Takeover rules need to reflect the role of pension funds
The proposals in the UK Takeover Panel consultation published last month are regarded by many commentators as likely to make takeovers more difficult for bidders, especially hostile ones, and redress the balance to some extent in favour of bid targets. It’s generally seen to be a good thing. Meanwhile in the background major international M&A activity rumbles on and there are forecasts of an uptick in acquisition activity from all quarters of the world, especially from companies in emerging countries.
One key interest group that has been ignored by the Takeover Panel are pension funds. Since 2004, the Pension Regulator has required pension funds to assess the strength of the covenent between the pension scheme and their supporting company (the employer) in the event of change of ownership at the company or another major financial change. If there is a deterioration as a result of the takeover, then the bidding company has to address the resulting deficit in the pension scheme when it becomes owner.
This certainly gives pension schemes some leverage in takeover bids, but the leverage is mainly the ability to hold a company to account in the longer term (which can be 15 months) through the good offices of the Pension Regulator rather than any immediate ability to demand action. However, pension funds can seek to embarrass the bidder or putative bidder in the media to resolve matters more immediately. (And there have been a few good and effective examples of this, bringing recalcitrant bidders to the negotiating table with the trustee).
The issue is not just the length of time it can take to get a resolution for pension fund deficits. Also how far does the UK’s Pensions Regulator writ run? In recent cases the US courts have resisted undertakings required of companies to resolve scheme deficits by the Regulator. And bidders for UK companies are no longer just coming from Europe and US but increasingly from Asia in particular India and China. What chance of such undertakings being upheld in Chinese courts?
Already over 40% of UK plc shares are foreign owned. Companies from emerging markets with increasing amounts of cash are predicted to end up owning a much greater proportion of UK plc than currently.
So pension schemes need to find other ways to protect their members and the security of their pensions. One possible resolution is to ensure that the timetable for shareholders in a takeover bid applies also to the pension fund, which can be the key creditor of the company as well. Instead of finding negotiations kicked into touch for 15 months with all the uncertainty that entails for members, the scheme would have its deficit resolved within the takeover timetable – normally two to three months.