Kay Review: Government to be more active on takeovers

City of London skyline
Image caption Professor Kay was asked to investigate ways of encouraging more long-term thinking in the City

The government says it will take "a greater interest" in mergers and acquisitions involving UK companies as part of its response to the Kay Review.

Its comments came in response to the Kay Review into how to discourage short-termism in markets.

The government has decided it should "engage with companies and their investors... to promote investment which benefits the UK economy".

There will be no change in legislation, Business Secretary Vince Cable said.

Prof John Kay's report, ordered by Mr Cable, suggests discouraging acquisitions that would threaten a firm's operations in the UK.

The takeover of Cadbury by Kraft of the US in 2010 was criticised at the time for valuing a short-term share price gains above the long-term welfare of the company and its staff.

It lead to the closure of one of Cadbury's long-standing production plants near Bristol with the loss of 400 jobs.


The government said it supported Prof Kay's view that the duty of company directors to stakeholders requires decisions be made for the long-term, meaning that company directors can recommend rejecting a bid, even if the price appears to offer a good return, if they believe the transaction will destroy value in the longer term.

But the government's response says no changes to current regulation are needed because the Takeover Code, which governs takeover activity, was changed last year to reflect that view.

It said it "does not believe there is a case for blanket regulation", but hopes that its reforms, designed to empower shareholders and create more transparency in remuneration, will help bring about such good practice.

The report also argues against a general hostility to foreign ownership, an approach the government said it endorsed because it acknowledges the continued importance of open markets for growth.

The regional secretary of the GMB union, which campaigned against the Kraft takeover of Cadbury, welcomed the endorsement of the Kay report, but said there was another key issue that had not been addressed.

Paul Maloney said: "Too often, takeovers and mergers are driven by rent-seeking. The single biggest change would be if tax relief on interest payments for debts used to takeover companies was abolished. We would like to see action on this in the chancellor's Autumn Statement."

'Quick buck'

The Department for Business, Innovation and Skills endorsed Prof Kay's 10 principles for stock markets, which were designed to encourage more focus on the long-term returns from businesses rather than short-term profits.

Mr Cable said: "Too often, traders go after a quick buck rather than looking for sustainable returns based on sound stewardship of companies.

"This phantom chase was at its most frantic in the financial markets, where banks took dross and sold it as gold. But that lack of responsibility - the failure to take calculated investment risks based on sound principles - is more widespread."

Prof Kay called for the way that directors are paid to be changed to encourage more long-term thinking.

He suggested that bonuses should only be paid in shares that could not be sold until after an executive left the company.

Similarly, Prof Kay proposed that bankers and investment managers should receive bonuses either in the form of shares in the firms for which they work, or an interest in the investment funds they manage.

Again, such shares could not be sold until they left the company.

The application of Good Practice Statements for company directors, bankers and investors are to be encouraged by the government, but overall the report aims to reduce the number and frequency of company announcements if they are not relevant to the company's long-term strategy.

The government said it was working with its European Union counterparts to end mandatory quarterly reporting and help reduce the excessive focus on short-term earnings.

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