Introduction
It is widely recognized that the hostile takeover is a mainstay of shareholder value corporate governance.Footnote 1 A takeover is hostile where a bidder makes an offer directly to the shareholders to buy up all the shares of a target company, without the consent of, or even in the face of opposition from, the incumbent directors of the target. Once a bidder has acquired sufficient voting shares to take control of the general meeting of shareholders, they can replace the board of directors and run the company in their own financial interests. Where the hostile takeover is able to operate, it puts pressure on company directors to prioritize the short-term financial interests of shareholders. By the 1960s, the academic literature recognized that the mere threat of hostile takeover will suffice to increase the pressure on directors.Footnote 2 Fligstein and Shin date the “shareholder value conception of control” to the economic crisis of the 1970s, emerging “as an ideology and as a set of strategies” in response to managers who “were sitting on undervalued assets that were earning low profits and, not surprisingly, their stock prices reflected the judgment of the market as to how well they were doing.”Footnote 3
This article argues that the hostile takeover was normalized in the United Kingdom at the beginning of 1954, considerably earlier than in the United States.Footnote 4 The hostile takeover brought with it a new social norm: shareholder value. Company law does not require directors to maximize shareholder value in the sense of prioritizing the short-term financial interests of shareholders.Footnote 5 Instead, directors have considerable latitude, subject to the various ways in which shareholders can hold the directors accountable. As shareholders were largely passive in the first half of the twentieth century, directors and managers were generally considered to have gained significant discretionary power to identify who would benefit from company decision-making. This was reflected in a huge growth in managerialist theorizing.Footnote 6 Writing in 1955, Gower, the UK’s leading academic company lawyer, claimed that “So far at any rate as England is concerned public opinion seems to have hardened … so that it has become almost an accepted dogma that management owes duties to ‘the four parties to industry’ (labor, capital, management, and the community)”.Footnote 7 Gower then became increasingly managerialist as time went on, repeating the claim that company law was “unreal” because a company’s “relationships with its workers, the consumers of its products, and the community as a whole, are of equal if not greater importance” than those with its shareholders.Footnote 8
This article argues that, despite widespread acceptance of managerialist ideology during the early 1950s, the emergence and normalization of the hostile takeover had already planted the seeds of change. As the hostile takeover became a growing threat, company directors had to give priority to the interests of shareholders if they wanted to preserve their control of companies. The story begins with shareholders in a weak position, both legally and politically. Things began to shift when the door was opened to the hostile takeover by legal changes in the Companies Acts 1947-48. A new group of bidders quickly took advantage, identifying targets with undervalued property on their balance sheets, then took control of those companies, liquidating the property and using the proceeds to finance their next round of bids. In this endeavor, they were assisted by financial institutions, the insurance companies in particular, which were keen to get their hands on high-quality property, and entered sale and leaseback transactions with the bidders. As we will see, key actors in the relevant branches of central government were not expecting the emergence of the takeover, and policy was in a state of flux during 1952 and 1953. However, by the beginning of 1954, there was no longer any significant opposition in principle to takeovers, although the Bank of England remained sensitive to the effects that shifts in public opinion might have on its position as the primary regulator of the City of London.
This article makes two main contributions to the existing literature. First, it fleshes out the fairly minimalist accounts of the early years of the hostile takeover that are already in existence.Footnote 9 It shows how the hostile takeover, which first emerged in 1952, took the corporate and financial community, as well as the government (including the Bank of England, Board of Trade and Treasury), by surprise. The media led the way in cheerleading for the hostile takeover, arguing that takeovers were both “natural” and efficiency-enhancing. In particular, the more detailed account offered here highlights how a number of companies approached the government for help in the face of unwelcome bids. Previous research has not identified that those companies included Sears and the Daily Mirror, focusing instead on the very public controversy surrounding the Savoy bid.Footnote 10 Against a backdrop of media outcry that the attempted defense by the Savoy Hotel heralded the end of capitalism, the Government was struggling to define the new phenomenon and reach consensus on which aspects of it were objectionable. The evidence from the archives suggests that media coverage, in turn, was a constant influence on government policy, pushing it in the direction of accepting takeovers as legitimate.
While the Governor of the Bank of England and the Chancellor agreed in public that “speculative” takeovers should not be financed, they left “speculative” undefined. Behind the scenes, however, a consensus gradually emerged that there was little that could or should be done about takeovers, the Board of Trade looking on hostile takeovers more favorably than their counterparts at the Treasury, and the Governor consistently opposed to any formal intervention. The Bank of England continued to tell financial institutions to exercise caution, but when the British Insurance Association admitted financing hostile takeovers through sale and leaseback transactions, the Governor acquiesced, and this practice was also well known to the Treasury. From 1954, it was recognized across Government that: companies were under pressure to raise dividends and sell off assets in order to deter takeover bidders; companies only had limited options to defend themselves; and that there was little that could be done by Government. The threat of hostile takeover was already exercising a powerful influence over the decisions of corporate management.
Second, in arguing that the hostile takeover had been normalized within government by the beginning of 1954, the article also offers a different interpretation of the evidence from that found in Richard Roberts’ seminal 1992 article, as well as in more recent work by Neil Rollings.
It makes a number of clarifications and adds nuances to Roberts’ influential account. It disagrees with Roberts’ view that, in the Spring of 1953, “the Bank’s sympathies plainly lay with the ‘victim companies’ and take-overs were regarded as against the national interest.”Footnote 11 It also disagrees that “by mid-November 1953, the authorities were agreed that take-overs were politically undesirable and economically harmful.”Footnote 12 In fact, as we will see, the picture was much more complex than that, and the balance of sympathy was in support of the bidders, or at least it was recognized that there was little that could—or should—be done to interfere with what was generally viewed as a market transaction. The Savoy Hotel affair, in particular, created an enormous media storm, and from that point onwards, there was no support for takeover defenses and no longer any serious pushback against bidders within government.
The article also questions Roberts’ argument that the Bank was trying to stop takeovers in December 1953 by sending letters to banking and insurance industry associations so that bidders were “cut off from credit”.Footnote 13 While there was much discussion about “speculation”, it is far from clear that the “authorities viewed the finance of take-overs as speculation and wished it to stop”.Footnote 14 As we will see, the Governor knew that the insurance companies were financing the bidders, but acquiesced and certainly did not instruct the insurance companies to cease financing bidders. It therefore calls into question Roberts’ claim that by cutting off bidders’ access to finance, the authorities ensured that takeovers “did not become “normal commercial exercises” in the mid-1950s but remained ‘financial curiosities.’”Footnote 15 The article shows that companies, from small breweries to the Daily Mirror, which owned property were worried about takeovers during the early 1950s, and that the media was awash with discussion about the bids. While takeovers became more frequent during the late 1950s and during the 1960s, there were 162 takeovers of listed companies between 1952 and 1955, an unknown number of which were hostile.Footnote 16 There was also an unknown number of takeovers of private companies.Footnote 17 As such, the threat of takeover would have become an important managerial consideration—and a counterweight in practice to professed managerialist beliefs—by early 1954.
