UNITED KINGDOM

By Christine Chiew, Claudio Gallicchio, and Vineet Chhibber

The Higgs Review - Strengthening Corporate Governance

On July 23, 2003, a redraft of the Higgs Report "Review of the Role and Effectiveness of Non-Executive Directors," which had initially been published in January 2003, was given the go-ahead by the Financial Reporting Council (FRC), the independent body given the authority to oversee changes to the Combined Code. Consequently, the Combined Code was amended reflecting boardroom reforms proposed by former investment banker Derek Higgs. Much of the language of the recommended reforms in the original report had been toned down and redrafted under the new Code.

When the Higgs proposals were first published, there was much criticism from U.K. boards that felt that the new recommendations, if adopted, would undermine the capabilities of a company management and potentially split company boards endangering the unitary principal. In fact, a handful of companies were expressing their concerns to shareholders in their annual reports and accounts. The thoughts expressed in the 2002 annual reports and accounts of Secure Trust Banking Group seem to best reflect the views of those disgruntled companies. In his letter to shareholders under a section entitled "Higgs Will Do More Harm Than Good," Henry Angest, the combined Chairman and CEO, and majority shareholder holding 47.3 percent of the company's issued share capital, states "I am dismayed by Higgs--which means I am in danger of being labelled a whiner by the Financial Times." He states that he believes that the proposals are likely to cause serious damage to governance of U.K.-based companies and that the vast majority of companies are honest and trustworthy, and do not need outsiders.

The view by Angest seemed to be a defensive one with regards to the situation on Secure Trust Banking's own board. He refers to Higgs' suggestion that half of the board should comprise of independent outsiders as "deeply divisive" and that "the only reason for creating this cumbersome arrangement, it seems to me, is to enable the executive directors to be outvoted." Angest also touches on the requirement, which applies to himself, that the role of Chairman and CEO be split. He expresses that "having two captains at the top usually spells trouble because they will fight for supremacy. To reach ambitious goals, you need unity and singular determination," flouting the best-practice recommendation for two separate well-defined roles for both Chairman and CEO.

However, the final draft of the Higgs Report gained strong support after months of debate. Many business and shareholders groups declared the FRC had performed the diplomatic balancing act of making the language of the original Higgs review proposals more flexible without watering them down. According to a Financial Times article on July 24, 2003, "after months of controversy, it has suddenly become hard to find a critic of the boardroom reforms proposed by the Higgs review."

The new Code on Corporate Governance states an increase in principles from 14, as provided in the original Code, to 21 supporting principles. The emphasis on Code provisions will also rise from 47 to 83, incorporating virtually all the 50 recommendations of the Higgs review. In addition, the new Combined Code document will also include a separate section incorporating the suggestions for good practice from the report.

However, changes in the revised draft have been widely flagged, including changes to the recommendations on a board's senior independent director. A Higgs recommendation proposing that a chairman of a company should not also chair its board's nomination committee was also dropped. But the draft maintains that the chairman or an independent non-executive should chair the committee except when a successor to the chairmanship is appointed.

The provision that a chief executive should not go on to become chairman of the same company has also been kept. However, as a concession to business, particularly the banking industry, a warning has been added that, if a board should decide such a move is appropriate, it should consult main shareholders and set out the reasons at the time of appointment and in the next annual report.

The draft clarifies some confusion over original Higgs proposals on the length of tenure for non-executive directors. After six years, or two three-year terms, the continued appointment of a non-executive should be subject to a "particularly rigorous review." After nine years, the draft says, non-executives should be subject to annual re-elections and they may no longer be considered independent.

Other than these changes, the central reforms remain largely intact. These include provisions that at least half a board should comprise independent non-executive directors. In addition, the chairman of the board should be independent at the time of appointment. The new code also provides a set of criteria to assess whether a director is independent or not.

In addition, the draft also calls for boards to adopt more transparent and effective recruitment and self-evaluation procedures. This work has been further investigated by the Tyson report.

The revised Code does not include material in the previous Code on the disclosure of directors' remuneration because earlier Code provisions have now been superseded by ‘The Directors Remuneration Report Regulations 2002." This report requires the directors of a company to provide and prepare a remuneration report that is clear and transparent to shareholders.

