Panel upholds takeover move

The Takeover Panel has ruled out any form of substantive action to ban the use in takeover battles of "contracts for differences" - derivative instruments that allow the bidder to profit from the upward movement in the target's share price.

Trafalgar House and its investment bank adviser, Swiss Bank Corporation, caused a storm of controversy earlier this year by using the device to help cover the costs of bidding for Northern Electric. Some critics likened it to a form of insider dealing.

However, after consultation in the City the Panel has decided against outlawing the practice. The view has been taken that, since bidders are allowed under a Companies Act exemption to profit by purchasing ahead of a bid physical stock in their bid targets, there is no reason why derivative instruments that do the same thing should be treated differently.

A minor rule change to deal with the use of derivatives after the takeover bid has commenced, is to be proposed, but this would only bring them into line with other disclosure provisions.

Contracts for differences and other derivative transactions entered into by the bidder or its associates during the course of a bid will be made disclosable in the same way as dealings in the physical stock.

The Takeover Panel has consistently adopted a more relaxed view of the use of derivatives in takeovers than other City regulators. It sees little difference between the economic interest a derivative gives in a takeover battle and that given by real shares. The rules should, therefore, seek to treat them as the same, the Panel argues.

In the Trafalgar case the contract for differences caused added controversy since it involved transactions in the shares of a range of other regional electricity companies, as well as those in the target company, Northern Electric.

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