Finally, it traces acceptance of the hostile takeover within government to the beginning of 1954, some five years earlier than Roberts, who relies on a 1959 memorandum written by then Chief Cashier Leslie O’Brien to identify a shift in the Bank of England’s thinking.Footnote 18 In making this argument, the article also rejects Rollings’ more recent claim that normalization came even later. In support of this position, Rollings refers to continued unease from the Governor of the Bank of England about hostile take-overs as late as 1959.Footnote 19 Rollings claims that Roberts’ account is “oversimplified” and even “misleading”Footnote 20 because Roberts’ narrow range of sources omits the Treasury and the Board of Trade. This article trawls the same archival evidence as Rollings, albeit supplemented with the media coverage at the time, but offers a different reading. The Governor may well have expressed concern about “developments in this field of activity” in 1959, but as we will see, behind the scenes, he had given up trying to prevent insurance companies from financing takeovers by late 1953. Indeed, shortly after the 1959 memo cited by Rollings, the Governor convened a Working Party to develop a code of conduct for acquisitions and mergers, which is not the action of someone who had fundamental objections to takeovers.Footnote 21 In fact, the Governor’s concern in 1959 was not with the principle of hostile takeovers, but rather with how they were being conducted and the resultant public concern (Clore had just launched a bid for Watney), which was creating a growing danger of regulatory intervention.Footnote 22 Moreover, the Governor’s concerns probably only related to certain potential targets.Footnote 23 For example, the memo cited by Rollings records the “Governor’s nightmare … that one day he might wake up to find some successful bid had been made for one of the Banks.”Footnote 24 Behind the scenes, the Governor was taking legal advice about how takeovers of banks could be prevented, rather than about takeovers more generally.Footnote 25 In sum, the Governor acquiesced to takeovers in principle from the end of 1953.
The article is structured as follows. It begins with an account of the situation before 1952. This highlights how difficult it was for control of companies to change hands, drawing on the work of Rutterford and Hannah, as well as the little known account offered by Tabb. It then highlights how the changes to the Companies Act from 1947-48, following the recommendations of the Cohen Committee, made corporate control more contestable and laid the legal foundation for the emergence of the hostile takeover from 1952. Finally, it highlights the precarious position of shareholders in 1951, a position that would change significantly the following year. The third section explores the emergence of the takeover bidders and their reception in the media, highlighting that the media recognized very early on that there had been a fundamental shift in favor of shareholders. The fourth part traces the development of government policy during 1953 and the ambiguous but public consensus that emerged at the end of that year that only “speculative” takeovers were objectionable. The final part explores the efforts of the Bank of England to restrict the supply of finance to unwelcome bidders, which ended with the Bank’s quiet acquiescence to the financing practices of the insurance companies. From this point, there was no longer any meaningful opposition to the hostile takeover. A short conclusion follows.
The Situation Before 1952
While the separation of ownership and control may have been largely completed in listed UK companies before 1914,Footnote 26 shareholders were not entirely passive. Numerous shareholder associations in specific industries were formed during the early twentieth century, while in 1932, a short-lived Shareholders Protection Association was formed to assist shareholders bringing claims against boards of directors.Footnote 27
However, even if they were well organized, it was hard for shareholders who were dissatisfied with the company’s performance to change the board. Before 1948, hostile takeovers were very difficult—the board of the target company normally had to consent to any change of control. As Tabb puts it, “Before 1948, where the directors of an offeree company expressed strong opposition to a bid it was immediately withdrawn.”Footnote 28 Culture no doubt played a part, but the main reason for this was that company boards were entrenched through a variety of legal devices.Footnote 29 In sum, as long as the directors and their associates could block a 75 percent special resolution—which they usually could,Footnote 30 whether by holding more than 25 percent of the votes or by issuing non-voting shares—they could not be removed. Nor could the shareholders interfere with their management of the company unless they could pass a 75 percent resolution, either to give instructions under the default articles or to change the articles to allow them to give instructions.Footnote 31
The inability of shareholders easily to override the decisions of directors does not mean that there were no changes of board control or amalgamations between companies. In a pioneering but largely overlooked 1981 article, Tabb details the four ways in which takeovers could be completed before 1950.Footnote 32 The first was very rare in the UK: it was something like a proxy fight in the US, albeit that the bidder would buy shares, then attend the general meeting and try to persuade the other shareholders to appoint them as chairman. Second, the bidder could gain approval from the target board; these friendly takeovers “were really amalgamations” and “were the most common prior to 1950.” They can be seen in the anti-competitive restructuring of small businesses under a holding umbrella, with the directors and managers generally remaining in control.Footnote 33 Third, a third party, such as the target’s bank, might put pressure on the target board to accept.Footnote 34 Finally, the bidder could persuade the target board to withdraw its initial opposition either by offering a very generous price or paying the directors’ compensation for loss of office.Footnote 35
To Tabb’s four ways of changing control, Rutterford and Hannah have added a fifth way of changing control in the face of board opposition, albeit one that did not involve acquisitions of shares, and so is not a hostile takeover as defined in this article. In their research into the influence of shareholder committees of investigation appointed under the Companies Act 1862, four out of their sample of 50 produced a shift in board control in a manner somewhat akin to a proxy contest. These committees could be proposed and adopted by shareholders by majority,Footnote 36 their costs could be shared among shareholders or reimbursed by the company,Footnote 37 and they operated as a means of challenging directors and management who did not meet expectations or who benefited from conflicts of interest. Most importantly, they acted as an important means by which directors could be removed from office before the Companies Act 1948.Footnote 38 Where a committee recommended removal of all directors, they sometimes resigned, while in other cases, shareholders voted against reappointment.Footnote 39 Committee members were sometimes appointed to the Board after they had reported.Footnote 40 This happened in the extraordinary situation in 1919 in Schweppes, where the general meeting failed to pass a special resolution removing the existing directors, so passed resolutions increasing the number of directors and appointing committee members, following which the incumbents resigned.Footnote 41 After 1945, these committees died out, as company affairs became more complex, individual shareholders more dispersed, institutional investors formed their own protection committees, and the market for corporate control emerged after the reforms of 1948.Footnote 42
This was the context in which the Cohen Committee was appointed in 1943 to consider amendments to company law, focusing on “the safeguards afforded for investors and for the public interest.”Footnote 43 In the event, the Committee’s 1945 report recommended a number of changes to company law which dramatically changed the balance of power between directors and shareholders when they became law in the Companies Act 1947 (and were then consolidated with existing provisions into the Companies Act 1948).
