In this week’s update: an urgent injunction preventing the potentially unfairly prejudicial issue of shares and the Takeover Panel issues the cold shoulder for breaches of the Code.

Court restrains company from issuing shares in breach of shareholders’ agreement

The High Court has granted an injunction to prevent a company from issuing shares and loan notes in breach of a shareholders’ agreement.

What happened?

Berlin Hyp AG v Lumineau and others concerned a company with various shareholders, who had signed up to a shareholders’ agreement regulating the company’s affairs.

Among other things, the shareholders’ agreement restricted the company from allotting, issuing, buying back or redeeming any share or loan capital or granting any options without first obtaining consent from one of the company’s minority shareholders.

That minority shareholder brought an unfair prejudice petition against the company and its two founders. It alleged that the founders were proposing to cause the company to issue new shares and loan notes in breach of the shareholders’ agreement by not obtaining its consent. It sought an injunction to prevent the company from (among other things) issuing those shares and notes.

What did the court say?

The court was prepared to hear the petition urgently, given that the company was proposing to issue the shares and notes the next day.

In deciding whether to grant an injunction, the judge considered two key questions:

  • Was there a serious issue to be tried? He concluded that there was. There had been an “extremely clear” breach of the shareholders’ agreement.
  • Was damages an adequate remedy instead of an injunction? He concluded that damages would not compensate the minority shareholder in place of an injunction. Issuing the shares would be an “irreversible” course that would bring new shareholders and new debt into the company.

He therefore ordered the injunction.

What does this mean for me?

The facts of this case are not particularly remarkable. It seems that there was a clear breach of the shareholders’ agreement, making the judge’s decision relatively straightforward.

However, the case does show the readiness of the courts to uphold protections for shareholders and to hear proceedings and act quickly if needed.

It is worth noting that this was a particularly stark case. In a situation where a breach of a shareholders’ agreement affects a company’s affairs in a less fundamental way, or where an aggrieved party can be compensated adequately through damages, the court is likely to be more hesitant to order an injunction.

Takeover Panel cold-shoulders Mr David King

The Takeover Panel Hearings Committee has published Statement 2019/16, in which it has formally cold-shouldered Mr David King for a period of four years. Cold-shouldering is one of the most severe sanctions available to the Panel, and this is only the third time in its history the Panel has issued one.

The decision comes in response to multiple breaches of the Code by Mr King in connection with his acting in concert with others to acquire shares in Rangers International Football Club plc (“Rangers”).

The decision was made in response to four breaches of the Takeover Code.

  • Mandatory offer. Mr King failed, for four years, to make a mandatory cash offer for the remaining shares in Rangers under Rule 9 of the Code after being required to do so by the Panel. This resulted in the Panel having to seek (and successfully obtaining) an order under section 955 of the Companies Act 2006 to compel Mr King to make the offer (which he ultimately did).
  • Misleading answers to investigations. During the course of the investigation into his conduct, Mr King provided incorrect and misleading answers to queries by the Panel Executive in contravention of Section 9(a) of the Introduction to the Code. In particular, Mr King had expressly denied to the Executive that communication had taken place between himself and one of his concert parties, which later turned out to be untrue.
  • Failing to consult the Executive. Despite being reminded by one of his concert parties of the requirement to make a cash offer if their combined holding exceeded 30% of Rangers’ shares, Mr King acquired further Rangers shares, taking the concert parties’ combined holding to 34.05%. Mr King failed to consult the Panel Executive in advance as to whether this course of conduct might breach the Code, in contravention of section 6(b) of the Introduction to the Code.
  • Cash confirmation. When Mr King finally made his Rule 9 offer, he failed to include a cash confirmation as required by Rule 24.8 of the Code. He also failed to consult the Executive on the cash confirmation, in breach of section 6(b) of the Introduction. The Committee declined to find, however, that he also misled the Executive to believe that an investment bank would be providing the confirmation, in breach of section 9(a) of the Introduction.

The Hearings Committee has therefore determined that Mr King is a person who is not likely to comply with the Code, noting that his behaviour showed a “clear propensity to disregard the Code”. (The decision was made primarily based on Mr King’s breach of Rule 9 and the Introduction, rather than his breach of Rule 24.8.)

In reaching its decision, the Committee dismissed an offer by Mr King to give a formal undertaking to comply with the Code in the future. It said it had to weigh that undertaking against “the propensity revealed by his previous conduct” and the “practical difficulty in enforcing” such an undertaking.

As a result of the decision, no Financial Conduct Authority-regulated firm may now act for Mr King on any transaction governed by the Code. Mr King has not lodged an appeal in the time allowed.