M&A WEEKLY UPDATE
9 - 15 MAY 2014
GENERAL CORPORATE
Unfair prejudice, alteration of articles and valuation of shares of
a private equity business
A recent decision by the High Court in Re Charterhouse
Capital Ltd Arbuthnott v Bonnyman and others [2014] EWHC
1410 (Ch) is a useful reminder of the test for unfair prejudice
and the inherent difficulties in the valuation of companies. The
well-publicised case involved a retired partner from a private
equity business (Charterhouse) claiming unfair prejudice in
relation to the acquisition of his shares in Charterhouse Capital
Limited (CCL) by the remaining partners. The judge rejected
Mr Arbuthnott’s claim for unfair prejudice under s.994 of the
Companies Act 2006 and/or under the rule in Allen v Gold
Reefs of West Africa [1900] 1 Ch 656.
The judgment (paragraph 214 onwards) is a useful overview of
the relevant law and the distinct requirements for establishing
unfair prejudice. It also sets out the “well known” principle that
“the exercise of the power of the majority by special resolution
to alter the articles of association may be subject to restraint in
equity if it is abused” referring to Allen v Gold Reefs. The judge
noted that “Any resolution which offends the Allen principle will
inevitably be unfair and prejudicial for the purposes of section
994, but an alteration of the articles does not have to offend
the Allen principle in order to amount to unfair prejudice. Unfair
prejudice is a wider concept, judged in accordance with an
objective standard and gives rise to greater and more flexible
remedies.”
Impact – the case makes interesting reading, not least in
relation to the method to be applied when valuing a business.
Whilst the case was decided on its facts, applying the principles
under s.994 and Allen v Gold Reefs, a point to highlight in
relation to the application of Allen v Gold Reefs is that the case
was distinguished from the application of Allen v Gold Reefs
to other situations where articles were amended to insert a
drag provision. In this case drag rights already existed in the
shareholders’ agreement and articles and were simply being
altered. Secondly, an argument by the claimant which tried to
attribute the actions of a newco to CCL, for the purpose of
establishing the actions of the company under s.994, failed
but is a salient reminder to ensure all parties are adequately
independently represented.
Background - Mr Arbuthnott retired from Charterhouse,
negotiating a settlement package on exit. Due to the way the
business was structured he also owned shares in CCL which
he retained. CCL was used as a vehicle to reward the members
of the business and retained little profit. No dividends were
paid. Following Mr Arbuthnott’s retirement and the planned
retirement of others it was considered prudent to restructure
the business. A newco was set up by those remaining to
acquire CCL and in the process amend its articles. All of
the retiring members agreed to these terms apart from Mr
Arbuthnott.
PUBLIC COMPANIES
Revisions to AIM Rules – 13 May 2014
Changes have been made to the AIM Rules with immediate
effect (save in relation to Rule 26). A black-line version of
the revised rules is available here. The revisions are largely
inconsequential such as to update terminology in the rules
so that it reflects legislation or technical guidance e.g. the
replacement of “FSA” with “FCA”. More substantive alterations
include:
ŠŠ Rule 26 (company information disclosure): to be
implemented on 11 August 2014, which will require the
addition of information to the company’s website, e.g.
details of compliance with its corporate governance code.
ŠŠ New Rule 43 (jurisdiction): when an AIM company ceases
to have a class of securities admitted to trading on AIM,
the London Stock Exchange will retain jurisdiction over
the company for the purpose of investigating and taking
disciplinary action in relation to breaches, or suspected
breaches, of the rules at a time when that company was an
applicant or had a class of securities admitted to trading
on AIM.
ŠŠ Guidance note 40: additional guidance on suspension of
AIM companies.
Additional changes have also been made to the AIM rules
for Nomads, relating to qualified executives and continuing
eligibility and notification requirements (Rules 4 and 11).
Background – draft rules were published for consultation in
January 2014, see AIM Notice 38.
Controlling shareholder Listing Rule changes – 16 May 2014
Changes to the UK’s Listing Rules regulating controlling
shareholders of premium listed companies come into
effect today. In summary, the new rules require premium
listed companies with a controlling shareholder, (broadly a
shareholder who, with concert parties, can exercise 30 per cent
or more of the votes at general meetings (a Controller)) to:
ŠŠ enter into a documented agreement ensuring the company
is able to operate independently of the Controller;
ŠŠ have an additional separate resolution of the independent
shareholders approving the election of independent
directors; and
ŠŠ in addition to the existing requirement for shareholder
approval to cancel a listing, require the approval of a
majority of the independent shareholders.
directors’ request. The judges went on to say that “the misuse of
power doctrine has no significant place in the operation of...Part
22 of the 2006 Act”.
