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The Guardian
Thursday, 8 March 1990
Inspectors in call for changes in the City to prevent similar affair from happening again
Lessons to be learned
Mark Milner
THE City had important lessons to learn from the House of Fraser affair, Department of Trade and Industry inspectors concluded at the end of a 15-month investigation.
The inspectors, Hugh Aldous and Sir Henry Brooke, QC, said that in a crucial 10-day period in March 1985 "many things happened… which warrant careful study if events like this are not to happen again".
In the 750-page report, completed in the summer of 1988, the inspectors called for a series of changes, ranging from the need for clear lines of responsibility among City advisers to ways in which loopholes in the Takeover Code could be closed.
They acknowledged that no system can be proof against determined dishonesty and that those who were involved in bid battles had to operate under time constraints.
But they added that there were "some lessons of importance to be learned" and listed six main headings:
- Clear demarcation of responsibility;
- Advisers' knowledge of their client;
- Appropriate procedures for advisers;
- Relationships with the media;
- Relationships with the authorities;
- Loopholes in the takeover code.
During the battle for House of Fraser, the Fayeds were advised by merchant bankers Kleinwort Benson and solicitors Herbert Smith. The inspectors argued that as far as submissions to the Office of Fair Trading were concerned "nobody was clearly in charge and nobody's responsibility is very clear".
They said more care should be given to defining the roles and responsibilities of advisers. "If this is not done the sort of muddle which happened in this case will recur."
The inspectors were critical of Kleinwort Benson and one of its directors, Mr John MacArthur, for making confident statements about the Fayeds' affairs "on the basis of relatively little reliable knowledge".
They were told by Kleinwort Benson's Lord Rockley that merchant bankers were accustomed to using their judgment and that elaborate verification procedures were not appropriate in the fast moving circumstances of takeover bids.
In response the inspectors noted: "If, as we accept, this is a belief and attitude which genuinely remains in some parts of the City, then we are of the opinion that it is time such beliefs and attitudes were changed."
The report suggested a series of procedures which advisers should follow when taking on new clients and that there should be independent verification of claims made by clients.
The inspectors also pointed out that during the period between March 4 and March 14, 1985, Mr MacArthur made a number of statements to the media which were not correct. In the report they recommended that advisers should make sure they had done sufficient research so that when they spoke to the media they could do so with confidence.
In relation to the regulatory authorities, the inspectors suggested that when issues of "public interest" other than competition were involved, the OFT should "identify it clearly and do all it can within the limitations imposed by confidentiality to explain to parties the contrary evidence which is worrying it and give them an opportunity to answer."
If information was not provided to the OFT within a reasonable time, the inspectors suggested advisers "should know that the case will be referred for further inquiry elsewhere."
Above all the Secretary of State for Trade and Industry, who has the ultimate responsibility for deciding if takeover bids should be allowed to proceed, should not be forced into a position where he was "obliged to combine the roles of inquisitor and decision maker."
Finally they called for the closure of an historic loophole in which a bidder, other than a company, was not required to make the detailed disclosures required from a corporate bidder.
Last night the Takeover Panel, which said it was studying the report, pointed out that the disclosure arrangements had been considerably tightened since the House of Fraser bid.
Kleinwort Benson noted the inspectors had accepted it acted in good faith and that all House of Fraser shareholders had been paid in full.
"As regards representations made on behalf of the Fayeds, there are limits to what can be verified, as the Inspectors themselves have discovered."
A spokesman for Herbert Smith declined to comment in detail.
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