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Guest post: Pfizer’s bid for AstraZeneca – what can the government do?

On April 28, Pfizer announced a possible offer to buy AstraZeneca, presumably having thought an announcement was required by rule 2.2 of the Takeover Code. The result is that, under the relatively new ‘put up or shut up’ rule now embodied in rule 2.5 of the Code, Pfizer has until 5 o’clock on May 26 – the 28th day after its announcement – in which to make a firm offer.

It’s not done that yet, although as has been widely publicised, it has put to AstraZeneca’s board a proposal to buy the Anglo-Swedish firm for £50 a share, in a mix of cash and shares. The proposal has triggered a wave of concern here in Britain about the potential loss (assuming Pfizer acts as it has done in the past, and makes post-merger economies of scale by cutting research and development somewhere in the new merged firm’s global empire) of a new R&D centre AstraZeneca plans to build in Cambridge; and about possible loss of jobs in Macclesfield.

According to the FT, Pfizer’s boss has assured the government that, under Pfizer’s plans, the new merged company would –

• complete the Cambridge investment;

• keep 20% of its global R&D spending in the UK;

• base its scientific leadership in the UK;

• locate its HQ in the UK, and

• keep ‘substantial’ manufacturing in Macclesfield.

But these promises only last for five years, they’re explicitly subject to any significant change in the commercial environment – and in any event they have no binding force. So: does the government have any way of forcing Pfizer to make more significant, binding commitments? Can it somehow step in to prevent the deal if it’s not satisfied?

Since competition law clearance of this merger would be a matter for the European Commission (the global revenues of each company being so huge), the only public law power British ministers could exercise here would to issue a European Intervention Notice under section 67 of the Enterprise Act 2002. A recent high-profile example of the exercise of that power was the European Intervention Notice issued in 2010 by Vince Cable in relation to the News Corporation’s proposed takeover of BSkyB. The effect of such a notice would be to enable ministers to block to merger, unless their public interest concerns were satisfied.

But there’s a problem. Under section 58 of the Act, a European Intervention Notice can only be issued on the basis of a limited number of public interest considerations: national security, accuracy and feee expression in newspapers, considerations relating to broadcasting, and since 2008 (the amendment is not yet reflected on the website) maintaining the stability of the UK financial system. So as the law stands, a European Intervention Notice cannot be issued.

A further consideration could be added to section 58: subsection (4) gives ministers a power to so so by order. This is what Ed Miliband means when he says he wants to ‘widen’ the public interest test so as to enable some kind of intervention on this occasion. It’s what writers like Stefan Stern mean when they say a public interest test is needed and it’s what the FT was calling for when it suggested an independent body should be set up to assess the danger mergers pose the UK science base:

‘This should have the power to seek structural remedies if necessary. In extremis it should be able to block deals outright. These powers must be tightly defined and used sparingly.’

You may remember ministers had these powers in the NewsCorp-BSkyB case, acting in that case on the advice of Ofcom.

But for any new public interest consideration to be permissible, the government would have to seek the approval of the European Commission under article 21.4 of the EU Merger Regulation for ‘recognition”‘in principle of the new ‘public interest’. But that would mean giving the European Commission the final word over whether the government could intervene again; not an attractive approach for any British government, especially during a European Parliament elections campaign.

These are at least some of the ‘serious European legal constraints’ Vince Cable recently told the House of Commons he was operating under. He says he’s ‘open minded’ and considering all options, but I doubt he’ll want to take this one just now. I suppose the option might be less politically toxic after May 26, when we’ll know whether Pfizer is bidding, and when the Euroelections are over. The Commission might – just might – recognise a public interest compatible with EU law in maintaining scientific research capability in Europe. I don’t think there’s any chance of the Commission’s accepting anything that would protect the Macclesfield factory. But I doubt Cable will go down this route at all.

The next two or three weeks will also however give Cable, his civil servants and lawyers, a chance to work out if there’s some other way Pfizer’s assurances can be made legally binding. Could that possibly be done? I doubt it.

