Guernsey Court of Appeal rejects "oppressive" Scheme of Arrangement
25 May 2017
Mourant Ozannes' litigation and corporate teams in Guernsey have successfully resisted an appeal by Puma Brandenburg Limited (Puma Brandenburg) against the refusal by the Royal Court of Guernsey to sanction its scheme of arrangement (the Scheme). In a landmark judgment released yesterday, the Guernsey Court of Appeal was highly critical of the Scheme, describing the manner in which Puma Brandenburg pressured minority shareholders to accept a significantly discounted offer price on their shares, as "oppressive".
Mourant Ozannes acted for a minority shareholder in an attempt by Puma Brandenburg to implement a selective share buyback using the scheme of arrangement procedure. A scheme of arrangement, rather than a traditional takeover bid under Part XVIII of The Companies (Guernsey) Law, 2008 (Companies Law), was the chosen transaction structure due to the significant blocking stake held by the minority shareholder which would have prevented a statutory "squeeze-out" had the takeover been undertaken by a third party bidder.
If successful, the Scheme would have resulted in the majority shareholder (who is also a director) acquiring sole ownership of Puma Brandenburg and its assets. However, unlike traditional third party "takeover schemes" that are a popular and common feature of the jurisdiction, it was Puma Brandenburg itself that was to pay for the shares rather than the person or entity who would benefit from the takeover. Had the Scheme been sanctioned, minority shareholders would have been forced to accept a 43.6% discount to the net asset value of Puma Brandenburg, resulting in a transfer of value of at least €37 million from the (collective) minority shareholders to the majority shareholder.
The Mourant Ozannes team successfully challenged the Scheme in the Royal Court at the sanction hearing. In a judgment delivered on 24 February 2017, the Royal Court refused to sanction the Scheme finding that it was contrary to the share buyback provisions in the Companies Law which specifically requires a shareholder to "consent" to the acquisition of its shares. The Royal Court went one step further and found that when voting in favour of the Scheme, the members who approved the transaction (which included the significant shareholding of the brother of the majority shareholder) were not acting in the bone fide best interests of the class as a whole. Puma Brandenburg appealed.
In a hearing before the Guernsey Court of Appeal, Justices Mr Nigel Pleming QC, Mr George Bompas QC and Sir Michael Birt dismissed the appeal, confirming the decision of the Royal Court.
The Court of Appeal held that the Royal Court was correct in its interpretation of the "consent" requirement under the share buyback provisions, finding that Puma Brandenburg could not use the sanction of a scheme by the Royal Court as a substitute for obtaining individual shareholder consent to the acquisition of its shares under a share buyback scenario. Notwithstanding Puma Brandenburg failed to satisfy the Court of Appeal that the Royal Court had jurisdiction to sanction the Scheme, the Court of Appeal also said that "unhesitatingly" it would have, in any event, refused to sanction the Scheme on discretionary grounds. The Court of Appeal was particularly concerned that approval of the Scheme relied on the votes of "insiders" closely associated with the majority shareholder and that the offer price was the product of discussions between those insiders and the majority shareholder. Additionally, they were troubled by the lack of evidence or explanation in the Scheme documentation for the heavily discounted offer price, which appeared to be without merit based on the financial performance of the company. Finally, the Court of Appeal decided that the Scheme put undue "pressure" on shareholders to sell their shares at a price that had no real reference to the value of their shares by threatening that no dividends would be paid in the foreseeable future, conduct the Court of Appeal agreed was "oppressive."
Not only did the success in defending this compulsory buy-back arrangement achieve the desired result for the client, importantly, it reaffirmed that Guernsey will apply accepted English law principles on schemes of arrangement to ensure that such schemes are closely examined and the interests of minorities are protected from oppressive conduct by majorities. In short, this judgment preserves the accepted practice for properly constituted schemes of arrangement in Guernsey and should reassure investors that Guernsey will not permit the scheme of arrangement mechanic to be misused.
The Mourant Ozannes team was led by Partners Abel Lyall and John Rochester, supported by Counsels Alex Davies and Jamie Bookless, Associates Ryan Hallett, Victoria Thomas and Sophie Williams and leading London counsel Andrew Thornton from Erskine Chambers.
Advocate Lyall, who appeared for the minority shareholder on the appeal, commented that: "I am pleased that our combined corporate and litigation teams were able to respond comprehensively to defeat what was ultimately found to be an oppressive scheme of arrangement. Schemes of arrangement will continue to be a popular mechanism for effecting takeovers and corporate restructuring in Guernsey, but as the Court of Appeal made clear, those seeking to undertake schemes of arrangement need to take care in their preparation and presentation to the Court".
The success in defeating this transaction, together with other successful public and private takeovers in the past two years, firmly establishes Mourant Ozannes as the leading legal advisor in the jurisdiction for high-level friendly and hostile mergers & acquisitions transactions.
A copy of the full judgement can be found here.