The Deal: U.K. Lawmakers Urge Curb on Hedge Fund Takeovers

By Laura Board

LONDON ( TheStreet) -- A committee of U.K. lawmakers Thursday, July 25, revived the debate about limiting the voting power of hedge funds during takeovers and called on the government to study merger policies in comparable jurisdictions amid skepticism about the benefits of M&A.

The Business Select Committee issued its recommendations in response to a year-old report by economist John Kay on how to combat "short termism" in the City. That report was commissioned in the wake of frustration about the-then Kraft Foods' ( KRFT) controversial 11.9 billion euro ($18.2 billion) purchase of Cadbury in February 2010, which was facilitated by the arrival of hedge funds on the storied confectioner's share register.

The decision to commission the Kay report also reflected wider disquiet about the rash of overseas takeovers of British companies in recent years and the ensuing impact on tax revenues and jobs. Thursday's report was the work of a committee of lawmakers chaired by Labor MP Adrian Bailey.

The lawmakers recommended that Business Secretary Vince Cable revisit the idea of introducing differential voting rights between short-term and long-term shareholders to restrict the role of hedge funds and arbitrageurs in bid outcomes. Though government members and regulators have previously dismissed the idea as unworkable, the committee said Cable told them "that his instinct was to go back and consider introducing differential votes."

"We recommend that the Department produces a feasibility study which clearly outlines the risks and benefits of introducing a policy that differentiates between shareholders and voting rights based on the length of time a share has been held," the lawmakers said.

Like Kay, the lawmakers Thursday stopped short of advocating any curbs specifically directed at foreign buyers, as did Business Secretary Cable when he responded to the Kay report last November. British law gives governments limited scope to intervene in mergers and the state has shied away from stretching the definitions of "public interest" and "national security" to facilitate meddling.

"We recommend that the Government conducts and publishes an assessment of the takeover regimes of other similar economies with a view to learning about the impact that takeovers have had on their companies and economies," the lawmakers went on to say. "Furthermore, it should summarize which positive elements may be incorporated into our domestic system to strengthen our economy and ensure that takeovers benefit, rather than damage our economy."

The lawmakers also called for a study about the effect on the U.K. of foreign takeovers of British companies over the past 25 years.

And they noted that Cable had echoed Kay's skepticism of the value of large mergers and acquisitions. Kay had in July 2012 urged the government to monitor M&A more closely.

"The Government has accepted Professor Kay's recommendation on mergers and acquisitions, but it is unclear what specific action it will take. We recommend that the Government clarifies what actions it will take over the next six months to be in a position to effectively monitor all merger activity in the U.K. In its response to us, the Government should outline what action it will take to engage with companies and their investors to ensure that any investment merger activity is to the long-term benefit of the U.K. economy," the report stated.

Much of Kay's report -- and the lawmakers' response Thursday -- was devoted to how to promote better "stewardship" of U.K. companies by institutional investors.

Out of left field, the lawmakers surprised observers by advocating a financial transaction tax as a means of curbing high-frequency trading that could be detrimental to the economy. They called for the government to conduct an impact assessment on the issue.

Such a tax is vehemently opposed by government members, including Chancellor of the Exchequer George Osborne, who is fighting the European Commission on the issue.

A Business Department spokesperson Thursday welcomed the "Committee's interest in the Kay Review and their contribution to this important debate" and said the government would consider the recommendations before responding in detail.

"We are fully committed to implementing the Kay Review and one year on have already made good progress, introducing reforms to the governance of executive pay, corporate narrative reporting and access to equity finance," the spokesperson added.

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