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Introduction

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:

  • approved by a majority in number representing 75% in value of the target's shareholders voting; and
  • sanctioned by the court.

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 ([2019] EWHC 2080 (Ch)) and In the matter of Inmarsat plc ([2019] 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.

In the matter of Realm Therapeutics plc

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):

  • held Realm shares and Essa shares and warrants;
  • was both a seller and a buyer of Realm shares (the day after the announcement of the transaction, BVF had acquired Realm shares from another shareholder); and
  • received special treatment under the scheme as it had the right to enforce a provision in the implementation agreement for the takeover.

The High Court rejected these arguments and held that:

  • the fact that a class member had a cross holding in a purchaser was not a relevant issue for class composition;
  • BVF's acquisition of Realm shares after the transaction announcement had not 'fractured the class' (the court noted particularly that Essa and BVF were distinct from one another (neither was under the control of the other) and there was no evidence suggesting that they were concert parties); and
  • the purpose of the relevant provision in the implementation agreement was to confer upon BVF (which under US securities regulations might be regarded as an 'affiliate' by reason of the size of its shareholding) the same dealing rights that the other Realm shareholders would enjoy. This right was not a material difference that would put BVF into a separate class. Hence, the High Court held that the court had been right to give permission for Realm to convene a single scheme meeting and therefore the scheme could be considered for sanction.

In determining whether the scheme should be sanctioned, the High Court noted that it had to consider whether:

  • the majority was acting bona fide and was not coercing the minority in order to promote interests adverse to the class whom they purported to represent; and
  • the arrangement was such as an intelligent and honest class member acting in respect of that membership interest might reasonably approve.

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.

In the matter of Inmarsat plc

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 explanatory statement for the scheme circular was not sufficiently clear about the Ligado cooperation agreement;
  • as Ligado had an application to modify the spectrum licence before the FCC, the transaction should have been structured to include a 'contingent value right' (ie, a right for Inmarsat shareholders to receive deferred consideration if the FCC approved the modification); and
  • there had been a material change in circumstances since the scheme meeting as a press story was published in October 2019 indicating that the FCC would approve such modification shortly.

The High Court rejected these arguments and sanctioned the scheme. Specifically, the court concluded as follows:

  • Oaktree had not identified anything specifically that ought to be explained about the Ligado cooperation agreement over and above what was made public in Inmarsat's 2018 annual accounts. The court concluded that the explanatory statement was clear, fair and sufficient. In addition, the statement made clear that the Ligado payments had been subject to commercial contingencies.
  • The court was concerned only with whether the scheme presented to it might reasonably be approved by an honest and intelligent shareholder and not whether a better deal might be negotiated. Accordingly, it was not relevant to the court's discretion on sanctioning the scheme whether a contingent valuation right should have been included in the deal.
  • On the facts, the court held there had been no material change since the date of the scheme meeting which would cause it to review the decision taken at that meeting. The press story was pure speculation and the prospect of a modification to the Ligado licence remained as uncertain as it had been at the scheme meeting.

Comment

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:

  • a target shareholder with shares in the acquirer voted in accordance with its economic interests in relation to a matter not shared by the relevant class of target shareholders; and
  • there has been a material change of circumstances since the scheme shareholders' meeting.