted. But you could argue that as soon as managers start talking with backers about a bid, they should admit to it. And there are those who feel that while the talks are going on, the directors should stand aside and not be involved in managing the business.

This would lead to anarchy. But the current system isn't protecting the shareholder. And, as the FSA says, protecting shareholders is its objective. It needs to do something, and soon.

j.nisse@independent.co.uk

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