Much has been written about the Cohen Committee and the reforms of 1947-8, with the focus primarily on the accounting reforms. For example, both Maltby and Bircher have shown that the 1947 Act built on public arguments that financial reporting should be used to ensure accountability, both to shareholders and to the public.Footnote 44 However, the Cohen Committee focused on reporting to ensure accountability to shareholders. In Maltby’s telling, the modernizers who viewed shareholders as paramount won out over the traditionalists who thought boards ought to be in control of what was disclosed. Bircher also showed how the Committee’s recommendations of mandatory profit and loss account, balance sheet showing true and fair view, and consolidated accounting were driven by submissions of the ICAEW, but were also “premised on the newly perceived need to protect disenfranchised shareholders”.Footnote 45 Perhaps most influentially, Hannah offered a “tentative explanation” that more reliable publicly available information contributed to the emergence of the hostile takeover by facilitating direct bids to shareholders where incumbent directors were refusing to cooperate.Footnote 46
The reforms of 1947–1948 also made a number of important changes to company law, and their importance to the emergence of the hostile takeover is increasingly recognized.Footnote 47 The most significant was probably the introduction of a power for the shareholders in general meeting to remove a director by simple majority at any time, regardless of any provision in the articles or any contract with the company.Footnote 48 The origins of this recommendation are obscure, with no discussion in the Committee, and it may have simply come from Cohen himself.Footnote 49 In any event, it allowed a new controller quickly to undo all the mechanisms by which directors tended to entrench themselves, making control of many companies contestable overnight. Before this change, a new controller would have had to rely on the incumbent directors and any entrenched managing directors resigning voluntarily, or on retirement by rotation, which would involve waiting two years to take control of the board (and would not work if retirement by rotation had been disabled in the articles or managing directors exemptedFootnote 50). In giving a new controller a legal right to remove incumbents quickly and cleanly,Footnote 51 it would have reassured the new wave of bidders—and especially those who financed them—that companies could be restructured quickly following an acquisition of control, and properties could be sold off.
Beyond the removal power, the Committee recommended that company directors should be required to disclose and obtain shareholder approval for any payments made to them by way of compensation for loss of office, particularly in connection with share transfers.Footnote 52 This addressed the fourth of Tabb’s ways of launching a takeover, namely, paying the directors to give up their positions, making it more shareholder-friendly. There was a recommendation for changes to the “squeeze out” rule, originally introduced in 1929,Footnote 53 which allowed an acquiror of 90 percent of a company’s shares compulsorily to acquire the remainder of the shares, but could not be used by an acquiror who already owned 10 percent of the shares before making the offer.Footnote 54 The Committee’s recommendation to allow an acquiror in this position to use the power would subsequently benefit bidders, like Clore, who secretly bought up shares on the market before launching a bid by excluding those holdings from threshold calculations.Footnote 55 Finally, the Committee recommended the introduction of a sell-out rule, allowing those who did not accept the offer to force the bidder to acquire their shares where they acquired 90 percent of the shares.Footnote 56 As is recognized now, this rule operates to protect target shareholders from coercive bids.Footnote 57
It seems unlikely that the Labour government that was in power in 1947 intended to create space for the hostile takeover to emerge. While the Labour government insisted on dividend restraint, it had been heavily focused on nationalization between 1945 and 1948,Footnote 58 with the Cabinet in turmoil over whether the nationalize the steel industry in 1947.Footnote 59 As such, it paid little attention to matters of company law.Footnote 60 Nor was there any meaningful debate in Parliament about the shareholder power to remove directors.Footnote 61 Indeed, there is no evidence that anyone in government—or in Parliament—anticipated what was going to happen next. In contrast, key members of the Cohen Committee, including Cohen himself and Professor Goodhart, viewed shareholder control over directors as fundamental.Footnote 62 Despite a mandate that included considering the “public interest”,Footnote 63 Cohen steered the Committee’s focus toward “Shareholders’ control and modification of the rights of the shareholders”.Footnote 64 Did the Committee intend to facilitate hostile takeovers? There is no doubt that it wanted to “to give shareholders greater powers to remove directors with whom they are dissatisfied, than they have at present”.Footnote 65 Moreover, the changes discussed in the previous paragraph suggest an intention to facilitate changes of control through share acquisitions.
However, these legal changes would not have made any difference if shareholders had not been willing to sell. But company law reform and the emergence of the hostile takeover came along at a critical time for shareholders, who were often in a precarious financial position. In August 1953, the Financial Times reported that individuals had been net sellers of stocks and shares for several years, asking why the “gradual euthanasia of the rentier is still regarded widely as inevitable fate?”Footnote 66 The Economist summed up the dire position of many shareholders by noting that, despite the boom, the previous five years had seen no net personal investment on the stock exchange, and asked whether the “old-fashioned private investor is really dead”.Footnote 67
Shareholding was becoming less attractive because of political pressure and tax disincentives not to distribute dividends, which were intended to reduce pressure for wage rises. Dalton introduced a policy of voluntary dividend restraint from 1947, which was continued by Cripps, and a three-year government control of dividends was proposed in June 1951, although it was never introduced.Footnote 68 The most significant changes in corporate control that occurred between 1945 and 1951 were nationalizations, paid for in fixed interest government stock.Footnote 69 Alongside this, a permanent profits tax was introduced in 1947, taxing retained profits at 10 percent but taxing distributions at 25 percent, rising to 30 percent in 1949-50 and 50 percent in 1951.Footnote 70 While profits tax was deductible from income tax until the end of 1951, income taxes were also very high between 1945 and 1951, “the tax rate for income above £12,000 was set at 85 per cent and the top marginal rate of 90 per cent applied to income above £15,000.”Footnote 71 In addition, death duties were very high, at 50 percent for estates between £100,000 and £150,000 and 80 percent for estates over £1million.Footnote 72 Company shares were, of course, concentrated in estates over £50,000 that were liable to death duties.Footnote 73 The Financial Times quoted the chairman of Charterhouse Investment Trust to the effect that “the very fabric of these concerns is being torn to pieces by death duties”, with proprietors forced to dispose of part of their holdings to pay the tax. A large, previously privately held ordinary shareholding in H. Samuel was offered to preference shareholders in order for their previous owners to make provision for death duties.Footnote 74 We will see in the next section that the family that controlled Sears similarly had to dispose of a family blockholding to pay death duties, and that this, combined with the 1947–1948 changes to the Companies Act, opened the door to Clore and created a dilemma for government.
