The High Court has delivered its landmark judgment on whether a
shareholder can split its votes to defeat a takeover structured as
a scheme of arrangement.
On 23 November 2016, the board of Dee Valley Group plc received
an offer by Severn Trent to acquire its entire share capital, which
it recommended. The offer, which followed a series of competing
offers by Severn Trent and Ancala Partners, was to be structured as
a scheme of arrangement.
To be effective, a scheme needs to be approved by the
target's shareholders at a meeting convened by the court. There
are two thresholds to satisfy. First, the scheme must be approved
by shareholders present at the meeting (in person or by proxy) who
collectively hold 75 per cent or more by value of the shares being
Second (and critically in this case), it must be approved by a
majority in number of the shareholders present at the meeting. The
court convened a meeting of Dee Valley's shareholders to take
place on 12 January 2017. However, on 3 January 2017, one of the
company's shareholders (Mr Cashmore) transferred 434 of his
shares to 434 different individuals, who all became new
shareholders of Dee Valley.
The intended effect was that, if Mr Cashmore and all 434
individuals were to vote against the scheme, the scheme would fail,
because it would not receive the approval of a majority in number
(as described above). In essence, Mr Cashmore was splitting his
votes in order to defeat the takeover.
The company obtained an order allowing the chairman of the
meeting to provisionally disregard the votes of these 434
individuals. The court would then decide whether these votes should
be counted (in which case, the takeover would fail), or whether
they were cast improperly and should be ignored (in which case, the
takeover would proceed).
WHAT DID THE COURT DECIDE?
Unusually for a scheme, the court hearing lasted three days and
engaged several legal principles.
Ultimately, the judge approved the scheme, allowing the takeover
He decided that the individual shareholders' votes should be
disregarded and the chairman of the meeting was right to do this.
In doing so, he had regard to the principle that the shareholders
at the court-convened meeting to approve a scheme must vote in the
interests of the class of shareholders as a whole. They cannot take
their own personal or extraneous interests into account.
In the judge's view, Mr Cashmore's shares had been split
solely for the purpose of defeating the scheme. This naked
share-splitting was evidence that the individual shareholders'
votes had not been cast with the entire class in mind.
However, he rejected the idea that shareholders voting on a
takeover scheme of arrangement may only take financial motivations
into account (in practice, the price being offered on the
takeover). It is entirely legitimate for shareholders to consider
other interests, such as those of the company's employees and
customers and the environment.
The decision is an important clarification and good for bidders
and the M&A market generally. Share-splitting has often been a
concern on takeovers structured as schemes. Had the splitting been
effective, bidders might have become reluctant to choose a scheme
over a traditional contractual offer.
However, the judgment also creates some uncertainty and throws a
spotlight on what it means to vote in the interests of the class as
a whole. The court recognised that financial motivations are not
the only relevant factor when voting. Shareholders can consider the
interests of employees and customers (and, presumably, other
stakeholders) and the environment. In this case, it was the
sharesplitting that determined the matter. It seems that, if the
splitting had not taken place, and the 434 individuals had already
held their shares before the meeting was convened and voted as they
did, the scheme may well have been defeated.
But beyond this, the lines are blurred. The decision potentially
leaves the door open to challenge votes cast by other types of
shareholder (including those with a sizeable holding) who act with
their own interests in mind. This would, in theory, be relevant not
just for the majority in number test, but also when deciding
whether the 75 per cent threshold has been satisfied.
The story may not be over yet. The court has yet to consider
whether to allow an appeal. Given the ramifications of its
decision, it may well be minded to do so. We will be following this
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