Further to the ruling of the Takeover Appeal Board of the Panel on Takeovers and Mergers in March 2017 (upholding earlier decisions of the Panel's Executive and Hearings Committee), the Panel has sought and obtained an order of the Court of Session requiring the chairman of Rangers Football Club, Mr David Cunningham King to make a mandatory offer in accordance with Rule 9 of the City Code on Takeovers and Mergers (Code) for all the issued ordinary share capital in Rangers not already owned by Mr King or his concert parties.
Briefly, Mr King had been found by the Panel to be acting in concert with three other shareholders through co-ordinated acquisitions of shares in Rangers in late December 2014. On 2 January 2015, Mr King's family trust (over which the Panel concluded that Mr King had de facto control) purchased a further 14.57% stake in Rangers. This acquisition took the number of shares in Rangers in which Mr King and his concert parties were interested to more than 30%, triggering the Rule 9 obligation. The Panel ruled that Mr King was required to make the mandatory offer by 12 April 2017. For further details of the factual history see our previous article.
As no offer was announced by the specified date, the Panel issued enforcement proceedings in the Court of Session under Section 955 of the Companies Act 2006. This is the first time that the Panel has had to resort to this legislation to enforce a decision.
Section 955 Companies Act 2006
Under Section 955, the Panel can apply to the court for an order requiring compliance with the Code. Section 955 includes the following:
'(1) if on the application of the Panel, the court is satisfied:
(b) that a person has contravened a rule-based requirement …, the court may make any order it thinks fit to secure compliance with the requirement.
(4) In this section:
'contravene' includes fail to comply; … 'rule-based requirement' means a requirement imposed by or under rules.'
The principal questions to be decided by the court were:
- What is the ambit of the court's discretion conferred by section 955?
- If the court has discretion to refuse to make an order, should the court refuse the order sought by the Panel?
On the first point, the judge, Lord Bannatyne, agreed with the argument made on behalf of Mr King that the wording in section 955 that the court 'may' make any order it thinks fit, meant that the court has a discretion whether or not to make the order sought. If Parliament had intended that the court should not have such a discretion, it would have expressed that intention in the clearest of language.
Lord Bannatyne rejected the Panel's argument that when arriving at the correct construction of section 955, the words 'to secure compliance with the requirement' circumscribed the court's discretion so that the court had to pronounce an order securing compliance. It was not an option available to the court not to make an order as not making an order did not secure compliance with the requirement. The word 'may' only gave the court discretion as to the terms of the order and nothing further.
Having rejected this (ie the Panel's) interpretation of section 955, Lord Bannatyne concluded that the effect of these words was to limit what order the court could make after it had concluded that an order should be made. But the words do not require the court to make an order.
The judge went on to say, however, that the court, in nearly all cases, if asked by the Panel to enforce its decision by granting an order, will do so but there may, conceivably, be very rare cases where it might not do so. Lord Bannatyne did not believe that holding that the court has discretion to refuse to make an order undermines the functioning of the Panel. The judge referred to the judgment of Sir John Donaldson MR in Ex parte Datafin Plc  where Sir John Donaldson said that the court has an ultimate discretion to set public law decisions (including decisions of the Panel) aside and may refuse to do so in the public interest. Although these observations were made in the context of judicial review and predated the legislation in question, they tended to point to the ambit of the court's powers including a power not to make an order.
Should the court exercise its discretion?
It was argued on behalf of Mr King:
- Mr King's assets were held within two family trusts, neither of which was prepared to fund an offer
- Accordingly, Mr King did not have 'free personal funds' to finance the offer and was not in a position to instruct professionals to do so
- It was not Mr King but his family trust that acquired the shares in Rangers through New Oasis Asset Limited (NOAL)
- If the offer was made it would not be accepted by Rangers' shareholders because it was below the current share price, therefore the offer would achieve no practical result
- Making the order would merely impose a penalty on Mr King.
Lord Bannatyne's conclusions included the following:
- Lord Bannatyne dismissed the submission that Mr King's "impecuniosity" should be a factor, describing it as irrelevant. The court was satisfied that an email from Mr Letham (a member of the concert party) made on 31 December 2014, warned Mr King of the implications of a mandatory offer if he proceeded in the concert party acquiring more than 30% of the shares in Rangers. Mr King was fully aware of the consequences of such a course of action
- It was not open to Mr King to re-open the argument that his family trusts had bought the shares rather than him. The Panel had considered Mr King's relationships with NOAL and the trusts and concluded that Mr King had de facto control over the trusts. The court agreed with this analysis
- Furthermore, the Panel had found that Mr King had indicated to his broker that funds were freely available at his discretion, again evidencing de facto control over the trusts
- If the court were not to grant the application on the basis of Mr King's alleged impecuniosity, it would materially undermine the working of the Panel. The parties could circumvent Rule 9 by arranging their financial affairs in such a way that when they were called on to comply with their obligations under Rule 9 they could say they did not have the funds to comply. If that were the case it would not allow the Panel to fulfil one of its principal functions of achieving fairness of treatment amongst shareholders. The public has a very significant interest in the proper operation of the Panel and anything which tended to undermine the Panel's ability properly to police takeovers would be entirely contrary to the public interest
- The court rejected the argument that an order would be of no practical effect because no shareholder would take up the offer of 20 pence per share as it was far below their current market value. The court regarded this as irrelevant. The Code is designed principally to ensure that shareholders in an offeree company are treated fairly. In order to achieve that aim, Rule 9 provides that where control of Rangers has been obtained in these circumstances Mr King must make an offer to purchase the shares of the other shareholders at the price at which he gained control. Thereafter, the shareholders have the option to sell their shares at that price. It was not for Mr King to argue at what price an offer should be made; rather, it is for the shareholders to decide if they wish to accept an offer
- Mr King has been in charge of the Rangers board for some two and a half years. Mr King could have sought a dispensation from the Rule 9 obligation from the Panel but did not do so. Note 5 of Notes on Dispensations from Rule 9 in the Code provides that the Panel will consider waiving the requirement for a general offer (under Rule 9) where:
(a) holders of shares carrying 50% or more of the voting rights state in writing that they would not accept such an offer; or (b) shares carrying 50% or more of the voting rights are already held by one other person.
The Court of Session granted the order sought, which was that Mr King must announce an offer within thirty days of the court order. According to reports, Mr King has subsequently announced his intention to appeal against this decision.