The Emergence of the Hostile Takeover and Early Media Coverage
In May 1951, shortly after Charles Clore had bought shares in it, but a few months before he joined the board,Footnote 75 a company called Investment Registry made its first hostile bid for Frederick Gorringe Ltd, which owned a store in Buckingham Palace Road. The formal offer was made directly to shareholders, conditional upon 90 percent acceptances.Footnote 76 The board of Gorringe managed to persuade the company’s shareholders not to accept, not least by highlighting how much money would be raised by selling off the company’s freehold, which was hugely undervalued on the balance sheet. In the end, the bid for Gorringe failed, accepted by only 41 percent of ordinary shareholders and 28 percent of voting preference shareholders.Footnote 77 Clore’s second attempt to gain control of prime property through a hostile bid, when he attempted a takeover of the company that owned the Grosvenor House Hotel on Park Lane, also failed when the directors revalued the property.Footnote 78
Everything changed with the success of his third attempt, aided by a loan from Bank of America, which was just opening its first British office.Footnote 79 Clore gained control of J. Sears and Co Ltd and its Freeman, Hardy and Willis subsidiary. At the time, it was one of Britain’s largest firms with over 900 shops, which were the main reason Clore was attracted to the company.Footnote 80 The board attempted to repel Clore, not least by trebling the dividend, but he obtained control of around 70 percent of the equity,Footnote 81 aided in part by the Sears’ family need to sell a large shareholding in 1952 in order to pay death duties.Footnote 82 Having gained a majority of the shares on Monday 9th February, by the end of the week Clore had control of the board. Clore immediately called a meeting at which the board was “reconstituted”,Footnote 83 with incumbent chairman Dudley Church and managing director EJ Ward departing, while Clore was appointed as chairman and both his lawyer Leonard Sainer and associate Jack Gardiner became directors of Sears and its Freeman Hardy and Willis subsidiary.Footnote 84 Clore may not have needed to use the removal power, but it would certainly have helped in the negotiations: if the incumbent directors had not been willing to resign, Clore could have removed them within 28 days. Presumably, they saw the writing on the wall. Once Clore had control of the board, the Sears family sold off their remaining shares.Footnote 85 Clore then sold off “a substantial portion of its freeholds and took back long leases in their stead.”Footnote 86 The New Statesman reported at the time that Sears sold “for £4m ‘or more’ freehold properties which Freeman, Hardy & Willis then rent back from the purchasers”.Footnote 87 Clore then used the gains made on the property sales to fund his next takeover.Footnote 88
As we will see in part five, the role of insurance companies in these sale and lease back transactions became known to the Bank of England and the Treasury by the end of 1953 at the latest. Historical research on the property sector has shown that, once planning controls were relaxed after 1949,Footnote 89 insurance companies provided a large amount of finance to hostile bidders in order to purchase properties that could be profitably redeveloped.Footnote 90 Here we can simply note that if an insurance company pledged the finance for a conditional offer to purchase shares, either the offer would fail and they would get their money back, or it would be successful, and they would get their hands on the property very quickly, thanks to the new rules giving a majority shareholder absolute power over the board. As Clore showed in the Sears case, the board could be reconstituted very quickly after the change of control, removing any obstacle to liquidating the undervalued property. Hence, the emergence of the takeover was also closely connected to the emergence after World War II of “the business of commercial property development (transforming the value of a real-estate asset by erecting valuable new buildings, rather than simply holding property and collecting rents)”.Footnote 91 Indeed, Kefford argues that “the British property sector was enmeshed with London’s financial sector from a remarkably early stage and the new business of commercial property development was seized upon by the City’s financial institutions as a favored means of storing and growing capital.”Footnote 92
The Sears takeover gave rise to debate about the merits of takeovers in the letters page of the Financial Times, with one writer highlighting that, with financial interests taking over, there was a danger that “shareholding becomes entirely divorced from social responsibility.”Footnote 93 Another countered that “those who take the risks are entitled to reap any reward that may come their way. After all, when a company falls on bad times the employee can withdraw his labour intact, but can the shareholder do this with his capital?”Footnote 94 In his influential Financial Times column, Harold Wincott condemned those opposing takeovers as:
“an odd collection of bedfellows … the TUC and the Socialists, who want statutory dividend limitation, just to do shareholders down; … those Tories who’ve lost faith in freedom; … the company directors and the managerial revolution to whom shareholders were really a bit of a nuisance anyway before it was discovered they actually had the power to pass the hat – your hat.”
Wincott’s article was also the first attempt to justify the hostile takeover as natural, arguing that
“Natural forces always do win out in the end, and all that is happening now is that directorial pants which have been sitting on the safety valve for a decade or so are at last getting scalded.”
Finally, he advanced a claim that is now commonplace in defenses of shareholder value,Footnote 95 namely that shareholders are better qualified than directors to deploy capital:
“the true interests of the country would have been far better serviced if shareholders had had the profits and reinvested them at their discretion.”Footnote 96
While the Government was still formally insisting on a policy of voluntary dividend restraint,Footnote 97 it was already clear to commentators in early 1953 that the bids had put directors under pressure to increase distributions to shareholders. Onlooker in the Financial Times noted the “possibility that more Boards of Directors will be declaring higher dividends to stave off attacks of the Sears type”.Footnote 98 More systematically, Wincott identified that a “silent revolution” had begun in October 1952 when the Sears share price started to rise, heralding the start of a trend for companies to increase dividends as a percentage of profits available, despite the fact that profits had fallen compared to the previous year.Footnote 99 Since dividends lagged asset prices, and there were “bids—and rumors of bids—galore”, this would inevitably lead to “Boards of directors ‘unlocking’ asset values themselves without waiting for someone outside to buy their way in and do the job” and “raising dividends to reduce the ‘area of undervaluation’”. In other words, in late 1952, boards of directors had already begun to behave exactly like bidders, and the first shoots of the shareholder value revolution were visible, to financial commentators at least.
Bids and Defenses: Contesting the Hostile Takeover
We have just seen that the media quickly recognized the change in corporate financial policies following the first bids, as boards increased dividends and sold off property. But other companies sought to head off bidders in different ways, including seeking help from the Treasury, looking for protection from a larger company, and designing legal devices to deter bidders.
For example, the Daily Mirror approached the Chancellor on 10th November 1953, concerned that Charles Clore was going to launch a hostile bid to gain control of the group’s paper mill assets.Footnote 100 The Mirror wanted to issue £400,000 of unissued capital to Albert Reed, a company in which it had a 42 percent shareholding, but needed permission from the Capital Issues Committee (CIC) to do so.Footnote 101 On hearing of the application, Compton at the Treasury commented that it was “difficult to believe that the Daily Mirror need protection!”, and anticipated that the Chancellor would not want to intervene at the CIC stage. Compton learned that the CIC “felt” against the application because they had “no instructions to take cognizance of ‘take-over bids’”, and judged on its “commercial merits”, the case deserved “no special ‘priority’”.Footnote 102 The Treasury’s initial view was not to depart from the CIC decision because it had “taken no decision in principle against take-over bids and we have been given no reason to suppose that Mr Clore’s designs on the Daily Mirror would damage any interest which the Government ought to protect.”Footnote 103 Treasury formally advised not giving consent, but the Economic Secretary, Reginald Maudling, disagreed, advising the Chancellor, Rab Butler, to approve the Mirror’s application on the basis that it would have no effect on the economy but would “help the Company to protect itself against speculative take-over bids of a type which you have recently condemned in public.”Footnote 104 In the end the Chancellor was not persuaded to permit the application. The Mirror was advised to make a second application, placing less emphasis on Clore, but it too was rejected. Maudling told the Chancellor that the “Committee are wrong” and that “if the applicant had been The Times and not the Daily Mirror permission would have been recommended”. Ultimately, Butler, Chancellor in a Conservative government that had won the election in October 1951, declined to intervene, perhaps unsurprisingly given the Daily Mirror’s allegiance to Labour.