I’m no mergers and acquisitions wizard; I like to think I’d have made a terrific partner at Slaughter and May, Clifford Chance or Allen & Overy, but I’m afraid none of those firms wanted me as a trainee. But the sort of possibility that might occur to those involved might be for Pfizer to agree to spin off AstraZeneca’s UK-based research and development functions into a separate company, servicing the new merged parent. The merger deal could include a covenant by the merged firm to maintain the R&D subsidiary in the UK for a certain period, and to spend at least 20% of its global R&D spending on the services of the spin-off operation. Its board could be required to be the same as that of the merged firm, and one of its objects could be to maintain a high level of scientific research capability in the UK.

Theoretically, then, the company’s directors would have a duty to act in good faith so as to achieve that purpose, under section 170 of the Companies Act 2006 (look carefully at the way subsection (2) would colour the subsection (1) duty with the “public” science duty I’ve proposed). A shareholder could go to court to pursue a derivative action in the name of the company against any director breaching that duty, for instance by agreeing, or proposing to agree, to closure of the firm or its sale – and perhaps obtain a remedy, such as an injunction, preventing the breach.

What sort of shareholder might take such action? Well, the government might, if it was given or sold a share as part of the merger deal. Alternatively, it might be some arms-length or independent body, like a company established specially for the purpose – or even an existing body with an in interest in this area, like the Wellcome Trust.

I don’t think even any of this stands legal scrutiny, though, at least not if brokered by the government.

The new merged firm, if based in the UK, would be treated as a ‘national of a Member State’ for the purposes of EU law and so would enjoy freedom of establishment under article 49 of the Treaty on the Functioning of the EU. Any requirement that the spin-off company remain based in the UK would probably be an unjustifiable interference with free movement (and breach article 14 of the Services Directive, for what it’s worth), as would any requirement for the merged parent to maintain a subsidiary in Cambridge. EU law would require the merged company to be free to move its R&D to Bulgaria, if it wants to.

Nor is it obvious that a softer restriction would pass muster. Limiting a firm’s ability to take its direct investment out of Europe would, it seems to me, restrict the free movement of capital under article 63 TFEU – again, probably without any sustainable legal justification.

Crucially, restrictions on the free movement of capital are not only prohibited between Member states, but between Member States and ‘third countries’ – like the USA. So even a requirement for the merged firm to keep its R&D base in Europe would be hard to square with EU law. I doubt, then, that Vince Cable can come up with any legal means of holding Pfizer to its word. I think he must hope its promises satisfy opinion, and that it doesn’t embarrass him by reneging on them at speed.

Interestingly, as this debate has been going on in the UK, French ministers have been resisting GE’s bid for Alstom, which may also be the result of an American firm wanting to invest its cash in Europe rather than repatriate it to be taxed more heavily. The economics minister Arnaud Montebourg has expressed his concerns in far more nationalistic and nostalgic terms than any British MP has in relation to AstraZeneca. Some French commentators have said France should handle this sort of deal more like the British (at least on this podcast they do; if your French is up to it, it’s worth listening to Le Monde’s Sylvie Kauffmann explaining the AstraZeneca debate in French) just as British commentators seem to want us to do things more like the French.

French politics on this sort of issue is conducted in a different style, and the French government does have some legal blocking power. But it’s not as broad a power as is often assumed: it’s limited to sectors closely involved with state functions, to security, defence and the arms industry. In fact in some ways, the legal power available to French ministers is narrower than that available in the UK. Neither is wide enough for present purposes. And ultimately, France is subject to the same ‘serious European legal constraints’ as Britain.

Politicians can exert pressure to get a better deal for their countries either by means of assurances or (in the case of Alstom) from a European ‘white knight’ like Siemens. A bidder might be deterred by political, commercial and media hostility. But I doubt these deals can lawfully be blocked, or even that bidders can be legally bound to nationally preferential promises. I don’t think government can do much.

Carl Gardner is a former barrister and government adviser who now works as a lecturer, writer and consultant. He blogs at Head of Legal