Pfizer/AstraZeneca and the Public Interest: Do Vince Cable’s Foreign Takeover Proposals Prescribe the Right Medication?

(by David Reader) When US pharmaceutical giant Pfizer sought to acquire its UK-listed counterpart AstraZeneca earlier this year, discussion centred around the supposed adverse impact that the merger could have on the UK’s science base, particularly in light of Pfizer’s questionable track record for asset-stripping and cutting investment in R&D. Although the proposed £69 billion takeover ultimately crumbled, the prospect of Pfizer returning with an improved offer later in the year has led many to ask whether the UK should adopt a tougher stance on foreign takeovers that threaten the national interest. The UK’s Business Secretary, Vince Cable MP, has since proposed new safeguards to counteract these perceived threats – but do they represent the best course of action in practice?

In the first of three proposals, Cable seeks to ensure that bidding firms adhere to the commitments they make in relation to a takeover by – in his words – removing the ‘wiggle room’ that exists within the current procedure. Indeed, despite the existing rules obligating firms to abide by any commitments they make during the bidding process,[1] firms can renege on these commitments where a ‘material change of circumstances’ arises.[2] The removal of this ‘get-out clause’, as Cable also describes it, would seemingly prevent firms from backtracking on their pledges. However, it would be wholly disproportionate to remove the clause in its entirety. The existence of the clause is, after all, a testament to the fact that there will sometimes be legitimate commercial reasons for firms to depart from their commitments, such as in times of unforeseen austerity or major regulatory reform.

The Business Secretary’s second proposal is to introduce tough financial penalties for firms who fail to honour the commitments they have made. At present, the harshest sanction the Takeover Panel can impose for such infringements are so-called ‘cold-shoulder’ penalties,[3] which prevent individuals from working on any takeover-related activity in the UK for a fixed period. Aside from some loss of reputation, the firms themselves face few repercussions as a result of reneging on their pre-merger commitments. Cable’s financial penalties proposal would offer one such repercussion but it faces a number of obstacles in terms of deterring such behaviour. For instance, how would these penalties be calculated and how high will they need to be in order to constitute a genuine deterrent? When one considers the tax savings that Pfizer was due to inherit as a result of its merger with AstraZeneca (estimated at £1.4 billion a year by one source),[4] one begins to appreciate how even a multimillion-pound fine could represent a mere ‘slap on the wrist’ where the acquiring firm reneges. Moreover, these fines will need to be capped to avoid having an adverse effect on the key national interests the policy is seeking to protect. Given that the fine would be imposed after the reneging firm has acquired the key national asset, the fine would effectively penalise the national asset as well as the acquirer.

Vince Cable’s third proposal seeks to amend the public interest provisions for merger control under the Enterprise Act 2002. He recommends the use of a public interest test as a ‘last resort’ measure that will only be utilised in cases where bidders refuse to undertake satisfactory commitments to protect the national interest. Exactly how Cable intends to achieve this is unclear,[5] but he told the BBC’s Andrew Marr Show that he would favour narrow and specific powers that would allow the Government to intervene and block mergers that were ‘very clearly against the national interest’ (citing the loss of R&D and pharmaceuticals as clear examples).[6] Of course, Cable appreciates that any such intervention on public interest grounds would need to comply with EU law if the merger meets certain turnover thresholds. But even if we assume that this new public interest test is compatible with EU law, there remains scope for firms to abuse this procedure. For example, if an acquiring firm genuinely believes that its takeover is likely to be blocked on public interest grounds, then that firm will naturally seek to offer satisfactory commitments to avoid this outcome, even if it has no intention of fulfilling those commitments. By the time the firm begins to renege on its commitments, the merger would already be complete and the option to block the merger on public interest grounds would no longer be available. The firm, meanwhile, would escape with a financial penalty established by Cable’s second proposal. As such, relying on the public interest test as a ‘last resort’ measure would therefore necessitate a difficult assessment of a firm’s ‘trustworthiness’ as well as the quality of its commitments.

Depending on what emerges from the Government’s consultation on these proposals, it is possible that the first two of Vince Cable’s suggestions will be introduced before next year’s General Election. However, based on the abovementioned reasons, there are doubts over whether these proposals would stand up to the task of safeguarding the national interest. With regards to the financial penalties proposal, in particular, it will be interesting to see whether alternative penalties (e.g. forced divestitures) will also be discussed during the consultation. If financial penalties fall short of providing an effective deterrent to firms reneging on their commitments, then Cable’s first and third proposals become equally ineffectual. Furthermore, at a fundamental level, the UK must ensure it takes every step to preserve its reputation as a nation that is open for business. To return to an interventionist merger policy would be completely undesirable,[7] not least for the protectionist message it sends to overseas investors.

[1] This obligation persists for 12 months or a period otherwise specified.

[2] The City Code on Takeovers and Mergers [PDF, 2.26MB], Rule 19.1.

[3] ibid, Section A, Part 11(b)(v). The Panel may also make a referral to the High Court under s. 955 of the Companies Act 2006 but this is, as yet, untested.

[4] Business, Innovation and Skills Committee, The Future of AstraZeneca (HC 2013-14), Q64.

[5] Interestingly, Vince Cable – as Secretary of State for Business – could exercise his residual power to propose new public interest grounds under section 58(3) of the Enterprise Act. Subject to Parliamentary approval, this could create the specific intervention power(s) that Cable is referring to, without the need for new primary legislation. See David Reader, ‘UK public interest mergers: uncertain times ahead’ (2013) 26 CCP Research Bulletin 18, available here [PDF, 4.65MB].

[6] A full transcript of this interview is available here [PDF, 143KB].

[7] See Andreas Stephan, ‘Did Lloyds/HBOS mark the failure of an enduring economics-based system of merger regulation?’ (2011) 62(4) Northern Ireland Legal Quarterly 539.

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