A week is a long time in politics: ARM Holdings plc (Part 2)

In the first part of this blog post, I looked a the takeover of ARM Holdings plc and how the Prime Minister welcoming the takeover appeared to run counter to her comments a week before in which she indicated that the government should have more powers to block takeovers. In the second part of this blog post, I will look at the ability of government and the regulators to prevent takeovers, and previous attempts by government to acquire greater powers to prevent takeovers.

The government’s ability to intervene

The government’s ability to intervene in takeovers is very limited. The dominant piece of legislation in this area is the Enterprise Act 2002. Sections 22 and 33 of the 2002 Act empower the Competition and Markets Authority (‘CMA’) to initiate investigations where a merger (the Act’s definition of ‘merger’ includes takeovers) has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services. If the CMA is of the opinion that a merger would lessen competition, it has a range of remedies available to it, including prohibiting the merger. The Secretary of State has the power to refer a merger to the CMA for investigation, but has no general power to intervene in mergers and the result of any investigation is a matter for the CMA alone.

The Secretary of State does, however, have the ability to intervene in a merger in several specific circumstances specified in s 58 of the 2002 Act. Originally, s 58 only allowed the Secretary of State to intervene in cases where a merger involved national security concerns. In 2003, the power in s 58 was expanded to include situations where a merger could affect accurate presentation of news or free expression of opinion in the newspaper industry, or where a merger could jeopardize sufficient plurality of persons who control the media – this was what permitted the government to become involved in NewsCorp’s bid to take over BSkyB. In 2008, the power in s 58 was expanded again to cover mergers that could affect the stability of the UK’s financial system – this permitted the government to intervene in Lloyds TSB’s takeover of HBOS.

Attempts to increase powers

Whilst the government’s powers to intervene in takeovers have increased over the years, its ability to intervene is still extremely limited. Attempts have been made over the years to increase the government’s powers of intervention. In 2008,there were rumours that the Russian state-owned utility company Gazprom was planning a takeover bid of Centrica. The bid never happened, but an amendment to the 2002 Act was tabled that would have allowed the government to intervene where a merger threatened the UK’s energy security. This amendment was not accepted on the ground that energy security would come within the national security exception noted above.

In 2010, the US company Kraft Foods took over Cadbury. Given that Kraft intended to embark on a closure programme of a number of Cadbury’s factories, MPs became concerned about predatory takeovers and a number of MPs (notably from the Liberal Democrat Party) advocated the adoption of a general public interest test. Thi was strongly criticized and, unsurprisingly, the new Coalition Government stated that it had no plans to amend the 2002 Act to increase its powers of intervention. The Takeover Code was amended to improve transparency. The ultimately failed takeover attempt by Pfizer of AstraZeneca brought the takeover issue to the fore again. However, the debate was now more focused on the ability to government to enforce assurances made by a bidder, and no further changes have been made to the government’s ability to intervene in takeovers.

Conclusion

As the above discussion has shown, the government has shown itself very reluctant to interfere in takeovers, largely for fear of creating the impression that foreign investment is not welcome. Theresa May’s comments indicated that the matter might be about to come back onto the government’s agenda and the government’s powers of intervention might be increased. Sadly, her reaction to the ARM Holdings takeover would appear to indicate that the Prime Minister favours the status quo much more than her earlier comments indicated.

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