Takeovers: compulsory purchase challenge rejected

United Kingdom
The Court of Appeal has rejected a challenge to current takeover practice in relation to overseas shareholders, and has endorsed (although not without reservations) the tried and trusted methods by which bidders avoid the scope of overseas securities laws but leave the way clear for compulsory acquisition of minority shareholdings following a successful takeover offer.

Section 428

Under Part XIIIA of the Companies Act 1985, a bidder has a compulsory right to buy out non-accepting shareholders if (in broad terms) the bidder secures acceptances in respect of at least 90 per cent in value of the total number of shares for which a takeover offer is made. This is, of course, a very significant factor in takeovers, particularly in the context of listed companies, and bidders invariably wish to ensure that they will qualify to exercise the power if the 90 per threshold is achieved. Particular care is taken to meet the requirement in section 428 of the Act that the offer is made for all the shares (or all shares of the class or classes concerned) on equal terms (as between shares of the same class, if more than one class is involved).

Offers are not usually made into certain overseas jurisdictions (such as the United States, Canada, Japan and Australia) because of the danger of contravening local securities laws, or of being required to comply with complicated or expensive regulatory procedures, especially where the bidder offers shares as well as or instead of cash.

In Winpar Holdings Ltd v Joseph Holt Group plc (The Times Law Reports, 24 May 2001, Court of Appeal), Winpar - an Australian shareholder in a London-listed target company - argued that the offer in question did not comply with section 428 - and therefore that the compulsory purchase right did not arise - because the offer had not been made in Australia, and so had not been on equal terms for Australian holders, and would have been practically impossible for an Australian to accept.

The offer

On 3rd March, 2000 the bidder, Joseph Holt Group plc, announced its offer for the entire issued share capital of Joseph Holt plc not already held by the bidder. The bidder offered shares in itself with a cash alternative. Its offer document was posted the next day and an advertisement was placed in the London edition of the Financial Times. The offer document was not, however, sent into the US, Canada, Japan or Australia and (in accordance with usual practice) expressly provided that the offer was not capable of being accepted in these territories. The form of acceptance, to be valid, required shareholders to provide an address outside these territories, and to warrant that they had not received the offer in or via the territories (although the bidder reserved the right at its discretion to treat any acceptance as valid even where the warranty could not be given). Strictly, the offer did not disqualify shareholders in the territories from accepting - it merely imposed procedural hurdles designed to avoid the contravention of securities laws in those territories.

Again, in accordance with settled practice, the newspaper advertisement, while reiterating these restrictions, stated that the offer was extended to shareholders to whom the offer document was not being sent and advised them that copies of the document were available for collection in the UK.

In due course the bidder achieved the 90 per cent threshold and proceeded to exercise the statutory compulsory purchase powers over the non-assented shares.

Winpar's case

It was perhaps hardly surprising that Winpar, based in Australia and holding only 100 shares, was unaware of the offer until it received a statutory notice that the bidder was compulsorily acquiring its shares. Winpar asked for a copy of the offer document and was refused.

Although Winpar was apparently only concerned to avoid the compulsory acquisition of its own tiny (0.0039 per cent) holding, its case necessarily implied that the bidder had had no right to acquire any other minority holdings compulsorily. If section 428 was not satisfied in relation to Winpar's shares, the offer would not be a takeover offer for the purposes of Part XIIIA.

Winpar initially applied in the High Court for a declaration that the bidder was not entitled to acquire its holding. The main plank of its argument was that, as no offer had actually been communicated to it, there was simply no takeover offer in respect of Winpar's holding. This was rejected by the judge, who held that the terms of the offer did not exclude Winpar (subject to its compliance with the procedural requirements), and that "takeover offer" within the meaning of the Act did not require the individual communication of offers to shareholders. Winpar's application was refused in October 2000.

