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Failed attempt to block a takeover scheme by share-splitting

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United Kingdom

The High Court has recently rejected an attempt by shareholders to block a takeover, by scheme of arrangement, of Dee Valley Group plc by Severn Trent Water Limited.

The High Court has recently rejected an attempt by shareholders to block a takeover, by scheme of arrangement, of Dee Valley Group plc by Severn Trent Water Limited.

The proposed takeover was opposed by (among others) an individual shareholder called Mr Cashmore. Before the court-ordered meeting to approve the takeover, Mr Cashmore bought more Dee Valley shares, and then transferred a single share to each of 443 new shareholders.  Proxy forms for many of these new shareholders to vote against the takeover scheme were then delivered to the company's registrars.  As a result of this share-splitting exercise, the scheme was not approved by a majority in number of the shareholders voting at the meeting, although more than 75% of the class of voting shareholders did approve the scheme.  However, the chairman of the meeting exercised his discretion to reject the votes of any shareholder who derived their shares from Mr Cashmore.  On that basis, the simple majority needed to approve the scheme was achieved.

The court confirmed that shareholders voting at a meeting of a class of shareholders to approve a scheme must vote in the interests of the class as a whole and not in their own specific interests if they are different from the interests of the class. However, as the chairman of the meeting had no evidence available to him at the meeting as to the motives of the individual shareholders, he could not justify a decision to reject their votes on the ground that they were motivated to benefit themselves only. In any event, the thought processes of the shareholders are likely to be complex and intertwined, and in most cases it will be hard to reject votes by looking into their minds.

But, in this case, the chairman had rejected the votes on the ground that the individual shareholders had each acquired a single share from Mr Cashmore in circumstances where the objective can only have been to manipulate the voting at the meeting to defeat the scheme.  The court concluded this gave the chairman sufficient evidence to conclude that those shareholders were not casting their votes for the purpose of benefitting the class as a whole.  The only possible explanation for their conduct was to further a share manipulation strategy to defeat the takeover scheme. Having confirmed that the legal requirements relating to shareholder approval of the scheme at the meeting had been met, the court went on to exercise its discretion to sanction the scheme.

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