British manufacturing, science and R&D, is again subject to attack with Pfizer’s proposed takeover of AstraZeneca. The deal is reported as threatening 30,000 British jobs and a substantial part the UK economy’s manufacturing added value, as well as severely damaging British leadership in drug research and production. All this, with the dogmatic encouragement of the British government. David Cameron simply affirms the government’s neutrality over the deal, but expresses satisfaction with Pfizer’s promise not to act against British interests for the first five years after acquisition – a time scale beyond which he appears to have little interest. George Osborne’s pleasure with the deal is clear in that it demonstrates yet again the extent of his business ‘friendliness’. Only Vince Cable demurs, suggesting weakly that we’ll need to look at the detail.
At this point in time it is unclear who will defend British interests against such damaging takeover. The thirteen directors of AstraZeneca are the first line of defence. They are collectively responsible for the success of the company and will no doubt all have contractual agreements requiring them to act in the best interests of the company at all times and to declare any possible conflict of interest. However, their rejection of Pfizer’s improved GBP63bn bid was simply on the grounds that it substantially undervalued the business. That price hardly reflects the tax avoiding potential of the newly created combine, never mind AstraZeneca’s pipeline of experimental drugs and cancer treatments which is reported to be substantially superior to Pfizer’s, and the potential for stripping out and realising AstraZeneca’s assets, a talent which Pfizer has previously demonstrated.
So an improved offer can be expected shortly. How then will AstraZeneca’s directors respond if they believe they have achieved the best possible price?
The Companies Act of 2006 specifies company directors’ legal duty as “to promote the success of the company for the benefit of all its members and in doing so have regard (amongst other matters) to a) the likely consequences of any decision in the long term, b) the interests of the company’s employees” as well as the interests of other stakeholders which the Act lists. So the legal duty of AstraZeneca’s directors is clear, both from the Companies Act and their own service contracts: they must fight for the autonomous survival and long term success of the company.
So far, the AstraZeneca directors appear to have done an excellent job promoting the success of the company. That is what makes it so attractive to Pfizer. But if the bid were to be accepted, all future decisions about AstraZeneca would be taken in New York or Connecticut, to fit the Pfizer convenience. For AstraZeneca that could only mean relative failure over the long term. AstraZeneca directors have so far been robust in rejecting the bid, pointing out the strength of their development pipeline and increasing momentum as an autonomous company.
We’ve been here before. Many times. The directors of Cadbury, for example, were in a similar position regarding the takeover bid they received from Kraft. They argued the offer price up as far as they could and then accepted multi-million pound bonuses for recommending the deal to their shareholders. Kraft, like Pfizer, made comforting assurances in respect of the UK operations, but nevertheless closed Cadbury’s Bristol plant within weeks of the deal’s completion. Cadbury’s directors had acted illegally in not promoting the success of their company and also by accepting the bonuses which were a clear conflict of interest. But they were not prosecuted for such dereliction of their duty.
AstraZeneca’s directors may have a more robust sense of their legal responsibilities and a greater determination to see them through. They have the benefit of a changing mood in the mainstream economic ideology. The Friedmanite conception that companies exist simply to maximize shareholder wealth is falling out of favour as the extremes of inequality to which it contributes, are recognized as having overall a negative economic impact. Shareholder gains no longer ‘trickle down’ to benefit the rest of the economy, if they ever did. The grounds for pitching economic ideology above the legal responsibilities of ‘corporate officials’, are no longer seen as rational.
AstraZeneca’s directors may fight for the continued autonomy of their company and its long term future success. Neil Woodford, a fund manager controlling GBP350m of AstraZeneca shares for St. James’s Place Wealth Management, has argued the case for total rejection of the bid. He makes the point that it is a case of short term against long term interests: “There is a short-term profit for shareholders through a deal, but there is more value in this company in the long term as a single entity.” (Financial Times 3.5.14). It is also clearly a case of shareholder take against company success.
According to the Financial Times, shareholders have signalled that the price is not yet high enough, but when it is, they may well decide to accept Pfizer’s bid and pocket the windfall gain. That will put 7000 direct, high quality British jobs on the line and a further 23,000 indirect jobs at risk, and could severely reduce Britain’s manufacturing and exports, placing our drug research and production at risk.
There is a legal route to ensure the directors pursue their legal duty and reject the bid. There are now shareholders in place prepared to initiate proceedings against AstraZeneca board members should they decide to follow the example set by Cadbury’s directors. This would establish a healthy precedent, but it might not save AstraZeneca, the future of which almost certainly rests in the hands of hedge funds and private equity traders whose concerns are extremely short term, if not measured in nanoseconds.
In most other countries, systems are in place to provide some protection against such predatory activity. Even in the US, governments have shown themselves prepared to bend the rules if the national interest is threatened. Only, it seems, in the UK is government so naive, or so cynically self-serving, that they resolutely refuse to defend British interests against long term destruction for the short term gains by City ‘Flashboys’.
Government has the option to refer the loss of competition in UK markets for further consideration by the Competition and Markets Authority (CMA). Most of the protections of competition, so carefully established after the 1930s fiasco, have since been dismantled, allowing the establishment of global monster corporations big enough to control supply and fix prices. Pfizer-AstraZeneca could be just such another: ready, willing and able to abuse the public health. A progressive government would be keen to prevent such abuse being made so readily possible. It would refer the takeover to the CMA whose prime duty is to promote competition, both within and outside the UK, for the benefit of consumers. This, of course, runs counter to the George Osborne aim of maximising shareholder wealth, and so is unlikely to be accomplished by the current UK government. But it might have been expected that Vince Cable would have put up some defence of British interests.
When and if the AstraZeneca board accepts a revised Pfizer bid, a fund will be established to finance the competent initiation of proceedings against those directors recommending acceptance. A successful outcome would establish, once and for all, the primacy of the law over economic ideology based on a misinterpretation of past data and some ‘theory’ based on the false denial of the company’s existence, claiming it to be a ‘legal fiction’. That would be a victory for the law, for common sense and for the common good, over ideology, dishonesty and inequality.