Reform of UK company takeover rules would boost productivity and investment, Parliamentarians told

Current regulatory options either entrench bad leadership or stop funding for research and development, Dr Matthew Cole, from the University of Exeter Law School said at an online Parliamentary event in Parliament today.

The prohibition of takeover defences – where a company at risk of being taken over cannot stop this from happening – could be one of the reasons why productivity growth, often associated with higher levels of spending on research and development, is much lower in Britain than other nations, Dr Cole believes.

Dr Cole told those at the event takeover defences should be allowed in some circumstances because the current regulations lead to sub-optimal economic outcomes such as inefficient companies. The constant threat of a takeover means the jobs of those on the board are at risk if dividends or share prices drop, so instead the board focuses on producing short-term results at the expense of the long term.

Dr Cole said: “The UK has been in the grip of a productivity growth slow down for over ten years. Growth has been almost zero. The UK economy is currently suffering due to COVID-19 and the Withdrawal Agreement with the EU is due to expire at the end of 2020. It is therefore imperative that the UK’s businesses are able to invest for the long-term in order to boost productivity growth and stay competitive in the world economy.

“Current UK takeover rules make it difficult for company boards to invest for the long-term benefit of their company. This may explain why the UK struggles to match comparable nations in terms of research and development spending, which is linked to greater productivity growth.

“The current regulations dis-incentivises long-term investment in research and development, as such investment diverts funds away from dividends and lower dividends mean lower share prices and greater likelihood of a takeover. This disincentive needs to be removed.”

Dr Cole said if takeovers defences were allowed they must be time limited for a specific number of years to ensure if management fails to deliver, once the period has expired, they can be removed and replaced by more efficient managers. The defence period must be approved by shareholders and be used to encourage investment. This ensures that boards are not able to use defences just to protect their position.

Dr Cole suggests the current regulator the Takeover Panel could make reforms or the law could be amended, to allow time limited takeover defences to be ‘pitched’ to investors who can chose to grant the company a period of time, free from the threat of hostile takeovers, to invest capital in specific projects.

Pitches should be scrutinised by independent third parties such as a merchant bank so that they can report to investors whether the projections and figures provided are reasonable and realistic.