Following the go-ahead by the FRC, Higgs affirmed, "the new Code will encourage professionalism and objectivity in the boardroom. Shareholders will benefit from greater transparency and understanding of how boards work." He continues, "The Code will raise boardroom standards, drive company performance and help restore confidence in listed company sector." In fact, the new Code stipulates that companies have to provide a narrative explanation of how they comply with principles or otherwise.

The FRC strongly supports the incorporation of the substance of the Higgs report into the Combined Code. Sir Bryan Nicholson, Chairman of the FRC, discloses that "the "comply or explain" principal was key to the successful working of the Code and that dialogue between companies and institutional shareholders was not as well developed as it should be. Both needed to put more effort into making the system work."

The new Code on Corporate Governance is intended to apply for reporting years beginning on or after Nov. 1, 2003.

Third Quarter Mergers and Acquisitions

The level of M&A activity reported in the third quarter was in sharp contrast to the heady days of the last bull market. The third quarter of 2003 reported only two dealings of note – British Biotech plc's merger with Vernalis plc and Taylor Woodrow plc's acquisition of Wilson Connolly Holdings plc.

British Biotech and Vernalis

On July 3, 2003, the boards of British Biotech and Vernalis announced that they had unanimously agreed the terms of a merger of the two companies. The merger was to be implemented by way of an offer by British Biotech to Vernalis shareholders to acquire their respective holdings in Vernalis shares in exchange for new British Biotech shares. Under the terms of the offer, British Biotech shareholders would retain their existing British Biotech shares and Vernalis shareholders would receive 0.861 of a new British Biotech share for each Vernalis share held. Following completion of the merger, existing British Biotech and Vernalis shareholders would hold 47 and 53 percent of the new company, respectively.

The merged group has one marketed product in frovatriptan, an oral treatment for acute migraine. The combined expertise and financial resources of the two companies may help to expand the potential of frovatriptan, specifically to include prevention of menstrually associated migraine. The combined group also has a broad product pipeline and following a portfolio review has decided to focus on treatments for central nervous system disorders and oncology.

ISS had no objections to the merger and recommended that shareholders vote in its support. At an EGM held on Aug. 13, 2003, British Biotech shareholders approved the merger, and on Aug. 29, 2003, the board of British Biotech confirmed that its recommended bid for Vernalis had been declared unconditional in all respects. The newly merged company operates under the name of Vernalis plc.

Taylor Woodrow and Wilson Connolly

On Sept. 1, 2003, the board of Taylor Woodrow announced that it had agreed terms of cash and shares offer to acquire Wilson Connolly Holdings. Under the terms of the offer, Wilson Connolly shareholders were offered GBP2 ($3.22) in cash and 0.132 new Taylor Woodrow ordinary shares for each Wilson Connolly share held. The offer valued Wilson Connolly at GBP 480 million ($772.8 million).

The combined group would become the U.K.'s fourth-largest homebuilder, measured in volume with approximately 10,000 completions every year. With a combined landbank portfolio of 37,082 plots, equivalent to 3.6 years' supply, the company would have a strong strategic landbank portfolio located across the United Kingdom and resultantly excellent potential for value creation. Most importantly, the two businesses complement each other geographically, with Wilson Connolly's coverage of the North West of England and East Anglia adding to Taylor Woodrow's strength in the Midlands, the South of England and Scotland. Taylor Woodrow will continue to have operations in North America, Spain and Gibraltar. With improved geographical coverage the combined group would have a strong base for future growth.

Emphasizing the excellent strategic fit and geographical coverage of the combined business, together with the cost-effective structure produced by the merger, ISS had no objections to the acquisition and recommended that shareholders vote in its support. On Oct. 9, 2003, Taylor Woodrow announced that valid acceptances of the offer for Wilson Connolly had been received in respect of approximately 94 percent of the existing issued share capital of Wilson Connolly. As valid acceptances have been received for over nine-tenths of Wilson Connolly's issued share capital, Taylor Woodrow intends to apply the provisions of sections 428-430F of the Companies Act 1985 to acquire all outstanding Wilson Connolly ordinary shares on the terms of the offer.

