Richmond / PPCS – class exemption

Published 1 March 2004

This exemption arose as a result of orders made by the High Court in respect of proceedings brought against PPCS Limited concerning two parcels of Richmond Limited shares held by PPCS.

The High Court in November 2002 had ordered that one of the parcels be forfeited and that the voting rights attaching to the other parcel be suspended until such time as PPCS sold that parcel. The forfeiture and suspension meant that the voting rights attaching to the shares would not be “currently exercisable” and would therefore not constitute voting rights for the purposes of the Code. Accordingly, the percentage of voting rights held by remaining shareholders would increase proportionately when the orders took effect. This could result in the voting rights of a Richmond shareholder, which had legitimately acquired up to 20% of the voting rights in Richmond before the orders came into force, increasing beyond the 20% threshold in breach of rule 6(1) of the Code.

The orders did not have immediate effect because of an appeal to the Court of Appeal. Subsequently, in January 2003 PPCS made a full takeover bid for Richmond.

The High Court’s decision created a number of difficulties for the market. First, there was the uncertainty as to whether the forfeiture and suspension would take effect in view of the appeal.

Second, if the forfeiture and suspension did take effect, then the suspension itself created a very unsatisfactory position under the Code. A shareholder holding 20% of the voting rights in Richmond would, as a result of the suspension, suddenly find itself in excess of the 20% threshold with a result that a sell down to 20% would be required. However, the suspension was not permanent and would cease once PPCS sold the parcel of shares in question. Consequently the shareholder which had originally held 20% of the voting rights but had been forced to sell down shares to comply with the Code would, on the cessation of the suspension, find itself below its original holding of 20%.

In view of the uncertainty as to whether the Court’s decision would be upheld on appeal, the Panel considered that the status quo should prevail and shareholders should be entitled to buy and sell shares on that basis. Furthermore, shareholders should not be prejudiced by so doing. Consequently, in the event that the High Court’s forfeiture and suspension orders took effect and, as a result solely of the Court orders, a shareholder’s voting rights were to exceed the 20% threshold contained in the Code, then there should be an exemption from the Code to allow that excess to be retained. Such an exemption was further justified by the fact that the suspension would eventually cease thereby reducing the amount by which the 20% threshold would be exceeded. The parcel of shares subject to the suspension was over twice the size of the parcel subject to forfeiture.

The Court of Appeal ultimately upheld the forfeiture but quashed the suspension. No shareholder exceeded the 20% threshold as a result of the forfeiture and hence the exemption was not in fact needed.

Although the Richmond exemption is unusual, arising out of a very complex situation, it is an example of the need for the Panel to be proactive in trying to ensure certainty in the operation of the takeovers market under the Code.