In the Vernalis plc and Abzena plc takeover schemes (sanctioned on 8 and 10 October 2018 respectively), Snowden J considered how the court should approach schemes where there is a risk that untraceable, missing or ‘gone-away’ scheme shareholders (ie shareholders with whom the target company has lost contact, for example because the shareholders have not notified the company of a change of address: see Schemes of arrangement, Q&A here) would not cash the cheques sent to them as consideration under the scheme.
Both schemes were transfer schemes (see Schemes of arrangement, Q&A here) containing the following (market standard) wording:
‘…the encashment of any…cheque shall be a complete discharge of Bidco’s obligation under the Scheme to pay the monies represented thereby.’
Vernalis scheme
An unusual feature of the Vernalis scheme was the high level of ‘gone-away’ shareholders (1,636 out of 14,784 scheme shareholders). As a result, Vernalis had advertised notice of the court meeting in The Times, as well as sending the scheme document to the scheme shareholders’ registered addresses. The turnout at the court meeting was 3.88% in number and 85.95% in value and was therefore low in terms of number of shareholders.
At the Vernalis sanction hearing, Snowden J expressed some concern as to the wording of the clause set out above, in particular how it would operate where scheme shareholders did not cash their cheques before they expired and subsequently approached the bidder seeking payment. Although, under the express terms of the clause, the bidder was only released from liability to make payment to the scheme shareholders on encashment of the cheques, Snowden J was concerned to understand how this would operate in practice.
As is common in public takeover deals, the process of dispatching the consideration to scheme shareholders had been sub-contracted to a third party service provider (receiving agent). To address Snowden J’s concerns, the bidder provided undertakings to the court:
- to procure payment of the total consideration payable under the scheme to the receiving agent prior to the date falling 14 days after the expected effective date of the scheme;
- irrevocably to instruct the receiving agent to hold those monies in a designated UK bank account solely for the purposes of satisfying the bidder’s payment obligations under the scheme; and
- not to seek recovery of any sums held by the receiving agent for 12 years, except with the permission of the court.
These undertakings were in addition to the customary undertaking to be bound by the scheme (see Schemes of arrangement, Q&A here) and the term required by the Takeover Code that consideration is sent to scheme shareholders within 14 days of the effective date (see Takeover Code: Schemes of arrangement, Q&A here).
The effect of the additional undertakings (taken together with the existing contract with the receiving agent) was that the bidder would have no real control over the payment mechanism once it had transferred the scheme consideration to the receiving agent. The undertaking ensured that a ‘gone-away’ shareholder seeking payment within 12 years of the scheme taking effect would be able to obtain the scheme consideration from the receiving agent.
Abzena scheme
An identical scheme subsequently came before Snowden J in relation to the takeover of Abzena plc. In that case, the evidence was that there were no ‘gone-away’ shareholders and therefore no reason to believe that cheques sent to scheme shareholders would not be cashed. As with the Vernalis scheme, a third party service provider had been engaged to deal with payment of the scheme consideration, with the aggregate scheme consideration again being paid into a separate account. Snowden J was content to sanction the scheme without any undertakings of the type provided in the Vernalis scheme, on the basis that there was no reason to believe that any scheme shareholder would not cash their consideration cheque.
Comment
It is noteworthy that the two schemes considered by Snowden J were at two different extremes of what ordinarily comes before the court. Abzena was unusual in having no missing shareholders, whereas Vernalis’s ‘gone-away’ count was high (largely as a result of various acquisitions it had made over time). Most schemes coming before the court fall somewhere in between these two extremes (some ‘gone-aways’, but less than 5% in number of scheme shareholders).
The above authorities will lead to a minor shift in the scheme process. To date, the court has been content to rely on the express provisions of the release wording set out above. Going forward, where there are missing shareholders, it would be prudent: (a) to ensure that arrangements are put in place reflecting the principles in the Vernalis scheme undertakings (which are then explained in the witness evidence); and/or (b) to offer undertakings to the court in similar terms to those offered in the Vernalis scheme.
See FC Markets: Vernalis plc takeover bid by Ligand Pharmaceuticals Inc and Abzena plc takeover bid by WCAS XII-Astro, LP.
FC Q&A are being updated to reflect these developments.