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.