M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, March 23, 2010

Kraft as "corporate pillager"?

Things have been percolating across the pond with respect to the official post-mortems of Kraft's acquisition of Cadbury.  In the UK, the acquisition was the source of a good deal of angst -- generating "Keep Cadbury British" campaigns amongst employees who feared the acquisition would be followed by job losses and a moving of production offshore.  Central to Kraft's present challenges are statements made by Kraft that the transaction would in fact not result in a net loss of jobs in the UK and would respect the traditions of the British icon.   According to the Daily Mail, those statements now seem questionable.  

During her pursuit of Cadbury, [Kraft CEO Irene] Rosenfeld stridently declared her 'great respect and admiration for Cadbury, its employees, its leadership and its proud heritage'.

Yet just days after Kraft's purchase, the mask came off. Rosenfeld suddenly ditched repeated pledges to reverse plans for the closure of Cadbury's Somerdale plant near Bristol, putting 400 jobs in jeopardy as production is shifted to Poland.
The promise had been a central plank in the publicity battle fought by Kraft during its pursuit of Cadbury. Now it looks like a piece of disgraceful cynicism.

It has also emerged that Kraft is reviewing Cadbury's final salary scheme - an emblem of its historically caring attitude towards employees - possibly putting current workers on to a less generous scheme, while closing the plan to new members.

This came even after a personal pledge by Rosenfeld in a letter to Cadbury chairman Roger Carr on August 28, 2009 - and in subsequent takeover documentation - that employees' pension rights would be 'fully safeguarded'.

All of this has led to a political uproar in the UK. The Takeover Panel is considering changes to the Takeover Code in light of the reaction to the Cadbury transaction and is in the midst of a consultation with respect to rule changes.  In addition, last week, Parliament called in Kraft to question representatives over the takeover.  Rosenfeld declined an invitation to appear and sent a designated punching bag.  No surprise the session didn't really go well.

Kraft executives have made the extraordinary admission that key elements of their bid for Cadbury were based on information gleaned off Google. ...

This emerged as Marc Firestone, a Kraft executive vice-president, issued his firm's first apology to workers.

He said he was 'terribly sorry' for breaking the promise on Somerdale, adding: 'I do sincerely personally express my apology.'

Keeping Somerdale open was a key pledge made during the controversial £11.9bn bid battle for Cadbury. Kraft reneged on it just days after winning control last month.

The American company insisted it did not know 'tens of millions of pounds' of equipment had been installed in a new Polish factory.

That's the way these things go I suppose.  Rosenfeld is coming under quite a bit of criticism in her UK for dissing the Parliamentary proceedings. Compare Kraft with Toyota -when Toyota was the subject of recent US Congressional hearings, Toyota's CEO found his way to Congress and took his lumps.  Rosenfeld on the other hand didn't bother to show up when the Parliament called.  Of course, Toyota's CEO made the pilgrimage, in part, because Toyota has significant ongoing business interests at stake and wants to ensure that it can keep selling cars in the US market.   Kraft, however, is in a different place.  With its deal done, it's not all that interested in the political wreckage left behind.  If it results in an overhaul of the takeover rules that won't have a material effect on Kraft going forward.  

It's hard to know how this is going to play out over time - whether Parliament is simply venting and does not have a legislative agenda, or whether there is anything that will come out of the Takeover Panel's review.  The talk already is about redefining director fiduciary duties so that directors of UK corporations act more like "stewards" for the long-term interest rather than "auctioneers."

If the result of all of this is that the takeover rules are reworked to provide directors with a more active role in defense of the corporation in the face of a takeover threat that would be a wholesale reversal of a long-standing UK governance principle and put the UK on a footing closer to that of Delaware.  That would be a disappointing development.  I say disappointing mostly because with Delaware on the one side and the Takeover Code on the other, one has a natural experiment.  In the UK we have the embodiment of Ron Gilson's passive approach to director action in the face of a takeover.  While in Delaware we see Marty Lipton's active managers stewarding the corporation through the shoals of takeover threats.



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