Shareholder Proposal at British Land

ISS recommended a vote against a shareholder proposal requisitioned by activist investor Laxey Partners Ltd., an offshore company in the Isle of Man, at the AGM of British Land in July 2003. The resolution sought to remove chairman and chief executive John Ritblat from the board. However, Laxey, which at one stage last year held as high as nine percent of shares, had been gradually reducing its stake in British Land to just 0.15 percent by early-July, making it inappropriate to continue with the resolution. By the time of the AGM, Laxey had sold the entirety of its stake and withdrawn the resolution. However, the company stated that the withdrawal was not legally possible so it remained on the agenda.

Background

Initially, the proponents had proposed six resolutions to be put forward for the July 2003 AGM, two of which were essentially the same. The four other resolutions had been deemed invalid for reasons of "…trespassing upon the proper functions of the board," which the directors of British Land, upon receiving legal advice, omitted from the AGM agenda.

• Resolution 1, which was duplicated again in Resolution 3, called for the removal of John Ritblat as a director;
• Resolution 2, which had been subsequently withdrawn, urged the board to formulate proposals to be submitted to shareholders for the buy back of up to 25 percent of the company's shares at a price of GBP 6 ($10.02) or at a price equal to 75 percent of the net value of its assets; and
• Resolutions 4, 5, and 6, which were deemed invalid by the board, urged the company to effect within three months the separation of the roles of Chairman and Managing Director and appoint a non-executive Chairman, and to formulate and submit to shareholders proposals to deliver value in the near to medium term or otherwise proceed with a complete realization of all the company's assets.

Board's Arguments

In response, the board noted that Laxey owned less than one percent of British Land's issued share capital and did not have the support of 99 other shareholders as required by the Companies Act to requisition shareholder proposals. Nevertheless, the board did allow the proponents' proposals to be voted on at the 2003 AGM. However, it expressed little patience for a further continuation of this "management by referendum" and recommended that shareholders vote against the proposal.

The directors did not believe that Laxey's continuing public campaign, without first engaging in a direct debate with the company, was in the interest of the company's shareholders as a whole. Instead, the board invited any shareholders to discuss proper and concrete proposals to create value with the directors. The board pointed out that there are a number of formal routes available to shareholders, including requisition of ordinary resolutions to remove or appoint directors, or special resolutions to amend the articles of association or liquidate the company.

Conclusion

ISS did not believe the resolution to be in the best interests of the company or its shareholders as a whole. Although Laxey expressed valid concerns regarding the performance of British Land's shares, which were trading at a discount to their net asset value) and their current corporate governance structure at the company (which allows for a combined role of Chairman and Managing Director contrary to the recommendations of the Combined Code and best practice), ISS viewed the requisitioned proposals as an attempt to require the company to be run in accordance with their own management objectives. Such proposals run the risk of undermining the board's authority to develop and pursue a corporate strategy, which would create value for shareholders.

British Land further announced in April that it has appointed head-hunters Whitehead Mann to find a CEO in the next year to work alongside John Ritblat who would remain as chairman for an indefinite period.

Laxey's declared motive for its activist campaign to institute a corporate governance overhaul at British Land seemed questionable (Derek Higgs sits on British Land's board). ISS believes that these kinds of decisions are usually best left with management and should not be forced upon management by shareholders. Nevertheless, Laxey's past and most recent efforts could be regarded to some extent as a success for the company's shareholders. British Land adopted Higgs recommendation for a senior independent non-executive director by appointing Chris Gibson-Smith, promised to split the roles of chairman and CEO from next year at the latest and, for the first time in ten years, returned to buying back shares, which have helped improve share price performance.

However, in the light of Laxey's effort to withdraw the resolution and British Land's stated commitment to separate the offices of chairman and CEO by the company's 2004 AGM, ISS recommended that shareholders oppose the resolution.

Royal & Sun Alliance's Rights Issue

RSA proposed a controversial GBP 960 million ($1,546 million) one-for-one rights issue at a discounted price of 70 pence ($1.13) per share at its Sept. 22 EGM.

Background and Strategic Rationale

Royal and Sun Alliance Group operates as a global financial services company, predominantly offering insurance policies. The group had grown organically and through mergers with other associated businesses. During 2002, the group disposed of its U.K. asset management operation, Royal & Sun Alliance Investments, and its German subsidiary, Royal & Sun Alliance Holding GmbH. Royal & Sun Alliance stated its aim to meet the needs of both its business and retail customers, whilst continuing to expand its operations outside the United Kingdom and provide increasing shareholder value.

