Guinness assigns Panel to the dustbin of history
Jeremy Warner on why the Takeover Panel may find it difficult to survive the Guinness report
Saturday 29 November 1997
The Panel is already under attack from Brussels, which wants to harmonise takeover regulation throughout Europe on a statutory basis. Could it be that the Guinness report will prove the final nail in the Panel's coffin? The timing could hardly be worse. The Council of Ministers is due to review the Commission's proposed directive next Monday. The inspectors' findings don't exactly bolster the Panel's case for preserving Britain's unique system of non statutory takeover regulation.
In some respects the inspectors' conclusions about the Panel are unfair. No system of regulation, statutory or not, can ever be foolproof against those prepared to take the risk of breaking the rules and then lie about it. If there were such a system, we would live in a perfect world in which there would be no crime or amoral practice.
Even the Guinness inspectors, armed with the most intrusive and daunting powers available in the jurisdiction, were confronted by non cooperation and lies on a massive scale, to the extent that eleven years after the event, they are forced to admit to not being unable to get to the bottom of some matters.
All the same, the underlying premise behind the inspectors' criticism is a reasonable one - it is that all financial scandals are to a greater or lesser extent about a failure in regulation. If the responsible regulator is unable to prevent a scandal as momentous as the Guinness affair, then it is plainly culpable to some degree.
There were obvious signs in the years that preceded the Guinness affair of cavalier and questionable practice on a growing scale in the City. Before the fall, Roger Seelig, Guinness's merchant bank adviser, boasted in an interview that he didn't play by the rules, he made them.
His corporate finance colleague at Morgan Grenfell, George Magan, talked of using every available inch of the playing field in serving the perceived interests of clients. Even an organisation as apparently asleep at the wheel as the Panel could not have helped but notice the the arrogance of these remarks and be warned by them that things were seriously out of control. The Panel should have done something, but it didn't.
Strangely, however, this is not the main thrust of the criticism levelled at the Panel. Rather the inspectors concentrate on some specific failings in the the Takeover Code and the manner in which the Panel dealt with the Distillers bid and its aftermath.
For instance, the inspectors observe that the absence of a specific ban on the use of indemnified purchases of shares made it at least possible to claim that this practice was not disallowed by the Code. The inspectors also criticise the way in which the Panel ordered Guinness to pay compensation to Distillers shareholders of pounds 85m in the aftermath of the affair as "based on an unreal premise".
Further, the pounds 85m together with the pounds 54m Guinness paid to Argyll, the rival bidder, in settlement of litigation, would have been regarded by Mr Saunders and others as a reasonable additional expense to secure the prize of Distillers. In other words, the Panel allowed Guinness to get away with it. Despite having broken virtually every rule in the book, the retribution was tiny compared with the size of the reward.
"Once consummated, a takeover cannot realistically be reversed and the present case illustrates the difficulty of providing ex post facto justice for either a losing contestant or accepting shareholders", the inspectors remark in a statement of the blindingly obvious.
The report moves closer to the heart of the matter when it observes that the Panel's powers of investigation depended on a shared ethic of truthfulness which the inspectors found during the course of their investigation belonged at best to a byegone age. "In the face of a party prepared not only to break the rules in secret but then lie in response to the investigator's questions, the Panel executive was confronted by a task which its founders never contemplated."
Here again, however, the inspectors largely miss the point. The Takeover Panel is in fact as diligent and thorough a regulator as it is possible to find. Anyone who has dug into the archives, as I have, to discover how the Panel dealt on an hourly basis with the allegation and counter allegation that went on during the course of the Distillers takeover battle, cannot help but be impressed by the professionalism and thoroughness of its approach.
Unfortunately, this is not enough. An effective regulator also needs to hold a presumption of guilt, and its approach to the task in hand must be that of the crusader. Most important of all, it needs to be the outsider peering in. The Panel makes a valiant attempt at being these things, but because it is an organisation set up by takeover practitioners essentially for the benefit of takeover practitioners, it cannot ever truly provide this function.
Like all forms of self regulation, the Panel's main purpose is to adjudicate between members of the club, not that of providing a wider public interest sanction. Its natural inclination is to trust its members and it is bound to hold a strong presumption of innocence. This is what seems to have happened in the Guinness affair. Since then the Panel has considerable tightened up its procedures and it may well be that the awful nemesis of the Guinness affair is sufficient deterrent in itself to the City's wilder flights of excess.
Don't count on it, though. As we approach the top of the cycle once more, the instances of questionable practice, both in takeover activity and elsewhere in the City, are again multiplying. When there's a fast buck to be made, there are always those prepared to bend the rules if they think they can get away with it. The uncomfortable truth is that the Panel's old fashioned combination of poacher and gamekeeper roles continues to make this endeavour that much easier. The lessons of the Guinness scandal are clear; takeover regulation, like other forms of City regulation, should be put on a full statutory footing
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