UK Bid Activism – Two Recent Examples of Disclosure and Fairness Objections in Schemes of Arrangement

Most public bids in the UK market are implemented by scheme of arrangement. When it becomes effective, a scheme of arrangement results in the transfer of all of the shares of the target to the bidder including the shares of target shareholders who decided not to vote on the scheme or to vote against the scheme.   

Given that a scheme binds all of the target shareholders, the scheme has certain inbuilt features which are designed to ensure fairness. These features include the fact that a scheme must be approved both by target shareholders at a target shareholders meeting;[1] and by the court. The function of the court in exercising its power of approval is principally to determine whether:

• The applicable regulatory requirements (such as the Takeover Code and the Companies Act) have been complied with (the first condition); 
• There has been coercion of the minority shareholders by the majority of shareholders (the second condition); and 
• The scheme is such that a target shareholder might reasonably approve (the third condition).

One of the tactics undertaken by shareholder activists in UK bids implemented by scheme of arrangement is to seek to exploit the minority protections in schemes in an attempt to force the bidder into increasing its bid price. One of the methods of doing this is to make objections at the court hearing to approve the scheme.  

Recent examples of disclosure and fairness claims in bids

There have been two interesting examples of shareholder activists seeking to intervene in recent UK bids implemented by scheme of arrangement by arguing at the court hearing that the relevant schemes failed to satisfy:

• the first condition, on the basis that the disclosure in the scheme documentation provided to target shareholders was defective and inadequate; and
• the third condition, on the basis that the bid undervalued the target and its prospects.

In each of these examples—the bids for Inmarsat and William Hill—the shareholder activists appeared to have been concerned that the board of the target did not negotiate a sufficient premium and that the bid therefore undervalued the target. These concerns manifested themselves in objections made by the activists that the scheme documentation was inadequate and that the scheme was unfair.   

In both cases, the court rejected the objections made by the shareholder activists and approved the schemes. In particular, in relation to the objections made:

• in relation to the first condition on the basis that the disclosure was inadequate and misleading, the court held that the disclosure given to target shareholders does not need to go into detail of all relevant contingencies necessary to enable a target shareholder to determine whether the bid was the best possible bid.  That information may be of particular interest to a shareholder activist who bought into a bid to seek to intervene in it, but it was not necessary for target shareholders to make a decision in relation to bid; and  
• in relation to the third condition on the basis that the scheme undervalued the target and was therefore unfair, the court held that its role was not to determine whether the bid under consideration was the best possible bid, but whether a target shareholder might reasonably approve the scheme. Objections would not succeed on the basis that some better bid might have been possible.

Conclusions

Disgruntled shareholder activists frequently attack bids implemented by scheme of arrangement at the court hearing at the end of the scheme process on the basis that the disclosure was inadequate and the scheme unfairly undervalued the target.  

Particular care does therefore need to be taken to ensure that the disclosure in scheme documentation does not open the door to criticism by shareholder activists. This is especially the case in relation to the description of the rationale for the transaction and the description of the bid process in the ‘background to and reasons for’ section of the scheme documentation.  

However, the UK courts have clarified in these recent decisions that the disclosure must be sufficient to enable target shareholder to take a decision on the bid. That does not require the scheme documentation to demonstrate that the bid was the best possible bid or contain information which would be necessary to determine whether or not that was the case.

This post comes to us from Sam Bagot, Partner at Cleary Gottlieb, London and is based on an Alert Memorandum available here.

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[1] By a majority of at least 75% by votes cast, and a majority in number, of target shareholders present and voting at the target shareholder meeting.