Takeover Schemes and Share Splitting

A recent case has help to clarify a perceived risk area relating to the use of schemes of arrangement to effect takeovers.

In recent years schemes of arrangement have become the preferred mechanism for affecting recommended takeovers because they offer a number of perceived advantages over the alternative route of a recommended offer, including the perception that it was easier to meet the acceptance thresholds under a scheme of arrangement, so as to make it bind all shareholders, compared with the 90% acceptance level necessary under a takeover offer.

Ballot_Box-l-s[1]There has, though, remained a perception that schemes of arrangement might have an inherent vulnerability because they require not only the approval of 75% in value of those voting at the relevant shareholders meeting to approve it, but also a majority in number.  The theoretical risk, therefore, was that a shareholder, or shareholders opposed to a scheme could split their shareholding into numerous smaller holdings so as to defeat the ‘majority in number’ requirement even where more than 75% in value of the shareholders voting on the scheme wanted to approve it.

This was exactly what was attempted by certain shareholders of Dee Valley Group plc in attempting to frustrate Severn Trent plc’s takeover of Dee Valley. A shareholder who was opposed to the scheme of arrangement split his shareholding into 443 separate individual holdings of one share, which individuals then individually voted against the scheme at the relevant court meeting such that, although more than 75% in value of voting shareholders supported the scheme, 466 of the 828 members voting opposed it.

The matter came to be considered in the High Court which, last week, ruled that the chairman of the meeting had acted within his powers in rejecting the votes of those individual shareholders who had come to hold shares through the share splitting exercise.  The Court concluded that:

  • A meeting of the relevant shareholders (or, more accurately, class of shareholders), convened under the control of the Court (which is what happens in a scheme of arrangement), is not the same as a company general meeting.
  • In contrast to the rules applicable to general meetings, members voting at a class meeting directed by the Court have an obligation to exercise their voting power “for the purpose of benefiting the class as a whole”.
  • The chairman’s action in rejecting the votes of those individual shareholders who had come to hold shares through the share splitting exercise did not represent a blot on the scheme.
  • The Court would normally only interfere with the chairman’s decisions at the meeting if they were perverse, made in bad faith, contrary to the Court’s directions, or on the basis of a mistaken understanding of the law.
  • Although the actions of the individual shareholders were not dishonest, they were “objectionable” and undermined “the underlying spirit of the dual requirements prescribed by the legislature as pre-conditions for scheme approval”

This is the first time that the share splitting tactic has come to be considered before a UK Court and the Court’s decision in this case is likely to discourage use of such a tactic in future. If anything that is likely to serve to enhance further the popularity of schemes of arrangement as a structure for implementing recommended takeovers.

Remuneration Committee Challenges in 2017

Colleagues have published a new post,  That Was the Year That Was: Challenges in 2017 for Remuneration Committees, on the Compensation and Benefits Global Insights blog.

Before the 2017 AGM season gets into full swing, this post looks back at what happened in the executive pay sphere during 2016 and looks forward to the challenges that remuneration committees face this year. 2017 will be the year that most companies must put their remuneration policies to a new shareholder vote so this is a timely and useful update.

New Disclosure Requirements For Strategic Reports

Certain large public interest entities, including companies listed on the Official List, who have more than 500 employees, are required to include a non-financial statement as part of their strategic report by the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations in relation to the financial years beginning on or after 1 January 2017. The regulations amend Part 15 of the Companies Act 2006 and form part of the UK’s implementation of the Non-financial Reporting Directive 2014/95/EU.

The non-financial information statement must contain information, to the extent necessary for an understanding of the company’s development, performance and position and the impact of its activity, relating to, as a minimum:

  • Environmental matters (including the impact of the company’s business on the environment).

  • The company’s employees.

  • Social matters.

  • Respect for human rights.

  • Anti-corruption and anti-bribery matters.

iStock_000005855098_SmallIf the company’s strategic report is a group strategic report, the non-financial information statement must be a consolidated statement relating to the undertakings included in the consolidation.

The information must include:

  • A brief description of the company’s business model.

  • A description of the policies pursued by the company in relation to the above matters and any due diligence processes implemented by the company in pursuance of those policies.

  • A description of the outcome of those policies.

  • A description of the principal risks relating to the matters mentioned above arising in connection with the company’s operations and, where relevant and proportionate:

    • a description of its business relationships, products and services which are likely to cause adverse impacts in those areas of risk; and

    • a description of how it manages the principal risks.

  • A description of the non-financial key performance indicators relevant to the company’s business (that is, factors by reference to which the development, performance or position of the company’s business, or the impact of the company’s activity, can be measured effectively).

 Directors will be relieved to know that nothing in the new regulations requires the disclosure of information about impending developments or matters in the course of negotiation if the disclosure would, in their opinion, be seriously prejudicial to the company’s commercial interests, provided that the non-disclosure does not prevent a fair and balanced understanding of the company’s development, performance or position or the impact of the company’s activity.