Elsewhere, small breweries that were being targeted by the bidders were approaching Whitbread, a huge national brewery, asking it to purchase minority stakes so that they could come under the protection of the “Whitbread umbrella”.Footnote 105 This began in “the early 1950s”, so that by the mid-1950s, “Whitbread had 13 such investments”.Footnote 106 Whitbread gained in various ways, by making beneficial trading arrangements and often taking a board seat. The Whitbread umbrella gained little publicity at the time, but, like the Mirror’s approach to the Chancellor, serves as a marker of the ferocity of the early 1950s takeover wave.
In contrast to the way these defenses played out in private, it was the attempted takeover of the Savoy Hotel that really brought the hostile takeover to the attention of the general public. As such, it could not be ignored by the government. In October 1953, a mystery bidder had acquired 20 percent of the ordinary shares in the Savoy Hotel Limited, which in turn owned 100 percent of the shares in the Berkeley Hotel Company Limited. The rapid rise in the share price had alerted the directors, who owned less than 10 percent of the shares, to a potential bid. The Savoy board asked for a Board of Trade enquiry into share ownership, and it ultimately became clear that the bidder was Land Securities. Its controller, Harold Samuel, had secretly acquired the 20 percent shareholding, while Clore had also acquired 9 percent of the shares. In late November 1953, Samuel informed Hugh Wontner, the managing director and chairman of the Savoy Hotel Group, that he was seeking control of the Savoy Company and that, if successful, he intended to close the Berkeley as a hotel and turn it into offices.Footnote 107 Shortly afterwards, Samuel sought representation for his company on the Savoy Board. Wontner approached his friend, the Prime Minister, Churchill, for help.Footnote 108 He also lobbied the Treasury for support, and attempted to persuade the President of the Board of Trade, Peter Thorneycroft, to put out a statement opposing any change of user of the Group’s properties.Footnote 109
Besides seeking political help, the Savoy Board explored other ways to defend against the bid. Having rejected a scheme based on share issuance to a staff benevolent fund following legal advice,Footnote 110 as well as considering the possibility of issuing special shares,Footnote 111 it approved the “Worcester Buildings Scheme”. That scheme transferred the Berkeley Hotel itself (and some other properties) to the Worcester Buildings Company (London) Ltd in return for a large quantity of non-voting preference shares and a much smaller quantity of voting second preference shares. Worcester Ltd then leased the Berkeley back to Berkeley Hotel Ltd, subject to a covenant that it be used as hotel and restaurant.Footnote 112 The ordinary voting shares in Worcester Ltd were issued for cash to trustees of a benevolent fund established for staff; the effect was to put control of the Berkeley Hotel and the other properties in the hands of the trustees, of whom Wontner was one, the other two being the company’s accountant and a doctor of high standing. Meanwhile, most of the cash flow rights accrued to the existing Savoy shareholders as preference shareholders in Worcester Ltd.Footnote 113
Once the scheme was announced, the directors of Savoy responded by purchasing “substantial amounts of stock” and Samuel offered to sell his stock, as well as threatening legal proceedings.Footnote 114 Shortly afterwards, Samuel agreed to sell his stock (as did Clore) to the directors of the Savoy Hotel. The trustees of the benevolent trust then sold their shares to the Savoy Company at par, giving it control of the Worcester Buildings Company, and with it, the Berkeley site. The Savoy Board’s purchase of Samuel’s and Clore’s shares was supported by a bank loan from Barclays, which, of course, required CIC approval. That application was rejected by the CIC,Footnote 115 albeit noting that some of the Savoy submissions “relate to matters outside the Committee’s terms of reference”. After much internal discussion, the Chancellor reluctantly agreed that “it would be against public policy to use the Treasury’s power of control over capital issues in order to frustrate the purchase of the Savoy shares by Mr Wontner and his associates”.Footnote 116 The contrast with the Daily Mirror decision only a month earlier is stark, as is the highly politicized nature of the decision. Having borrowed the money, the Savoy Board then sold and leased back a building, and paid a capital dividend to the company’s shareholders.Footnote 117 As such, the Savoy Board was behaving in a manner very similar to a takeover bidder.
The Savoy Hotel affair caused an enormous scandal, primarily because of the Worcester Buildings Scheme. The media coverage is particularly interesting, given that it came during a period which is generally understood as the high point of managerial capitalism.Footnote 118 The Financial Times began by acknowledging that the Savoy Board had a responsibility to consider the interests of workers, and that by acting on this principle they had “no doubt attracted a good deal of sympathy to themselves”. But this was not an absolute principle and the question was “whether or not the directors are or might be sacrificing the shareholders’ interests. Other things being equal, it is the shareholders’ interests, in the widest sense, which are paramount.” It concluded that, if the directors’ proposals were accepted as a precedent by the City, “the way will be open to the destruction of the whole company system.”Footnote 119
Similarly, The Times made the obligatory nod to the company being “something different from the totality of the shareholdings”, but stressed that it was the “owners… who take the ultimate risks” because “their property is irretrievably committed in the business”, something they would never agreed to “if they contemplated that control of their property could ordinarily be alienated without consideration and without their positive approval.” Few shareholders “can have supposed that the ‘managerial revolution’ had gone quite so far as that”. The Savoy scheme represented “a precedent which is hard to reconcile with the joint stock company system under which most of the country’s business is done.”Footnote 120
Finally, The Economist noted the potential harmful economic and social consequences of bids, especially if the bidder plans to “gut” a carefully husbanded undertaking and “to rob patient shareholders of what was due to them”.Footnote 121 But a week later, it proclaimed that the Savoy board “have done permanent damage to the basic assumptions of joint stock enterprise.”Footnote 122 While acknowledging public disapproval of bids and the inevitable speculation involved in changing use of property, it insisted that
“In theory and in legal form the shareholder is master, exalted by the Companies Act of 1948 far beyond the status of the directors. But in practice he makes no pretence to exert effective control, and is content to leave everything to the directors until he discovers that things are going wrong.”
Now, that Clore and Samuel had “let loose the suppressed revolution in company finance”, The Economist said, “the lessons are clear. It is more sensible to give benefits to existing shareholders than to leave the front door open to a determined bidder; once on the defensive, directors may be led into courses that are themselves indefensible.”Footnote 123 It was already clear, to the media at least, that managerialism would have to yield to shareholder value.
The Political Response to the Hostile Takeover Phenomenon
Behind the scenes in the Treasury and the Bank of England in 1953, there was a great deal of activity, and this intensified as the Savoy scheme was launched. This section traces the process through which Government policy toward takeovers was formulated, contrasting the ambiguity of public pronouncements with the emergence behind the scenes of a consensus that nothing could or should be done about takeovers.
