In a decision on a previously undecided point, the High Court has held that a share-splitting exercise, carried out by a shareholder to boost the number of shareholders voting against a scheme of arrangement, did not defeat the scheme.
The members of a company (or of the relevant class of members) must approve a scheme at a meeting convened at the court's direction. At the meeting, a majority in number representing 75 per cent in value of the members (or class of members) voting must approve the scheme. This is a twofold test. It looks at both the number of members who approve the scheme and the value of their holdings.
In November 2016 Severn Trent Plc (Severn Trent) made a recommended cash offer for Dee Valley Group plc (Dee Valley) to be effected as a scheme of arrangement. Seven individuals who were shareholders in Dee Valley opposed the Severn Trent scheme, as did the competing bidder. One of these individuals, after Severn Trent had made the offer, bought more ordinary shares in Dee Valley. He then gifted these to 443 separate individuals, each of whom became the owner of one ordinary share in Dee Valley. These individuals voted against the scheme of arrangement at the meeting.
The court held that members voting at a class meeting directed by the court must exercise their power to vote for the benefit of the class as a whole, and not merely individual members only.
The chairman had enough evidence to conclude that the shareholders who had accepted the gift of one share each were not casting their votes to benefit the class as a whole, but were engaged in a strategy to defeat the scheme. The court therefore upheld the chairman's decision to reject the votes of those shareholders. The chairman was entitled to protect the integrity of the meeting against manipulative practices that would frustrate its statutory purpose.
The court went on to exercise its discretion to sanction the scheme.
The effect of this decision should be to discourage shareholders who are against a scheme from using share splitting as a means to oppose it. The decision is therefore likely to preserve the attractiveness of schemes as a way to implement recommended takeovers. In this case, the actions of dissenting shareholders were blatantly manipulative. In other circumstances, the factual matrix may be less clear.