PLSA Revised Corporate Governance Guidelines

The Pensions and Lifetime Savings Association (PLSA) has published a revised version of its Corporate Governance Policy and Voting Guidelines.

The main changes in emphasis include the following:

Leadership: In addition to a board’s accountability to shareholders for protecting and generating sustainable value over the long term, the Guidelines specifically state that directors are required under the Companies Act 2006 to have regard to other stakeholders, including workers, customers, suppliers, wider society and the environment, and that boards should be aware of these requirements when carrying out their work.

Accountability: Several changes have been made to the 2015 Guidelines to underline the importance of a company’s workforce to its long-term success. In the PLSA’s view, improvements are needed in the reporting of corporate culture and how the company’s employment model and working practices relate to its underlying purpose and business model.

Business people discussing strategy in boardroomRemuneration: The PLSA references growing concern at the size of executive pay packages and their structure. It believes that the evidence that pay incentives are necessary to motivate or reward executives and to achieve success for companies is questionable, and urges remuneration committees to take a critical and challenging approach to pay increases and be prepared to exert downward pressure on executive pay.

The Guidelines also contain new material regarding voting at AGMs:

Resolution 1: annual report and accounts. The PLSA states that if shareholders do not see better disclosure on the stability, skills and engagement levels of a company’s workforce in coming years, a vote against the annual report would be appropriate. Likewise, if there is no clear evidence that diversity is being sufficiently considered by the board, a vote against the chair or, if not the same individual, the chair of the nominations committee may be warranted.

Resolution 2: approval of the remuneration policy. The PLSA states that pay policies should ensure that maximum pay-outs remain in line with shareholders’ and other stakeholders’ expectations, including workers and wider society. If shareholders judge that the company’s remuneration policy fails to meet the PLSA’s principles, then they may decide to vote against the policy. Pay policies likely to bring the company into public disrepute or foster internal resentment, owing to their excessive value and/or overly generous incentives and rewards, also justify a vote against.

Resolution 3: approval of the remuneration report. A new section stresses the importance of the role of the chair of the remuneration committee in working effectively with shareholders to understand their concerns. The Guidelines recommend that PLSA members who vote against a company’s remuneration policy or report should, in most cases, also vote against the re-election of the remuneration committee chair as a director. Additionally, given the advisory only vote on the remuneration report, it is more appropriate for shareholders to vote against any remuneration report that they feel unable to support rather than to abstain.

Resolution 5: re-election of directors. The Guidelines specify that directors’ formal performance evaluation should be done in the context of the fulfilment of that director’s duty to act in the long-term interest of the company on behalf of its members, while also having due regard for other stakeholders, as outlined in the Companies Act 2006.




Unusual Case of Cold-Shouldering

iStock_000049398330_SmallIn only the third case of its kind in the history of the Takeover Panel, the Panel has used its disciplinary power to declare a person to be someone who, in its opinion, is not likely to comply with the Code.  This has the consequence of triggering “cold-shouldering” i.e. professional members are obliged in certain circumstances not to act for the person in a transaction subject to the Code while the sanction remains effective.`

In this case, the Hearings Committee ruled that Mr Morton and Mr Garner be cold-shouldered for six and two years respectively. The facts of the case are quite unusual, but essentially there were flagrant and sustained breaches of section 9(a) of the Introduction to The City Code on Takeovers and Mergers – i.e. to deal with the Panel in an open and co-operative way and not to provide incorrect, incomplete or misleading information to the Panel.

On the facts, Mr Morton thought that, on an acquisition of shares, he had breached Rule 9 in that he should have made a mandatory offer for the remaining shares. He and Mr Garner then concocted a series of lies trying to establish that Mr Morton’s purchase had actually been for Mr Garner so no Rule 9 obligation arose. They went so far as to create a dishonestly back-dated promissory note which was proffered to the Executive of the Takeover Panel in an attempt to mislead it into thinking the purchase was for Mr Garner. The bitter  irony of the case is that, on a proper construction of Mr Morton’s various concert holdings, the initial purchase could have been made without triggering a Rule 9 obligation!

The moral of the story is to be open and honest with statutory regulators.



ESMA updates its Market Abuse Q&A

ESMA has published an updated version of its Q&A on the Market Abuse Regulation. Clarification has now been provided on the following matters:

  • For the purpose of calculating whether the threshold triggering the notification obligation under Article 19(1) of the MAR has been reached, the transactions carried out by a person discharging managerial responsibilities (PDMR) and by closely associated persons to that PDMR are not to be aggregated.
  • How the value of gifts, donations and inheritances is to be calculated for the purpose of the notification and disclosure of managers’ transactions under Article 19 of the MAR.
  • Where PDMRs are granted share awards that are conditional under a contractual remuneration package, notification will only be necessary when the conditions are satisfied and the transaction is actually executed, and not when the contractual remuneration package is entered into.
  • A communication which contains purely factual information on one or more financial instruments or issuers does not European Parliament in Brusselsconstitute an “investment recommendation” for the purposes of the MAR, provided it does not explicitly or implicitly recommend or suggest an investment strategy.
  • A communication which only reports or refers to previously disseminated investment recommendations, and does not include any new elements of opinion or valuation, or confirmation of a previous opinion or valuation, does not constitute an “investment recommendation” under the MAR.
  • If the price or value of a derivative traded outside a trading venue does not depend on or have an effect on the price or value of a financial instrument referred to in Article 2(1)(a), (b) or (c) of the MAR, the derivative is not in scope of the MAR and any recommendation relating to the financial instrument is not in scope of Article 20 of the MAR.
  • Where an investment recommendation relates to a derivative, how to determine whether a recommendation has been given on the same financial instrument, for the purposes of complying with Article 4(1)(h) of Commission Delegated Regulation (EU) 2016/958.

AIM Disciplinary Notice: Breach of Rule 31

The London Stock Exchange has published AIM Disciplinary Notice 15. The AIM company involved has been privately censured and fined £75,000 for a breach of AIM Rule 31 (AIM company and directors’ responsibility for compliance).

The AIM Disciplinary Committee (“ADC”) determined that the AIM company had failed to:

  • Provide its nomad with information reasonably required to carry out the nomad’s responsibilities owed to the Exchange.
  • Seek its nomad’s advice regarding compliance with the AIM Rules when it was appropriate to do so.
  • Inform its nomad and seek advice regarding a series of business developments. The ADC held that it was not appropriate for the company to decide whether or not the business developments were disclosable based solely on its own assessment of its obligations under the AIM Rules, without reference to its nomad.

iStock_000048287250_SmallThe ADC further noted that:

  • The company’s obligation to inform its nomad and seek advice regarding business developments covers a wider range of developments than would be required to be announced under AIM Rule 11 (General disclosure of price sensitive information).
  • It is not sufficient for an AIM company simply to send agendas and minutes of board meetings to its nomad, without any context or conversation, and assume that such actions discharge the company’s responsibilities under AIM Rule 31.
  • Contractual obligations between an AIM company and its nomad do not override the company’s responsibilities under the AIM Rules.

The case is a salutary reminder to AIM companies of the importance to comply with AIM Rule 31 obligations to liaise with its nomad. In particular, AIM Rule 31 should not be narrowly interpreted and requires an AIM company to provide full, timely and regular information to its nomad. The ADC has said that it will continue to pursue formal disciplinary actions for such breaches.

AIM Rules Social Media

AIM Regulation has published an Inside AIM update on how social media (such as “twitter”, Facebook and the company’s website) interacts with the disclosure obligations under the AIM Rules. It has also clarified that these forms of communication are subject to the same rules regarding disclosure of regulatory information.

In addition, if disclosure by social media leads to a breach of AIM Rules 10 or 11, AIM Regulation will investigate and take appropriate disciplinary action. AIM companies also need to be mindful of their obligations under the Market Abuse Regulation (MAR) and note that any premature or selective disclosure by social media may give rise to breaches of MAR.

London_SkylineAIM companies are required to have in place sufficient procedures, resources and controls to enable them to comply with the AIM rules. Such systems, procedures and resources need to take into account (amongst other things) the use of social media. Companies should have clear communication policies which address the following questions (by way of example):

  • Does the AIM company have a clear policy on the use of social media as part of its existing communications policy?
  • How effective is that policy? Is it read and understood by all relevant persons?
  • How regularly is the policy reviewed?  How does the AIM company identify and ensure the policy is kept up to date?
  • If the AIM company engages a third party to disseminate regulatory information via social media, how does it ensure the third party will not compromise compliance with the AIM Rules and MAR?
  • What are the AIM company’s protocols in talking to its nominated adviser in advance of information being released via social media?

It may feel like a lighter-touch environment, but social media is subject to the same regulatory scrutiny as more formal announcements and AIM companies would do well to keep that in mind.

Ethnic Diversity of UK Boards

The Parker Review Committee has published a consultation version of a report into the ethnic diversity of UK boards. The report finds that ethnic minority representation on the boards of FTSE 100 companies is disproportionately low, representing only 8% of the total director population compared to constituting 14% of the UK population.

Business people discussing strategy in boardroomThe report includes several recommendations which are intended to:

  • Increase the ethnic diversity of FTSE 100 and FTSE 250 boards.
  • Ensure that FTSE 100 and FTSE 250 companies develop mechanisms to identify, develop and promote people of colour so that they have a pipeline of board capable candidates.
  • Enhance transparency by way of the disclosure in annual reports of companies’ diversity policies and compliance with board composition recommendations.

A specific recommendation is that each FTSE 100 board should have at least one director of colour by 2021, and each FTSE 250 board should have at least one director of colour by 2024.

Comments on the consultation version of the report are requested by 28 February 2017 and a report containing the final recommendations and findings of the review will be published thereafter.