Things began when the Sears board approached the Treasury for help on 9th January 1953, Sears already being aware that Clore was probably behind the imminent bid, and that he planned to sell the freeholds to an insurance company and take them back on a 99-year lease. Having already increased the dividend, Sears’ board was now seeking CIC permission to issue bonus shares.Footnote 124 Compton added a note that “the Treasury is doing as much as we legitimately can to help them.” There is no further reference to Sears’ application to the CIC in the archive; presumably it was overtaken by events.
In February 1953, a draft statement was prepared for the Chancellor on dividend restraint, along with a supporting memorandum headed “Company Control and Dividend Limitation”. That memorandum was broadly approving of takeovers, asking whether management complaints about the policy of dividend restraint might actually be “an excuse for inferior management, which is not earning profits or is letting assets be unused. If so the shareholders have a perfect right to improve the yield of their property by changing the management, without interference from the Government.” It recommended that Government should “refrain from offering protection to Boards of Companies so assailed”. But, it added, companies must be free to protect themselves, giving up dividend restraint and increasing the dividend just as the Sears board had done.Footnote 125 Hence, early in 1953, it appears that the Treasury was already broadly supportive of takeovers.
The Bank of England was first alerted to the issue of hostile takeovers in March 1953 when it received a “Memorandum on Real and Fictitious Share Bids”.Footnote 126 Contrary to Roberts’ reading, this memorandum was not an internal Bank memo; a handwritten note on document (by Peppiatt) says that Chesterfield “brought in this memo”. This presumably referred to Arthur Desborough Chesterfield, chief general manager of Westminster Bank Ltd. This means that Roberts was incorrect to claim that the Bank was on the side of “victim companies” and that it regarded takeovers as “against the national interest”.Footnote 127 Chesterfield’s memo noted that offers had been made to shareholders by syndicates of financiers, either with the object of increasing the dividend or getting control of freehold property (or other assets) to be sold and cash released, leaving “a large capital gain for the syndicate (and probably a long lease on onerous terms for the Company)”. It acknowledged the arguments of financial writers, such as Wincott in the Financial Times, discussed above, but advanced the more conventional managerialist view of the time, that management should retain control over decisions about corporate finance. Each case was to be judged on its merits, but “at its worst this kind of maneuver simply means dissipating capital” and “may also mean the break up of businesses which are making an important contribution to the country’s needs”. There is no evidence that the Bank was persuaded by Chesterfield’s arguments, and Peppiatt noted that he told Chesterfield that both Bank and Treasury had considered the problem, and referred to a Parliamentary question and answer,Footnote 128 but “it was not just that any action could usefully be taken” (sic) and the “S.E. are on the look out for any abuse”.Footnote 129
After this, both Treasury and the Bank kept their counsel on the subject until the Savoy affair burst onto the scene. With the Prime Minister expressing concerns about the Savoy,Footnote 130 the Governor’s view in November 1953, which he had shared with the Treasury, was that “nothing can sensibly be done to interfere with take-over bids and that any remedy would cause more trouble than the disease”.Footnote 131 Compton at the Treasury was charged with producing a report on takeover policy, to be drafted jointly with the Board of Trade.Footnote 132 During meetings, there were extensive discussions about the pros and cons of takeovers, ranging from their role in promoting the shareholder interest and acting as deterrent to “complacent and inferior management” to the harmful publicity for the City and tax-free capital gains enjoyed by bidders. The group was told that the Governor’s view was that “you could not really prevent people using their money to buy things. Nor was it right to try”, something he later made clear in a public speech.Footnote 133
In the end, the group did agree that there was a problem of defining the mischief, and that there should not be a public inquiry.Footnote 134 However, the Board of Trade was more favorable toward takeovers than the Treasury, and there were heated discussions about whether ordinary takeovers should be considered “speculative.” The disagreements were so deep that the joint report was almost abandoned. In the end, the final report stated that
“it is wrong to interfere with the freedom of transactions in stocks and shares and… it is wrong to protect complacent directors against attempts by shareholders to change the management either with a view to running the business efficiently so as to get the best value out of the assets, or to using its resources more economically, or to improving their investment by promoting an amalgamation with another concern for a sound commercial reason.”Footnote 135
Those in the Treasury who were less receptive to takeovers were able to include a comment that a takeover “may be open to criticism if the object is to gain control in order to ‘milk’ the business by a sharp increase in dividend distribution, or to break up the business by distributing the capital assets, especially if the latter transaction is designed to take the form of a tax-free distribution.” However, a footnote, which was added at the insistence of the Board of Trade, stated “This is so far, a hypothetical criticism. The Board of Trade have as yet no knowledge of any case in which the business has in fact been broken up.” The “as yet” qualifier was added in turn at the insistence of the Treasury.Footnote 136
The upshot of this report was that both Board of Trade and Treasury largely accepted the legitimacy of the takeover bid, leaving only a hypothetical, but as yet, non-existent, set of problematic scenarios. At the same time, the Governor’s opposition to interference in markets was also clearly echoed in the quote above from the joint report. From the beginning of 1954, then, the Treasury and Board of Trade had reached a common position which was broadly supportive of takeovers, while the Governor was opposed to intervention. As is shown next, this consensus was much less apparent on the public record, which might explain why Roberts and Rollings concluded that the consensus emerged so much later.
In response to a Parliamentary question by Gaitskell on 15th December 1953, the Chancellor, drawing on a response drafted by the Governor and the Treasury, highlighted a distinction between takeovers “in the usual course of business” and those “open to criticism”. He then repeated his earlier guidance that credit “should not be given for the speculative buying or holding of securities, real property or stocks of commodities”.Footnote 137 However, by the time of the Opposition’s early day motion on takeover bids on 11th February 1954,Footnote 138 the Chancellor was equipped with the joint report and was able to dispose of the issue definitively. He outlined two “fairly normal” scenarios, one where a purchaser “in the same line of business” bought resources to allow it to expand, and the other where a purchaser bought resources in order “to develop them more profitably”. These were contrasted with the scenario in which the bidder “cares little whether he destroys some long-established business, or whether he saps the financial strength of the business by distributing profits which ought, in fact, to be ploughed back.”Footnote 139 Relying on the Board of Trade’s footnote, he claimed to have made a very wide examination of the matter, and found “no evidence of widespread plundering or destruction of businesses.” He added that he supported the Bank of England’s guidance to lenders to take “special care” when financing takeovers which appeared to include “a speculative element.” Asked to define “speculative element”, he said “I believe that the Bank of England and the banks understand this matter just as well as any right hon. or hon. Member of this House … credit facilities—and I am defining it a little more closely—should not be given for the speculative buying or holding of securities, real property or stocks of commodities.”Footnote 140
In fact, the meaning of the term “speculative” was far from clear, and the next section shows that its meaning was unclear even to the banks. Yet it was bearing a lot of weight in the Chancellor’s and Governor’s public pronouncements, carrying a clear derogatory implication for certain types of hypothetical takeovers. It seems to have been designed to both reassure the public and maintain consensus within government. As for the public, one memorandum highlighted that Treasury and Board of Trade were “fully alive to the harm done by the effect on public opinion of the less desirable type of transactions, and … ready to take further action if abuses are revealed.”Footnote 141 Marriott claims that the decision to use the term “upset many of the legitimate developers, who went to great lengths to insist that they were developers, investors, not speculators.”Footnote 142
Inside government, and beyond the public gaze, the term seems to have been understood quite narrowly as referring to market manipulations when there were rumors of a bid (there were no laws against insider trading at the time), but not to bids which sought to liquidate real property that was undervalued on the target company’s balance sheet. What explains this apparently deliberate ambiguity? The period after the Second World War is often termed the period of “Butskellism”, of economic consensus between the two main parties, especially in relation to a commitment to full employment.Footnote 143 Yet behind the apparent consensus, the Conservative government was divided over the desirability of at least some of the takeovers. As Dutton puts it, “Conservatism combined a collectivist, paternalistic strain with a free-market libertarian right.”Footnote 144 This divide can be seen clearly in the archive. The Treasury (and presumably the Chancellor, Rab Butler) opposed quick, tax-free gains as “bad for the reputation of business” and posing a threat to the public interest policy of dividend restraint. In contrast, the President of the Board of Trade, Peter Thorneycroft, thought that “speculation should be encouraged for the sake of an active share market and to stimulate business.” He was firmly on the side of shareholders and was opposed to “any action taken by the boards of companies to prevent shareholders from getting full value out of their property by dividend sales or break-up of assets”.Footnote 145 It is possible that Thorneycroft was encouraged by the Chancellor not to express these views in Parliament.Footnote 146 In summary, it can be suggested that the word “speculative” was used to encompass and conceal these divergent views within Government.