Following a rigorous review of the group's businesses, findings had shown an opportunity to build on stronger market positions and improve the scale and quality of services by focusing on areas of market strength, addressing issues of business weakness, poor performance, and longer term strategic uncertainties, and strengthening the balance sheet.

The group stated that the strategic review identified a number of operational actions that would result in improved performance. Consequently, the group intended to restructure its U.S. business; reduce the quota share reinsurance agreement with Munich Re Group from 2004 onwards; and implement a detailed business improvement action in expense savings, claims efficiencies, and underwriting improvements. Based on this review, the group revised it targets and outlined strategic plans to deliver a profitable and attractive general insurance business, taking advantage of the opportunities for premium growth in their chosen markets.

The entire proceeds of the rights issue, together with the group's existing capital resources and capital released from ongoing validation and confirmation, would establish further general insurance loss reserves up to the extent of the deficit identified by Tillinghast-Towers Perrin's review to grow further in selected business lines and reduce the Munich Re Group quota share.

Conclusion

Several concerns had been raised since the proposed rights issuance was announced, including concerns over dilution, which resulted in about a 13-percent drop in the company's share price immediately following the formal announcement. In addition, of the proceeds from the rights issue, GBP 800 million ($1.3 billion) would be used to raise provisions for anticipated claims in the third quarter, instead of funding future business growth and development. Royal and Sun Alliance's capital had been depleted over the years by asbestos claims and stock market declines. Based on financial information provided by Bloomberg, the group's shares had lost about three-quarters of their market value since the end of 2000.

Up until Oct. 15, 2003, being the last day for shareholders to support this rights issue, market analysts were skeptical about the group's capacity for growth in the face of increased competition in a slackening market. In addition, the underwriters for the rights issue, Merrill Lynch, Goldman Sachs, and Cazenove, would be entitled to receive fees up to GBP 34 million ($55 million), representing about 3.5 percent of the total sale which was on the high-end of such fees, and they would be obligated to take up any shares that are not taken up by existing shareholders.

ISS did not oppose the proposal for the rights issue, which was in line with what many insurers have done in the face of rising claims and weakened market conditions. Royal and Sun Alliance scrapped plans for a previous rights issue proposal less than a year ago due to lack of shareholder support. Under the one-for-one rights issue, shareholders potentially would have to pay considerable amounts to maintain their stakes in the group. However, the subscription price would be at a substantial discount based on the company's share price prior to the announcement of the offer. The proceeds from the rights issue would help meet the group's anticipated claim obligations, which would be important for the group's ongoing business.

Update

On Oct. 16, 2003, Royal and Sun Alliance announced that shareholders had subscribed to 92 percent of the shares in the expected GBP 960 million ($1,546 million) rights issue, ending several weeks of uncertainty over the offer. Royal and Sun Alliance shares have now stabilized in recent days, after a period of volatility. According to the Financial Times, Goldman Sachs, Merrill Lynch and Cazenove, who jointly underwritten the rights issue, are now seeking buyers for the remaining eight percent of the shares.

William Morrison Supermarkets PLC Given Go-ahead to Acquire Safeway PLC

In September 2003, William Morrison Supermarkets plc, the sixth-largest grocery retailer in the United Kingdom, was finally given the go-ahead to proceed with its proposed acquisition of Safeway plc, potentially ending several months of speculation over Safeway's future. Sir Ken Morrison's initial approach to purchase the UK's fourth largest supermarket chain in January 2003 led to a bidding frenzy with Tesco plc, Asda Group Ltd. (owned by Wal-Mart Stores Inc.) and J Sainsbury plc, all expressing their interest in Safeway. Joining the melee were billionaire entrepreneur, Philip Green, owner of the BHS department store chain and the Arcadia fashion group, and U.S. investment firm, Kohlberg Kravis Roberts, who would later pull out. With the obvious market implications of one supermarket chain acquiring another, the U.K. Competition Commission stepped in.

