Labour's 'Cadbury Law' proposals deserve a muted chorus of approval

So, the Cadbury Law is nothing of the sort. Instead, it boils down to this. Only bids for utilities and infrastructure firms – not makers of chocolate bars – will be subject to a public interest test. Bidders for all companies must secure a two-thirds majority to succeed, said Labour's manifesto . And the case for limiting votes to shareholders on the register before the launch of a bid "should be examined." This collection of remedies deserves two, but not three, cheers. We should certainly applaud the power to block bids for certain important companies. This is a significant U-turn by New Labour and fits current thinking on how, for example, a liberalised energy market has failed to deliver the investment required to ensure the lights don't go out sometime around 2020. The manifesto was silent on how a public interest test would be applied in practice. But there was no mention of nationality, which should comfort those fund managers screaming prematurely about the threat to inward investment in the UK. Rather, it seems, the idea is to ensure a new owner has the financial strength to meet large investment bills and can be trusted. This should not be controversial. To take a fanciful example, it would be barking mad to allow to allow a highly-leveraged financial fund to buy BT if such an owner couldn't commit to building a fibre-optic cable network. To take a more realistic example, if George Soros was correct in his analysis a few years ago that Russia "does not hesitate to use its monopoly power in devious and arbitrary ways," it would be equally crazy to allow state-controlled Gazprom to buy Centrica, owner of British Gas. So what of the reforms to the takeover code – the two-thirds threshold for success and the examination of the case for disenfranchising the Johnny-come-lately hedge funds? Here Labour has got its priorities back to front, which is why applause should be subdued. The problem with a two-thirds majority rule is that is plain undemocratic. Why allow the wishes of 35% of shareholders to frustrate the desire of the 65%? If the same yardstick was applied to votes in parliament, nothing would get done. The more promising avenue for reform is the one Labour pledges only to examine. The main problem in the modern takeover business is that the game so heavily favours the bidder. We've seen the plot develop many times, not just at Cadbury – in the final stages of an offer period, a company's share register is overrun by arbitrage funds whose ambition is to secure a quick profit of 10% or so. A defending management trying to preach a message of long-term prosperity over short-term gain is left high and dry. Cadbury chairman Roger Carr got it right: "Individuals controlling shares which they had owned for only a few days or weeks determined the destiny of a company that had been built over almost 200 years." It's this aspect of the takeover game that is so offensive since it encourages short-term speculation. A decade ago, there weren't enough hedge funds to make this a problem. Now that there are, it's reasonable to tweak the rules: limiting votes in takeover situations to shares that have been owned for, say, six months or a year seems a reasonable way to proceed. Lazy and incompetent managements would still face the threat of being culled; good managements would stand a better chance of surviving on merit; and institutional shareholders, with less opportunity to leak a few shares into the market, would have to stand up and explain how they acted in bid situations where the result of the vote might be uncertain until the end.