Takeover Panel thinks it can hold back the tide
Thursday 20 June 1996
The Takeover Panel's fiercely protective reaction to the proposed European directive on takeovers is therefore an entirely predictable and to some extent justified one. Contested takeovers are uncommon on the Continent and in some countries they are virtually unheard of. Where they do occur - and you have to think here mainly of Italy - there is often widespread abuse. Britain, on the other hand, has long experience of them, and although its system of non statutory regulation leaves a lot to be desired, it doesn't seem to work too badly. The idea that Brussels has anything to teach Britain about the regulation of takeovers, is plainly nonesense.
The directive itself is on the face of it a pretty innocuous one, the product of so much fudge, compromise and redrafting that it seems scarcely worth the paper it is written on. Many of its main elements and principles are borrowed from the British Takeover code anyway; it is also so vague that the ordinary business of the Panel probably won't be affected. Why then is the Panel so worked up about it?
The Panel's concern boils down to two issues. The first is that the directive would require statutory enactment (only in Britain, you understand, because nobody else is going to bother) which in turn would create legal rights. The Panel's decisions could thus be more easily challenged through the courts. Rulings in other countries would have to be accomodated within the British regulatory framework, however inappropriate to it they might be. The second is that provision would have to be made for compensation against cases of regulatory failure.
Most people wouldn't find much difficulty with either of these concepts but to the Panel they are anathma. According to the Panel, the first would greatly increase the cost and slow the process of takeovers. In some cases prolonged litigation would halt them entirely to the detriment of shareholder interests. Speed, flexibility and certainty, the strengths of the present system, would be lost. As for compensation, the idea that the Panel could itself be held negligent and liable is plainly too much to take for the gentlemen who run it.
The Panel is probably right about this directive; it looks like another piece of unnecessary meddling from Brussels. The problem is that in kicking up a fuss about it, the Panel has refocused the spot light on its own less than exemplary record. Self regulation is in many respects a fine thing, but is suffers from some obvious failings. Self regulation also tends to be self interested regulation. And here, it is the interests of City practictioners, and the lucrative source of revenue that takeovers provide them with, as much as those of shareholders, that the Panel is designed to protect.
Self interested regulation is often another way of saying lax regulation. It was the Panel, don't forget, which rehabilitated the ghastly Jim Raper. When he for a second time ran off with the loot, there was no compensation for those that had relied on the Panel's stamp of approval. More seriously, it was the Panel that lorded it over an unparalleled period of sharp practice and abuse in the mid-1980s, culminating finally in the Guinness scandal. There was compensation paid out on this occassion, but, to turn the Panel's arguements against it, only because of the threat of prolonged litigation. It wasn't the Panel as such which secured it. More recently, the Panel gave its blessing to a lucrative little corporate finance wheeze that another regulator, the SIB, later found to be tantamount to insider dealing.
It is the eternal lot of regulators that you see only the failures; the great raft of successes go largely unnoticed. Nonetheless, the Panel is being a little like King Canute in believing it can hold back the tide of international and statutory regulation. Today's markets are global, and today's takeovers, increasingly cross border. By defending its own little system against foreign encroachment, the City risks irrelevance and impotence. The Takeover Panel gains nothing by burying its head in the sand. Much better to ensure that the codes and practices so painstakingly evolved in Britain over the past thirty years become the standard for Europe. Our Continental partners are certainly in need of them.
The Securities and Investments Board has moved with commendable speed to review the London Metal Exchange, its trading and regulation. But anybody expecting a Barings or BCCI style attempt to tell the whole story in all its gory detail is advised not to hold their breath. The probe is limited in the sense that it is not setting out to identify what went wrong in the Sumitomo, Codelco or Citic scandals, all incidents in which large companies have lost a great deal of money on unauthorised copper trading in recent years.
We can therefore expect a worthy tome that will set out a new blueprint for the metal markets generally. It will also attempt to bring some regulatory control to the over the counter copper markets, a tall order since this is a world wide business. Perhaps most important of all, the review will look at how large customers of member firms of the LME can be brought under some form of regulatory control.
But in other respects, this is likely to prove an unsatisfactory exercise. Some of the people it most needs to talk to are under no obligation to talk at all. Sumitomo has made clear it will cooperate, but that will be voluntary and there will be nothing to stop it walking away if it is offended. If this had been a domestic scandal, there would by now be powerful calls for an independent inquiry not just into the lessons of what happened but into the causes. An attempt at full post mortem would already be under way.
The problem is that until it is known why Sumitomo lost so much and how the market rigging went on unchecked for so long, it will be hard for anybody to be really confident that the solutions are appropriate. Whether a wider inquiry is possible given the international nature of this affair, is open to question. The murkiest secrets of the whole affair may well be found in Japan rather than New York or London, and the Japanese are not going to open their books to the world unless it suits them. Any criminal actions will take years in the courts. The sad truth is that what actually happened here is likely to remain the subject of speculation and hearsay.
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