Morrison initially tabled a bid of approximately GBP 2.9 billion ($4.7 billion) for Safeway's 479 stores, with a view to creating a strong national presence combining Morrison's successful retail franchise with Safeway's smaller store expertise. The bid represented a premium of 30 percent over the closing mid-market price of Safeway shares on January 8, 2003, the day before the announcement of the deal. The combination of Morrison's strong presence in the Midlands and North of England with Safeway's solid status in Scotland and Southern England would create a group certainly capable of rivalling Asda and Sainsbury for market share. Tesco remains well ahead of its rivals, boasting a market share of approximately 27 percent.

The Competition Commission's ruling, backed by Patricia Hewitt, the UK Secretary for Trade and Industry, gave the go-ahead for Morrison to bid for Safeway, provided that approximately 53 Safeway stores are sold off or closed in towns where there are also Morrison stores nearby. Tesco, Asda and Sainsbury will be able to bid for these stores, along with other retailers such as Marks & Spencer, the Co-op and Waitrose. The Commission was of the opinion that an acquisition of Safeway by Tesco, Asda or Sainsbury would have required significant divestment of a large number of Safeway stores in order to maintain local choice for consumers. Furthermore, even if there were a large-scale divestment, the Commission had concerns regarding competition on the national level. Consequently, Tesco, Asda and Sainsbury have been prohibited from purchasing the whole or any part of Safeway, with the exception of the stores that Morrison chooses to divest, provided of course that the merger goes ahead.

Despite the ruling, Safeway's long-term future remains somewhat unpredictable. Morrison have yet to confirm their bid, and may be put off by the Commission's somewhat prohibitive requirement that they sell-off a significant number of Safeway stores. Although Green's bid was never subject to the Commission's scrutiny, he has remained fairly quiet, only stating that he was awaiting the Commission's decision before deciding whether or not to table a bid. Furthermore, recent speculation has emerged that Safeway CEO, Carlos Criado-Perez, who is known to have been against the board's decision to sell to Morrison, may be persuaded to lead a management buyout of the business. This one is far from over.

Cordiant Communications From Demerger to Takeover: A Timeline

October 1997

Cordiant demerged from Saatchi & Saatchi to form two separately listed advertising and marketing companies, Cordiant Communications Group and Saatchi & Saatchi. The company cites cultural differences between Saatchi's and Bates, Cordiant's other main advertising group, for the split.

1998

Cordiant was approached by advertising giants WPP, IPG and Omnicom for a possible takeover. The company reports pre-tax profits stood at GBP 23 million ($37 million) for 1997. Cordiant CEO Michael Bungey awarded himself a 36 percent pay rise. Bonuses and benefits took his total pay to GBP 1 million ($1.61 million).

Cordiant reveals an 11 percent rise in operating profits for the first half of 1998, but shares fell 1 pence ($0.016) to 107 pence ($0.17) after turmoil in the far east was revealed, forcing the company to make 200 staff redundant at a cost of GBP 1 million ($1.61).

1999

Michael Bungey, CEO unveiled a 13 percent increase in full-year, a pre-tax profits to GBP 25.9 million ($41.70 million), and there were speculation that a large advertising group, America's True North was preparing a bid for Cordiant.

Cordiant unveiled plans for a GBP 200 million ($322 million) acquisition spree, expanding the company by 50 percent, as it announces pre-tax profits rose from GBP 8.4 million ($13.52 million) to GBP 11.1 million ($17.87 million) in the first half of 1999.

2000

Cordiant reported a 32 percent leap in pre-tax during 1999 to GBP 32.3 million ($52 million) and outlined plans to reshape the group for the internet age by stripping out the internet consultancy offices of its existing agencies to form a new, separately branded internet business.

Cordiant makes an ambitious move into branding and corporate communications with the GBP 392 million ($631 million) takeover of Lighthouse Global Network, the US marketing giant that owns Financial Dynamics and design agency Fitch.

2001

Michael Bungey, CEO delivered upbeat view of the industry, predicting 11 percent growth for the year as he announced a 79 percent rise in pre-tax profits at Cordiant to GBP 57.5 million ($) in 2000.