The appeal

On appeal, Winpar realigned its attack, but without entirely abandoning its claim that no offer had been made to it. Winpar argued that the offer failed the two defining tests of a takeover offer within the meaning of section 428: that the offer must be made to all the shareholders, and must be made on equal terms. The terms were not, it claimed, equal as far as shareholders outside the UK were concerned; and as the offer document made it clear that the offer was not being made into Australia, it was not an offer for Winpar's shares and therefore could not be said to be an offer for all the shares. Winpar also claimed that it would have been practically impossible for it to have accepted the offer because, as a corporation, it could not take itself out of the territory in order to accept the offer.

The Court of Appeal, rejecting this, ruled that

  • the validity of a takeover offer depended on the primary contractual terms, not the mechanics of acceptance, being the same for all shareholders. The only differences, in fact, had been in the mechanics of acceptance;

  • the offer had extended to all issued shares in the target company and had been addressed to the shareholders (like Winpar) in Australia. The fact that it had not been made in Australia had not meant that shareholders resident in Australia were excluded;

  • the validity of a takeover offer did not depend on its being communicated to each and every shareholder; and

  • there was nothing within the mechanism of the offer and the documentation, which had the effect that an Australian resident could not accept. That included a corporation, which could validly accept outside the territory if an authorised officer did so on its behalf.

The decision is a welcome endorsement of a well-established and practical way of running takeovers (although Peter Gibson LJ, who delivered the leading judgment, did have reservations about City practice.

With increasing globalisation, many publicly quoted companies have overseas shareholders. If Winpar had succeeded, bidders hoping to acquire 100 per cent would almost invariably have had to deal with overseas securities laws, perhaps having to face slow and costly registration procedures (for which the timetable in the City Code, incidentally, does not provide), translation requirements or outright prohibitions. That would have placed serious (if not insurmountable) obstacles in the way of the bidder's right to compulsory acquisition of minority shareholdings - even though the bidder had already secured 90 per cent acceptances. Failure to satisfy the tests in section 428 in relation to a single holding, no matter how small, would have closed the way in relation to all the unassented shares.

Peter Gibson LJ did, however, say that the judgment was not to be taken as blessing City practice whatever the circumstances. Winpar's case was an extreme example - its holding was tiny, the bidder received over 98% acceptances (with 50% having been committed before the offer was made), and the offer price represented a substantial premium over the pre-bid market price. Things might have been different if the circumstances had been less clear-cut. The implication is that if there is less of a disparity between the value of the overseas holding and the costs of complying with local regulatory requirements, it might not be so easy to justify more onerous acceptance mechanisms for overseas shareholders. Even then, the judge seems to suggest that at most the overseas shareholder might persuade the court to order (under section 430C of the Act) that its shares should not be subject to compulsory purchase or that special terms should apply to its shares; he does not appear to imply that the offer would not qualify as a takeover offer or that compulsory purchase would not be available in respect of other minority holdings.

In its November 2000 consultation document, Completing the Structure, the Company Law Review Steering Group recommends a number of changes to Part XIIIA of the Companies Act, including:

  • that it should expressly state that a takeover offer is to be treated as being made on the same terms regardless of the ability or inability of the offeree shareholders to comply. This would cover, for example, offers which state that acceptances will not be valid if they are posted from a particular jurisdiction and would clarify that the bidder need not examine the circumstances of each group of shareholders to ascertain whether or not their ability to comply with the offer is impeded, so long as the same terms are offered to all; and

  • that where a shareholder has no registered address in the UK, the offer may be made to him by publishing a notice in the London Gazette (or the Edinburgh Gazette, in the case of Scottish target companies) - although it is proposed that this should only be available if the shareholder's local law prevents the offer document being sent there. The notice would specify a place in the UK where the offer document could be obtained. It is also proposed that the offer document could for these purposes be published on the Internet accessible from the UK.
For further information, please contact Nick Callister-Radcliffe (tel: 020 7367 2394; e-mail: nick.callister-radcliffe@cms-cmck.com)

or Simon Howley (tel: 020 7367 3566; e-mail: simon.howley@cms-cmck.com).