14 October 2014

Pfizer/AstraZeneca: Seeking a cure for foreign takeovers

UK Insight

This article was written by Michael Reiss

Despite borrowing the expression from the French, it is the British who have traditionally been laissez-faire when foreign companies have come shopping for British ones. From football to energy to airports, the British have been open to foreign investment. But from time to time, even the British have played hard to get. Pfizer’s aborted acquisition of AstraZeneca was the most prominent recent example.

Resisted by AstraZeneca’s management, Pfizer’s bid was also opposed by various members of the political establishment and other interest groups. They argued that Pfizer’s primary motive was to invert its tax domicile from the US to the UK and that the acquisition would endanger nearly 7,000 UK jobs at the forefront of R&D into pharmaceuticals.

To some extent therefore, a hostile political climate can scupper a deal even if the politicians do not have a formal veto. After all, it is difficult to do business when faced with virulent public opposition. It is nonetheless worth probing further into exactly which concrete powers the UK Government did have to delay or oppose this takeover and what more powers are being demanded.

Don’t tread on my legitimate interests

The Pfizer/AstraZeneca acquisition was large enough to be notifiable in Brussels under the EU merger regulation rather than at the UK level. The EU merger regulation, which in various forms has existed since 1989, was designed to ensure that such mega-mergers are looked at by the European Commission on competition grounds and not obstructed by national – some might say “protectionist” – concerns.

The sole jurisdiction of the Commission in such cases is, however, subject to certain exceptions. Of particular relevance here is the Article 21(4) exception that allows a Member State to review a transaction on non-competition grounds, in parallel to the Commission’s competition review, where the transaction is liable to impact on that Member State’s “legitimate interest”. This means that the transaction needs to be cleared by both the Commission (on competition grounds) and by the Member State (on legitimate interest grounds).

Article 21(4) sets out three express legitimate interests, namely, public security (i.e. defence), plurality of the media and prudential rules (i.e. financial stability). None of these was applicable to Pfizer/AstraZeneca. However, Article 21(4) also provides that “any other public interest must be communicated to the Commission by the Member State concerned and shall be recognised by the Commission after an assessment of its compatibility with the general principles and other provisions of Community law”. In other words, it was open to the UK Government to identify a novel category of legitimate interest (the expression “public interest” is used interchangeably) for intervention on noncompetition grounds. The new legitimate interest would have needed approval by the Commission.

The UK’s Conservative Prime Minister was under pressure to go down the legitimate interest route, while at the same time burnishing his pro-business credentials. The Labour Party leader of the opposition pushed him on this in the UK Parliament: “Is he [the Prime Minister] ruling out or ruling in using the public interest test on this takeover? We could make it happen. If he does not take action now and the bid goes through without a proper assessment, everyone will know that he was cheerleading for this bid and not championing British science and British industry”.

The key to framing a new category of legitimate interest is threefold: it must be genuinely of national importance; it must not be mere protectionism; and it must not be a question of competition concerns, as this is already within the Commission’s scope. Since the Pfizer/AstraZeneca transaction failed to proceed (for the time being at least), the UK Government did not have to conjure up a new category of legitimate interest. However, such a category might have been along the lines of “the protection of the UK’s scientific knowledge base”. It is unclear whether or not this would have been approved by the Commission. But there is a reasonable chance that it would.

A promise is a promise (mostly)

Another controversial aspect of the Pfizer/AstraZeneca deal was the question of promises made by Pfizer’s leadership. In particular, Pfizer’s CEO wrote to the UK Prime Minister promising that at least 20% of the R&D workforce would be maintained in the UK. The question was whether such promises were mere advocacy in favour of a deal or something binding on Pfizer.

Chocolate was the last time this issue turned sticky. Kraft’s successful acquisition of Cadbury’s was sweetened with an apparent commitment that Kraft would not close Cadbury’s factory near Bristol with the loss of 400 jobs. This US take-over of a British company went ahead but Kraft did ultimately close that factory. Kraft argued that it was only once it had acquired Cadbury’s that it learnt how advanced Cadbury’s own plans had been to close this factory and open a new one in Poland.

Headline grabbing promises at the time of a deal can therefore be re-characterised retrospectively as just aspirations when they are later overturned. Following the Kraft/Cadbury’s acquisition, the then Labour Government proposed a “Cadbury’s Law” in its 2010 election manifesto which, inter alia, would have tightened up such predeal promises. Labour lost the 2010 election and so the proposal was shelved.

Pfizer/AstraZeneca has, however, revived calls for such a reform. Vince Cable, the UK’s Business Secretary, has proposed that promises made during a bid process should be binding. If these promises are broken, then large penalties should be imposed. This has considerable support. He has also proposed that the Government should have a last resort power to block such deals. This is more controversial and is likely to be resisted by his more business-minded Conservative coalition partners.

The French model

The French, who invented not just laissez-faire but also dirigiste, have already gone further than the British. Following GE’s recent pursuit of Alstom, the French Government introduced powers to block take-overs of French companies in the energy, transport, water, communications and health sectors. This extended a 2005 law that provided for similar powers in relation to the defence sector.

There is a possibility that this new law – dubbed the décret Alstom – is incompatible with EU law. First, it is not clear that it has been notified to the Commission for approval in accordance with Article 21(4) of the EU merger regulation. Secondly, it is unclear whether it is compatible with Article 63 of the Treaty on the Functioning of the European Union, which provides for free movement of capital between EU Member States and between EU Member States and third countries.

Any incompatibility may only come to a head if a particular transaction is blocked under this law and the acquirer has the appetite for an appeal in the French or EU courts or if the Commission decides to step in. At the moment, the Commission is preoccupied with the process of appointing a new set of Commissioners over the next few months. Moreover, the left-leaning Economy Minister, Arnaud Montebourg, who was particularly identified with the décret Alstom, was recently ousted from his role by the French President after an internal rebellion against the French Government.

Next steps?

Pfizer could yet stage another take-over attempt for AstraZeneca, as the three month moratorium under the UK take-over rules has now elapsed. Whether this deal is resurrected or another acquisition is contemplated in a politically sensitive sector, it seems likely that the public interest test will, in the future, be expanded to cover categories other than defence, media plurality and financial stability. Potential acquirers should bear this in mind when considering acquisitions across the EU, particularly in the case of a potentially hostile take-over. As for the question of binding promises, further concrete action in the UK may now have to await the outcome of next May’s general election. But it seems likely that the politicians will promise something on this in their election manifestos. We shall then have to see whether they keep their promises.

KWM will be monitoring developments and would be happy to keep you directly informed. Please contact one of the contacts listed below to either discuss this topic further or stay directly informed.

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