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29 January 2020
UK public takeovers can be structured either as court-approved schemes of arrangement under the Companies Act 2006 or contractual offers. A contractual offer involves a bidder making an offer to the target's shareholders individually, after which it must gain acceptances in respect of at least 90% of the shares to which the offer relates in order for it to compulsorily acquire all of the target's shares. In contrast, a scheme involves the target proposing an arrangement to its shareholders, which becomes a binding requirement on all shareholders to transfer their shares to the bidder if the arrangement is:
Schemes are the preferred structure for UK public takeovers. According to the UK Takeover Panel report and accounts, during the year ending 31 March 2019, 18 firm takeover offers were structured as a contractual offer and 33 were structured as a scheme at the time of the relevant takeover announcement.
Two recent cases where shareholders' objections to schemes in a public M&A context were heard in court sanctions hearings are In the matter of Realm Therapeutics plc ( EWHC 2080 (Ch)) and In the matter of Inmarsat plc ( EWHC 3470 (Ch)). These cases are helpful in highlighting the types of objection raised by shareholders and understanding the approach taken by the English courts in applying their judicial discretion to sanction a scheme.
Realm Therapeutics plc (Realm) is a pharmaceutical development company. On 16 May 2019 Realm announced its proposed acquisition by Essa Pharma Inc (Essa), in exchange for consideration shares in Essa by way of a scheme. On 28 May 2019 the courts gave permission for Realm to convene a single scheme meeting. This meeting was held on 24 June 2019, at which the scheme was approved by Realm's shareholders.
Bavaria Industries Group AG (Bavaria) – a Realm shareholder – objected to the scheme at the sanctions hearing. It contended that the order to convene a single scheme meeting was wrong as there should have been two class meetings and that, consequently, the court lacked the jurisdiction to sanction the scheme. It argued that BVF Partners LP (BVF):
The High Court rejected these arguments and held that:
In determining whether the scheme should be sanctioned, the High Court noted that it had to consider whether:
On the first consideration, the High Court held that when addressing issues faced by a class as a whole, a class member is entitled to vote in accordance with its economic interests relating to such issues. However, that class member cannot vote in accordance with its economic interests in relation to a matter not shared by the class as a whole. For example, if BVF voted under the scheme in order to secure further finance for Essa (bearing in mind its cross shareholdings), it would not be using its vote in relation to the issue facing the class as a whole for the purpose for which it was conferred. Looking at the evidence, the court concluded that this was not the case and that BVF had voted in favour of the scheme as it shared the view, recommended by the Realm board, of the longer-term value presented by the transaction.
On the second consideration, Bavaria had argued that as Realm's shareholders included specialist fund managers which had to find a home within the sector for their investable funds, the transaction should have included a cash option as an alternative to consideration shares in Essa. The High Court rejected this argument. It noted that its task was not to ask whether this was the best scheme that could be devised as it was not as well placed as the shareholders to make a commercial judgment on whether to approve the scheme. The question that it had to answer was whether the scheme as presented met the fairness criteria. Based on the facts, a highly experienced board and a 78.49% majority by value of Realm's shareholders (which included experienced investors) all considered this to be the kind of transaction of which intelligent and honest shareholders might reasonably approve.
The court therefore saw no ground on which it could properly withhold sanction on discretionary grounds and thus sanctioned the scheme.
Inmarsat plc (Inmarsat) is a provider of mobile satellite services. On 25 March 2019 its board announced its proposed acquisition by Connect Bidco Limited (a consortium of financial investors) for cash by way of a scheme. On 10 May 2019 the scheme meeting was held, at which the scheme was approved by shareholders.
Oaktree Value Opportunities Fund LLP (Oaktree) objected to the scheme for reasons relating to a cooperation agreement under which Inmarsat had granted a number of options for Ligado (a US satellite communication business) to use certain radio frequencies in North America in return for scheduled payments (estimated at $136 million per year, growing at 3%, compounded over the next 89 years). Ligado had been unable to service these payments on a regular basis as it had not been able to obtain approval from the US Federal Communications Commission (FCC) to re-purpose certain parts of the global position spectrum for its intended terrestrial communications network. Its application to obtain such approval had been outstanding for a number of years.
Specifically, Oaktree contended that:
The High Court rejected these arguments and sanctioned the scheme. Specifically, the court concluded as follows:
Acquirers of UK public companies can take comfort that the English courts are maintaining their position of not considering the commercial benefits of the deal when deciding whether to sanction a scheme. An interventionist approach to the decision-making process would undoubtedly diminish the popularity of schemes as a preferred structure for implementing such takeovers. Shareholders wishing to object to such schemes should note that the focus of their arguments against such schemes should be based on the fairness of the scheme rather than the commercial benefits of the transaction.
The cases discussed above highlight the two circumstances in which the courts may choose not to sanction a scheme – namely, when:
For further information on this topic please contact Will Pearce or William Tong at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (email@example.com or firstname.lastname@example.org). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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