10 September 2016
Something unusual happened back in July when the proposed £24bn acquisition of ARM Holdings by Japan’s Softbank Group was announced.
Typically such regulatory announcements are very dry – a long list of promised financial benefits, underpinned by more or less plausible claims of strategic logic.
Overwhelmingly, they are directed at shareholders and the broader investment community.
This announcement was different. Before you got to the usual highlights, you read, inter alia, that SoftBank:
It was also said that the transaction would enable the combined group to fully capture the “Internet of things” opportunity.
Whatever you think of these pledges, none is obviously targeted at ARM group shareholders, to whom SoftBank’s offer was directed. Instead, they are clearly intended to speak to a broader stakeholder group, notably government and employees.
Clearly the content of this announcement was partly shaped by its timing – July 18, a few weeks after the Brexit vote, with the acquirer anxious to present a message that the acquisition would be good for Britain, good for society, and not just for ARM shareholders.
But you might equally say that the stakeholder language was doing nothing more than recognising the broader spirit of the times, where there is widespread acceptance that companies owe duties that extend beyond their shareholders.
Indeed, this view is explicitly recognised in law. In particular, s 172(1) of the 2006 Companies Act describes the duties of directors of companies. These are to act in such a such a way as to “promote the success of the company for the benefits of its members”, taking a long term view, and with reference to such factors as the interests of stakeholders such as staff, customers, suppliers and employees, and the overall reputation of the company.
What is interesting about this definition is that the interests of shareholders are nowhere directly cited, despite the overwhelming primacy of shareholders in the narrative of public companies. Indeed, it is not disputed that the legal duties outlined in S 172(1) introduced into the law the concept of enlightened shareholder value – and clearly this is something broader than pure, naked shareholder value.
And yet for all the stakeholder friendly language and “enlightenment” of the directors’ duties, when it comes to significant corporate activity, such as the ARM deal, it is shareholders who get to vote. Not staff, not customers, not suppliers. Only shareholders. And it remains the case that the dominant understanding of the law is that when we talk about the success of the company and its members, we are still talking about its shareholders.
This was neatly captured in comments reported in the 2012 Kay Review of UK equity markets where the chairman of a leading public company that accepted a (controversial) offer said that the board did not believe it was possible to reject a high bid that reflected full value for the business even if it considered that the long term success of the company may best be achieved if it remained independent.”
This view is hardly surprising. As the law stands, any board bold enough to turn down a fully valued offer on the basis that they felt it might not serve the wider interests of the company would likely be sued for breach of fiduciary duty by those shareholders wanting to accept the offer.
What is perhaps surprising is that we have not seen more effort by “enlightened” or progressive shareholders to challenge this shareholder focused interpretation of directors’ duties. This is particularly so when one considers that, post the financial crisis, unadulterated shareholder capitalism has hardly been a popular creed.
It is surely only be a matter of time before this issue is put to the test. In the meantime, for all the talk about stakeholder capitalism, it is still the shareholders who sit firmly in the van.