In August 2001, Bungey was forced into an embarrassed climb-down, admitting sales growth at the international marketing group would be "flat at best" in 2001 after a sharp downturn in global advertising and marketing spend. Shares in Cordiant were almost halved after the advertising group shocked its followers with a stark profits warning following the Sept. 11, terrorist attacks. Cordiant later issued another profits warning and announced 1,100 job cuts.

2002

Cordiant had talks with bankers to renegotiate the terms of its GBP 300 million ($483 million) overdraft facility amid fears of a dramatic collapse on profits. Cordiant's pre-tax profits slumped from GBP 57.5 million ($92.58 million) to GBP 25.7 million ($41.38 million) as its operating margin halved from 12 percent to six percent. Bungey announced he is to step down as CEO of Cordiant as the troubled group attempted to held off a rebellion among shareholders unhappy about a slump in its share price.

In December 2002, Bungey left Cordiant three months ahead of schedule, as the advertising group speeds up restructuring efforts.

2003

January 2003 – May 2003

Cordiant confirmed a partial break-up as predators circled its Australian advertising agency, George Patterson Bates. Financial Dynamics management team was reported to put in a bid of GBP 20 million ($32.2 million) for the financial PR agency, a little short of the GBP 28 million ($45.08 million) Cordiant was looking for.

With a slowdown in the global advertising industry and the loss of major clients in 2002 and the current year, including Hyundai and Wendy's, Cordiant struggled with a high level of debt which as of April 30, 2003, stood at GBP 201.2 million ($323.9 million).

In April 2003, Cordiant's shares collapsed after Allied Domecq, its second-largest global client, cancelled its contract with the group's Bates advertising agency. Consequently, Cordiant was forced to secure short-term financing and announced in June 2003 that it did not have sufficient working capital for the following 12 months, even with the expected proceeds from recently negotiated disposals. Cordiant then revealed it had received takeover approaches from a number of unnamed suitors.

June – July 2003

Cerberus Capital Management LP, a U.S. based hedge fund, which held the majority of Cordiant's secured debt teamed up with French Publicis Groupe SA to bid GBP 250 million ($403 million) to split Cordiant's assets. However, on June 19, WPP, the world third-largest advertising company, announced that it would buy Cordiant for GBP 266 million ($444.22 million), of which GBP 10 million ($16.7 million) would be for Cordiant's stock, valuing Cordiant's debt at GBP 256 million ($427.52 million). Subsequently, on June 26, WPP announced that it had bought out the outstanding debt in Cordiant held by Cerberus for GBP 90 million ($150.3 million), or GBP 11 million ($18.37 million) over par value of the debt, after having paid par value for the rest of Cordiant's debt held by other lenders.

However, this did not completely clear the way for WPP's takeover of Cordiant. On June 4, Active Value Fund, which is Cordiant's largest shareholder, had served notice to requisition an EGM to propose new management at Cordiant and block offers such as the one proposed by WPP. The requisitioned EGM is set to take place immediately following this EGM. As of July 9, Active Value had reportedly increased its share interest in Cordiant to 28.75 percent, which would be enough to block the acquisition of Cordiant by WPP by means of scheme of arrangement, which requires approval by 75 percent of Cordiant shareholders. However, as WPP now owns all of Cordiant's debt, WPP has threatened to force Cordiant into administration should the scheme of arrangement fail to receive the requisite approval, in which case, shareholders would receive nothing.

To further complicate matters, on July 8, Nahed Ojjeh, the Syrian-born billionaire and Paris-based chess promoter, had accumulated a 10.75-percent stake in Cordiant between June 10 and July 4, putting her in breach of a Takeover Panel rules after failing to disclose her dealings in a timely manner. The Takeover Panel subsequently announced that it was investigating the amassed stake, particularly whether Ojjeh had acted in concert with any other party. Although Publicis acknowledged that it had links with Ojjeh, who owns a one-percent interest in Publicis, it denied that any involved intentions towards Cordiant. In the letter sent by Ojjeh's lawyer informing the Cordiant board of the accumulated stake, it was stated that there had been no contact between Ojjeh and Active Value. Cordiant's shares were subsequently de-listed on July 16.

On July 23, Cordiant's fate was finally sealed at the EGM, when 99 percent of shareholders votes for WPP's offer. ISS recommended that Cordiant shareholders support the scheme of arrangement to effect the takeover by WPP.