There are a number of other changes to the Listing Rules,
including some that affect all listed companies i.e. including
those without a Controller. For more detail please refer to last
week’s update.
Background - The board of JKX, a company listed on the
London Stock Exchange, had proposed a number of resolutions
at the company’s forthcoming AGM to re-elect directors,
approve the remuneration report and authorise the allotment
and market purchase of shares. The beneficial owners of
approximately 40 per cent of JKX (who had requisitioned a
general meeting under s.303 of the Companies Act 2006 to
remove certain of the existing directors) were considered likely
to oppose the requisite shareholder resolutions. The board,
seeking to establish interests in shares in JKX, issued s.793
notices. The company’s articles provided that if the board
had “reasonable cause to believe” that s.793 responses were
false, or materially incorrect, it could impose restrictions on the
shares. Following responses to those notices (which the board
considered to be materially incorrect) the company issued
restriction notices in respect of those shares held by the hostile
40 per cent shareholders thereby effectively avoiding opposition
to the resolutions.
Takeover bid - frustrating action by board, restricting hostile
shareholder voting rights following incomplete response to
s.793 notice
In the first instance decision of Eclairs Group Ltd and another
company v JKX Oil and Gas plc (JKX) and others [2013]
EWHC 2631 (Ch) the judge was clear that s.793 of the
Companies Act 2006 could not be used to manipulate voting
in a takeover battle and that directors must exercise their
powers for their proper purpose. The fact that the directors’
decision may have been in the best interests of the company
as a whole did not mean that they could exercise their powers
for an improper purpose. The Court of Appeal has overturned
the decision in part and held that the directors’ power to issue
the notices and impose restrictions, where the requested
information was not provided, did not need to have been
exercised for a proper purpose (Eclairs Group Ltd and another
v JKX Oil and Gas plc and others - [2014] All ER (D) 117
(May)).
Impact - The judgments at first instance and in relation to the
appeal are a “must read” for anyone considering issuing s.793
notices but they also have wider implications for directors when
exercising their management powers. The leading appeal
judgment concurred with the first instance decision that the
directors had not exercised their powers for a proper purpose.
The judge, considering a number of precedents, considered that
the directors’ belief that their action was in the best interests
of the company did not override the directors’ duty to exercise
powers for a proper purpose. This was particularly so where the
exercise of a fiduciary power by the director (i.e. the issuance of
the restriction notices) would impinge upon the constitutional
balance of power between groups of shareholders. This fairly
compelling argument was roundly disagreed with by the other
two appeal judges who took a more practical approach. Their
thinking was that the failure by the directors to exercise this
particular power for a proper purpose was irrelevant where, as in
this case, the other party had an opportunity to comply with the
OTHER ITEMS
ŠŠ Walker guidelines consultation – changes to the
guidelines are proposed to reflect recent amendments
to the reporting requirements for UK companies i.e.
the requirement to produce a strategic report. The
consultation closes in June 2014. Once finalised, revised
guidelines are intended to apply to financial years ending
on or after 30 September 2014.
ŠŠ ECJ ruling on online search results - the UK’s Information
Commissioner’s Office has welcomed the ECJ’s recent
ruling requiring Google to delete personal sensitive data,
which it held breached data protection rules.
ŠŠ MiFID II has been approved and is expected to be
published in Q2 2014. Member states must implement it
within 30 months of its publication.
CONTACT DETAILS
If you would like further information or specific advice please contact:
JOHN DODSWORTH
DD: +44 (0)20 7849 2203
john.dodsworth@macfarlanes.com
MACFARLANES LLP
20 CURSITOR STREET LONDON EC4A 1LT
T: +44 (0)20 7831 9222 F: +44 (0)20 7831 9607 DX 138 Chancery Lane www.macfarlanes.com
This note is intended to provide general information about some recent and anticipated developments which may be of interest.
It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.
Macfarlanes LLP is a limited liability partnership registered in England with number OC334406. Its registered office and principal place of business are at 20 Cursitor Street, London EC4A 1LT.
The firm is not authorised under the Financial Services and Markets Act 2000, but is able in certain circumstances to offer a limited range of investment services to clients because it is authorised and regulated by the Solicitors Regulation Authority.
It can provide these investment services if they are an incidental part of the professional services it has been engaged to provide. © Macfarlanes May 2014