The individual shareholders in Dee Valley who objected to the proposed scheme of arrangement announced on Sunday 12 February that they would not pursue their appeal further against the judgement of the High Court.
A Dee Valley shareholder had attempted to defeat the scheme by gifting one share each to over 400 employees and other individuals opposed to the takeover ahead of a vote at a meeting convened by the court on the terms of the scheme. The deal required the approval of a majority of individual shareholders, as well as by 75% of the shareholders by value.
Sir Geoffrey Vos, the Chancellor of the High Court, ruled that Dee Valley chairman Jon Schofield was entitled to exclude the votes of the 434 individual shareholders in line with a court order granted ahead of the shareholder meeting. The court then used its discretion to approve the scheme on the grounds that, once the disputed votes were taken away, the members of the company voting at the meeting fairly represented the entire class of members and were acting bona fide.
Vos was also satisfied that all other requirements for the court to sanction the scheme had been satisfied.
"In my judgment, the chairman's knowledge of the circumstances in which the individual shareholders had acquired their shares gave him sufficient evidence to conclude that the votes of the individual shareholders at the 12th January meeting were not being cast for the purpose of benefiting the class as a whole," said the judge.
"That was not specifically because their imputed or expressed motives fell outside the band of what is permissible. It was because the only possible explanation for the conduct of the individual shareholders was to further a share manipulation strategy to defeat the scheme by use of the majority in number jurisdictional requirement … The chairman was entitled to protect the integrity of the court meeting against manipulative practices such as share-splitting that would frustrate its statutory purpose," he said.
In those circumstances, and after considering the terms of the scheme of arrangement in detail, it was "appropriate for the court to exercise its discretion to sanction the scheme", he said.
Corporate law expert Jonathan Beastall of Pinsent Masons, the law firm behind Out-Law.com, said that the court's decision on this unique set of facts was "welcome", although "elements of it may well be the subject of further debate".
"Schemes of arrangement are a key tool in implementing takeovers in the UK and it is important that the statutory process is not open to potential abuse," he said. "The court drew a distinction between a court-convened meeting and a company-convened meeting. The attempt to thwart the court through manipulation was clearly viewed as unacceptable".
A scheme of arrangement is a court-approved arrangement between a company and its shareholders, or a company and its creditors. They are typically used in the corporate sphere to give effect to acquisitions or demergers. In the UK, schemes of arrangement are governed by parts 26 and 27 of the 2006 Companies Act. The same Act provides that a court may sanction such a scheme if the majority in number, and 75% in value, of "present and voting" shareholders agree to it.
Some jurisdictions have amended their legislation to drop the majority in number test and as a result of this case there could be pressure in the UK to follow suit, according to the court.
In October 2016, the investment fund Ancala agreed a £71 million takeover of Dee Valley. This offer for the company, which is one of two water companies in Wales and supplies water to around 125,000 customers in north-east Wales and north-west England, resulted in a competitive bid situation whereby Severn Trent Water Ltd announced in mid-November 2016 that it had agreed a £17.05 per-share deal to buy Dee Valley, which was an improvement on the terms of the original takeover that had been agreed by Ancala. On 22 November Ancala submitted a revised bid of £17.06 per share, prompting Severn Trent to come back with its improved £18.25 per-share offer on Wednesday 23 November.
The court heard how those opposed to the takeover of Dee Valley by a "major corporation" were concerned about poor customer service, higher costs to customers and job losses within Dee Valley. However, Sir Geoffrey Vos said that it was not for the court to comment on the motives of those voting against the scheme. Rather, it was required to decide whether the act of share-splitting undermined the statutory purpose of the scheme.
Of particular relevance, according to the judge, was the fact that Dee Valley's chairman had only sought permission to exclude the votes of those who had been gifted an individual share by a named shareholder with no reference to the motives of those shareholders and the shareholders themselves had not argued that the court should exercise its discretion to reject the scheme on its merits.
"It is clear that the chairman would not have been justified in this case in rejecting the votes of the individual shareholders on the simple ground that their motivations were not for the benefit of the class as a whole or that they were motivated to benefit themselves only," he said.
"The actions of the individual shareholders in accepting the gift of a single share in the circumstances I have described demonstrated that they could have given no consideration to the interests of the class of members which they had joined. They can only have joined that class with the pre-conceived notion of voting down the scheme. There was no other reason to acquire one single share in the company at that crucial time after the court meeting had been directed. Both the chairman and the court could and should, in my judgment, take these matters into account in considering whether the votes of the individual shareholders were valid. In my judgment, they were not," he said.