Yet this reliance on the ambiguous term “speculative” meant that discussions within Government were confined to possible ways of dealing with the less desirable aspects of bids. As for the practice of building up holdings in secret before launching the bid, the Bank of England considered requiring disclosure of nominee shareholdings, something proposed in the Cohen Report, but which did not make it into the Companies Act.Footnote 147 However, there would be difficulties in practice, and it was ultimately rejected on the basis that it would “only touch the outside fringe of this particular problem.”Footnote 148 Likewise, there was discussion about the role of the Inland Revenue in catching up with the bidders, potentially treating gains as taxable as “the business of the operators”, but this would take time and would be unlikely to succeed given that “the operators are astute”.Footnote 149 There was even discussion of introducing a capital gains tax (which was eventually introduced in 1965), but the Budget Committee of the Treasury took the view that it “would be complicated in operation and uncertain in yield”.Footnote 150
In contrast, there was no appetite whatsoever in Government for protecting incumbent management against bidders. This was in part because of the media coverage of the Savoy affair,Footnote 151 and in part because of a general acceptance by the end of 1953 that takeovers were a means of removing inefficient management. The Government recognized that there were few options left for companies targeted by the bidders. The Board of Trade raised the possibility of companies changing their articles to require a 75 percent majority of shareholders to approve sales of property or changes of use, but this would require action before a bid came along, and would also require shareholders to be willing to rule out a bid.Footnote 152 This is an interesting suggestion as it would have returned such companies to the position they were in before the Companies Act 1948, where the board could hold a blocking minority with just over 25 percent. Wontner of the Savoy had even suggested that the Government or a trustee outside the business could hold an A share controlling disposals of property.Footnote 153 This too came to nothing.
In his speech in February 1954, the Chancellor addressed counter-measures taken by boards, highlighting that management could try to persuade shareholders not to sell or take other legally permissible actions.Footnote 154 Nor were the Opposition in any mood to support incumbent management, Gaitskell expressing concern that the Savoy directors “have all this power and are responsible to nobody”.Footnote 155 Here Gaitskell was echoing the views expressed in the New Statesman, which lamented the “speculative operation” that drove up Savoy shares as “jungle economics”, but was opposed to giving power back to directors, since it was “undesirable that they should be accountable to nobody for their conduct of affairs.”Footnote 156 In line with the consensus politics of the time, the gap between Gaitskell and the Treasury was vanishingly small.
Most importantly, there was no support from anyone for the type of scheme that the Savoy Hotel Group had implemented, the Board of Trade and Law Officers provisionally considering it “if not illegal, grossly improper.”Footnote 157 In April 1954, Peter Thorneycroft appointed Mr E Milner Holland QC to investigate the affairs of the Savoy Hotel Limited and the Berkeley Hotel Company Limited.Footnote 158 Ultimately, Milner Holland advised that the action by the Savoy Hotel directors might not have been taken in bad faith, but was still unlawful as taken for an improper purpose because its aim was to “deprive the shareholders of such control as under the regulations of the company they may have over the Company’s assets”. Rollings’ account shows how Thorneycroft’s decision angered Churchill,Footnote 159 but this was less a matter of principle and more a matter of Churchill’s relationship with Wontner.
For those in Government who remained concerned about the impact of takeovers on public opinion, including the Governor, perhaps the last way of controlling them was to get a tighter grip on the sources of finance. The final section explores this because, once this option was ruled out, there was no longer any obstacle to hostile bidders. The hostile takeover would have been tacitly accepted—and therefore normalized—across Government.
The Last Option: Controlling the Financing of Hostile Takeovers
While drafting the joint report discussed in the previous section, Compton asked the Bank of England who was financing the takeovers and why the Bank could not “control the raising of money by Clore and Co.?” He also wondered whether “influence might be brought to bear on those lenders to withdraw support from the less reputable take-over operators?”Footnote 160 After highlighting that The Economist had just expressed support for takeover bids, the alternative being “industrial stagnation”,Footnote 161 Peppiatt at the Bank replied that it was difficult to pick out certain names as “undesirable”, while tackling takeovers through influencing finance would only work to control bidders who were dependent on borrowing. Finally, he reiterated the Chancellor’s guidance not to finance “the speculative buying of securities”. However, he acknowledged that “the point at which a projected deal ceases to be speculation is not easy to define and we do not see what more can usefully be done”. We saw in the previous section that, behind the scenes, both the Board of Trade and the Bank were interpreting the term “speculative” very narrowly, excluding bids intended to liquidate (or “make better use of”) undervalued property. This interpretation is supported by Peppiatt’s observation that “It would seem natural that insurance companies would be interested so far as the eventual acquisition of property is concerned”.Footnote 162 The Bank’s acquiescence to the financing activities of insurance companies has not been made sufficiently clear to date in the literature, and is certainly incompatible with the view of Roberts and Rollings that the Bank remained opposed to takeovers until 1959.
