The recent case of Re Dee Valley Group plc  EWCH 184 (Ch) has raised some interesting implications for the use of Schemes of Arrangement in Takeover Offers.
As background, Dee Valley Group plc was the subject of a contested takeover bid with Seven Trent Limited becoming the recommended bidder. The proposed takeover was not viewed favourably by employees of Dee Valley or the associated unions. Ahead of the Court convened meeting to consider the Scheme in January 2017, Dee Valley became aware that an employee had acquired 461 of its shares and had gifted them to fellow employees. This had the effect of more than doubling the number of members on the register.
Dee Valley applied to the Court for a directions order to exclude the votes of those new shareholders and the Court duly gave the Chairman discretion to exclude them. This resulted in the passing of the necessary resolutions by the statutory tests which require the passing by (i) a majority in number and (ii) representing three-quarters in value of the members voting.
At the Court Hearing to sanction the Scheme, the Court held that the votes of shareholders who had acquired shares as a result of the gift from an employee for the sole purpose of defeating the scheme were invalid and therefore had been properly excluded by the Chairman as those shareholders could not have been voting in the interests of the class. The Court held that they key was that members of a class must vote in the interests of the class as whole and not in their own specific interests if they are different from the interests of the class and that as the meeting was a class meeting ordered by the Court, circumstances applicable to a company’s own meetings do not automatically apply.
This has a number of implications for Schemes and, more generally, the position of a shareholder in a company:
- The decision seemingly erodes the general principle that shareholders owe no duties to a company or other shareholders as to how they exercise their votes
- Would the decision have been any different if the individual shareholders had purchased their shares in on-market transactions ahead of the meeting being convened rather than having been gifted them after the meeting was convened?
- Would the decision have been any different if a Trade Union or other employee group had loaned the money to enable employees and those opposed to the transaction to purchase the shares?
- How would this affect the position of a hedge fund with both long and short interests in the shares of a company subject to a Scheme when it comes to voting on the Scheme?
There are also a number of reasons to query whether, in fact, the decision was correct:
- The reported cases in relation to Schemes of Arrangement concerning the concept that shareholders must vote in the best interests of the class as a whole are cases involving a majority shareholder imposing its will on the minority – but the judgment seemingly extends that principle across all shareholders.
- The Companies Act 2006 provisions in relation to Schemes do not discriminate between members dependent on how, or when, they acquired their shares.
Interestingly, the Court granted the new shareholders leave to appeal but confirmed that the appeal had no realistic prospect of success. It is the view of many practitioners that in fact the judgement was potentially flawed or, at the very least, that the legislation requires amendment.
There was some discussion in the drafting of the Companies Act 2006 that the two test process could be disposed of as the origins of the test was in creditor schemes where debt tended not be traded. Ultimately it was decided to keep the test in the same two-stage form as it had been in the Companies Act 1985.
In the long term, this decision could result in the majority in number test being removed from the statute books. In the meantime, it will be interesting to see whether the decision, in particular comments about shareholders having duties to other shareholders, begins to be applied to, or argued in relation to, cases in connection with shareholder considerations outside of a Scheme.
One further point made was that the Court noted that a chairman had the discretion to exclude the votes even without the permission of the Court, so long as he acts in good faith, as a chairman is entitled to protect the integrity of a meeting against manipulative practices – however, it would take a brave chairman to exclude votes without a court direction!