However, the Governor’s communications with financial institutions remained Delphic. In December 1953 correspondence with the British Insurance Association (BIA), for example, the Governor highlighted the “considerable speculative element” in “some at least” of the takeover bids, urging the BIA’s constituents to “keep well in mind the requests by the Chancellor” and emphasizing the need for “financial institutions to use special caution in respect of any invitations coming before them which appear to be connected with these take-over operations.”Footnote 163 After receiving a similar communication, the Committee of London Clearing Bankers (CLCB) sought greater clarity and suggested a presumption that share purchases by companies in the same line of business were acceptable, while “purely … financial” transactions should be carefully investigated.Footnote 164 While the Governor acknowledged this “help” and passed it on to foreign banks,Footnote 165 it is clear that the banks did not have a clear understanding of what the Governor wanted. In particular, the Bank of America admitted financing two or three takeover bids (one of which was presumably bridge financing of Clore’s bid for Sears), but insisted that there was no speculative element involved.Footnote 166 Finally, A.W. Tuke, the chairman of the CLCB, sent a hand-written note to the Governor, asking him “again” to use “some other expression, such as ‘open to criticism’” rather than “speculative” because at least some bids were “dead certs” in which “Mr X knows exactly what he is going to do with the Company’s property before he makes his offer”.Footnote 167
During this time, the Financial Times attributed a fall in the share prices of companies “in the ‘take-over’ class” to the fact that insurance companies had been warned by the Bank “not to buy property if it appears to assist the negotiation of a transaction of a purely speculative nature”. The insurers responded with a public statement that they paid “close attention” to the interests of policy holders and the nation, and that, where “there were a feeling” that any bid would be detrimental to the nation”, they would not facilitate it.Footnote 168 An internal memo at the Bank described the insurers’ response as “feeble and unconvincing”,Footnote 169 while the Lex column of the Financial Times noted that “the great majority of [insurance] companies have not at any time taken action which would facilitate speculative bids much less actually financed them”. However it added that “some may have negotiated with ‘potential owners’ of property rather than with actual owners, and one or two companies are widely believed to have done so.” While it expected the insurers to comply with the Bank’s request, it noted that the “conditions which give rise to bids are, however, far too widespread for even a Bank request to mean the end of the movement.”Footnote 170 It concluded that “only some bids – chiefly those which are spurious from the beginning and are never meant to implemented – are wholly bad, and only some bids involve property transactions. The odium which is justified in the case of some bidders, however, now seems to be spreading to cover all, and because of the property deal element in some cases the insurance companies have recently attracted their share of the criticism.”
Meanwhile, the Governor advised the BIA against putting out a further “disclaimer” in response. An unpublished draft they showed to the Governor is informative of how they sought to justify their activities: it emphasized that sale and lease back transactions can be “thoroughly desirable if they enable the owner to free monies tied up in bricks and mortar and utilize them for the direct purpose of financing and developing his business.”Footnote 171 The Governor’s suggested shorter response preserved the point about the merits of sale and leaseback, and shows that he was aware of it.Footnote 172
While there was considerable ambiguity in the Governor’s communications, his correspondence with the BIA makes it clear that he was aware that insurance companies were financing takeovers, yet made no effort to stop them. The Governor’s acquiescence is quite incompatible with someone who was opposed to takeovers. And following communications between the Bank and the Treasury, the final report on takeovers incorporated the BIA’s argument that “a firm understanding between a bidder and an insurance company may well be an important feature in a take-over bid involving a property deal.”Footnote 173
The BIA continued to push its line that it was not financing speculation, and that takeovers “may be expected to result in a greater efficiency, or a more effective use of the assets”. It added that “a good many insurance companies pursue an active policy of property investment” and “have without doubt purchased considerable amounts of property subject to the granting back of long-term leases to the vendors, but such transactions are not in themselves speculative, and may, and do, serve thoroughly sound and genuine business needs.” There was no need for concern because “institutional investors can surely be relied upon to exercise the utmost caution when such propositions are submitted to them, since in making their investments they would certainly wish to have a proper regard for the public interest in its widest sense.”Footnote 174 This memo is important because the insurance companies were admitting to the Treasury that they were financing takeovers, which was something the Bank already knew. Peppiatt commented that the memo contained “nothing new,” and the Bank wrote to Compton at the Treasury to confirm this.Footnote 175
Perhaps because of the ambiguity associated with the term “speculative”, the government’s policy toward the insurance companies was misunderstood at the time. For example, Bull and Vice claimed, virtually contemporaneously, that the Bank of England’s directive not to assist “purely speculative” transactions was “clearly” aimed at “the bidder’s familiar lease-back transaction”.Footnote 176 Likewise, Moon understood speculative bids to be aimed at forcing the declaration of larger dividends, obtaining quick capital profits through asset disposals, and having an impact on morale inside the firm.Footnote 177 No one seems to have been aware of the extraordinary scale of the property purchases by the insurance companies from the bidders. While there were scattered media reports at the time,Footnote 178 more recent research has begun to show the scale of the phenomenon. Peter Scott shows that Legal & General purchased more than 313 properties from Sears in a single deal in 1954, and £11m of property from Charles Clore before 1960. In total, they provided or committed £21,112,969 to Clore, £23,360,000 to Fraser, and £19,690,200 to Samuel before 1960.Footnote 179
From early 1954 onwards, then, the interest of the insurance companies was considered “natural”, and no objection was ever raised with them directly by the Governor or the Treasury. At this point, the Board of Trade was fully supportive of takeovers, while the Treasury and the Bank were acquiescing in the insurance companies financing the bidders by purchasing properties from them. This meant that the mantra that “speculative transactions should not be financed” had become virtually meaningless. From this point on, the hostile takeover had been normalized and became a permanent fixture on the UK’s corporate scene.
Conclusion
The acquiescence of the Bank and the Treasury to the financing of takeovers by insurance companies marks the end of this account and the dawn of the new age of shareholder value. As we have seen, the media played its part in the normalization of the hostile takeover and the rejection of managerialism. Likewise, within government, there was never any great opposition to takeovers, although there was initially a lack of consensus as to what was acceptable, concern about the implications for the policy of dividend restraint, and doubts about the viability of intervention. In the end, these disagreements were concealed behind ambiguous public pronouncements condemning “speculative” takeovers, a formulation which had the additional benefit of reassuring the public that something was being done. In line with the culture of consensus at the time, the opposition Labour Party’s position did not differ meaningfully from that of the government.
This is not to claim that there were any easy answers to whether and how the forces unleashed by the Cohen Report might be contained or mitigated. But, contrary to previous accounts in the literature, from the beginning of 1954, there was no longer any serious objection to hostile takeovers within the UK government. Despite widespread public and academic acceptance of managerialism, directors would be increasingly constrained to restructure the company’s balance sheet and to prioritize the interests of shareholders. From 1952, stock market performance improved markedly, reflecting not only a growing economy and the entry of growing numbers of small shareholders, but also the emergence of the takeover and the managerial response to the threat in the form of an increase in dividends.Footnote 180 The era of shareholder value had begun.
Acknowledgments
I am grateful to Julie Bower, Stephen Connelly, Paddy Ireland, George Meszaros, Marc Moore, the three anonymous reviewers and the editor for helpful and constructive comments and discussions. All errors remain my own.
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