Court of Appeal decision

Published 1 December 2006

Dominion Group appealed the decision and a Court of Appeal fixture was obtained on an urgent basis for 26 October 2006. The one-day hearing was before William Young P, Chambers and Ellen France JJ on that day.

The Court of Appeal allowed the appeal.[1] The original High Court order providing that there would be no quorum of voters required for the postal ballot was reinstated and the requirement for approval by the holders of the majority of voting rights in each company removed. Minor changes were made to the timetabling orders to accommodate the delay caused by the Court process. The order made by Stevens J requiring that the Panel be notified of the outcome of the shareholder voting was left in place. However, the reference to 17 November 2006 was removed giving the Panel only two working days from receipt of the voting results in which to fi le an application for leave to appear and be heard in relation to the final orders.

A number of the comments by the Court are relevant.

At paragraph [20], after discussing the three different mechanisms for a change of control of Code companies (amalgamation under Part 13 of the Companies Act, scheme of arrangement under Part 15 of that Act, or mechanism under the Code) the Court said:

“While the Part 15 process does not provide all the benefits for shareholders that are available under Part 13 and the Takeovers Code, some safeguards are available for dissenters under Part 15 which are not available under the other mechanisms. These are associated with Court supervision and the right of dissenters to have access to the Court.”

The Court addressed the issue of whether the amalgamation was a takeover. The Court noted [24] that the issue was quite complex and not well suited to being addressed in an oral judgment issued under time pressure.

At [25] the Court noted that the Code was not engaged by the amalgamation process, essentially because the amalgamation would not involve the acquisition by any person or group of associated persons of more than 20% of the voting rights of the Code companies involved. The Court noted that the shareholdings in each company are widely spread.

The Court observed [26] that:

“That the Code is not engaged is not, in itself, a controlling consideration in terms of whether the proposed amalgamation is a “takeover”, an expression that is not defined in either the Code or the Takeovers Act.

Counsel for the Panel, Robert Dobson QC, argued that the amalgamation would produce an outcome that is practically the same as if Dominion Income had taken over PF31 and Newmarket. This view was supported by correspondence the Dominion Group was to send to shareholders which described them “exchanging” old shares in PF31 and Newmarket for new shares in Dominion Income. Counsel also noted that the ability of the shareholders in the two smaller companies to influence events would be watered down. The Court noted:

“Mr Dobson’s propositions are true, but likewise are not controlling considerations. The fact remains that the amalgamation does not engage the Code and the law generally does not yet equate form and substance.”

Counsel for the Dominion Group, Ralph Simpson, argued that the amalgamation was not a takeover for the purposes of the Takeovers Act. This was because in his view no party obtained effective control of a company. The Court said [29]:

“Without finally determining the question, we suspect that Mr Simpson is right but we do not see this as being of critical significance in the context of the case as a whole.”

The absence of a shareholder meeting did not weigh heavily with the Court of Appeal in the context of the appropriate voting threshold.

While the Judges acknowledged that meetings are given considerable significance in the Companies Act, to the point where (s122 of the Companies Act) if a resolution is to be passed by shareholders where no meeting is held, a 75% majority of the total voting rights of the company is required. In this instance the Court noted that it would not be practicable to have both meetings and a postal ballot. The Court also noted that the evidence before the High Court was that postal voting was likely to result in greater shareholder participation.

The Court noted the Panel’s argument that the original voting threshold proposed by the High Court (no quorum requirement) meant that the amalgamation could potentially be approved by a very small proportion of the shareholders who are entitled to vote.

On the other hand the amalgamating companies argued that, because of shareholder apathy, it would be difficult (although not necessarily impossible) to obtain support from an absolute majority of those entitled to vote. They cited the outcome of several previous amalgamations involving the Dominion Group.

After discussion of the two viewpoints, the Court said [39]:

“… the merits of the positions advanced by both parties are closely balanced. But there are three points which lead us to the view that the approach taken by Stevens J on this aspect of the case was erroneous.”

The first of these aspects was that s 236(2)(b) of the Companies Act talks of approval not by shareholders, but rather by “meetings of shareholders”. While at the first High Court hearing Asher J had directed postal voting processes rather than the holding of meetings, the Court said [40]:

“But plainly he was acting by analogy with s 236(2)(b).….”

The second and, in their Honours’ words, the more important aspect, was a practical consideration. The Court noted that it was quite possible that the proposed amalgamation would be approved by an overwhelming majority of those who vote (say 95%) but the total votes in favour may fall slightly short of 50% of total voting rights. The Court noted a number of schemes of arrangement overwhelmingly supported by those shareholders who had voted for them, but where only 42% - 49% of those eligible to vote had voted.

The Judges noted that Stevens J had contemplated the possibility that the scheme might be approved by the Court even if not approved by the shareholders in the manner fixed by the Court. While acknowledging that such an outcome might be possible on a literal reading of s 236, the Justices said [42] that they saw “the scheme of the section as being very much to the contrary.”

The third and partly overlapping point was that the Court could see no basis, on the evidence associated with the present case (which appeared “to be a very orthodox amalgamation and not a device to avoid the Takeovers Code”) for departing from usual practice, including the usual practice previously adopted for similar amalgamations within the Dominion Group.

Their Honours concluded [44]:

“… we see the most appropriate course as being to revert to the orders made by Asher J. If the proposed amalgamation is approved by the shareholders, it will still be for the Court to decide on the final application whether to approve the proposal. The smaller number of votes cast in favour of the amalgamation, the greater must be the scrutiny of the Court. Further, if the Court sees the amalgamation as engaging the policy of the Takeovers Act or an [sic] inappropriate vis-à-vis dissenting shareholders, then this may be relevant to whether the Court, on the application for final orders, should refuse approval or make approval the subject of a buyout of dissenting shareholders.”

The Court next addressed the issue of the standing of the Panel to take part in the proceedings.

The Judges had already determined by this point that the appeal would be allowed on its merits. For this reason [47] they were not inclined to give a final ruling on the standing issue. However the Court said:

“We are, however, of the view that it was at least well arguable that the Panel did have standing. Given that Part 13 and Part 15 amalgamations (depending on their structuring) may engage the Takeovers Code and are sometimes used as devices to avoid the Code, we are inclined to think that the proposed amalgamation was legitimately a matter of interest to the Panel under s8 of the Takeovers Act. On the basis that the Panel therefore had a legitimate interest in the proposed amalgamation, we are inclined to think that it was open to Stevens J to form the view that it was also “interested” for the purposes of s236(2) and thus to hear it under that subsection.”

The Court noted that the amalgamating companies had argued that the Panel’s participation in the hearing was beyond the Panel’s powers under the Takeovers Act. At [48] their Honours said:

“We prefer to express no definitive view on the Panel’s powers although tentatively we think that its participation was within its powers. If the reasoning set out in [47] is right, it might be thought that the Panel’s participation in the hearing was sufficiently related to, or “consequential on”, its functions under s 8 of the Takeovers Act as being within its powers, given particularly s 14(1)(c) of the Crown Entities Act 2004.”

A further issue addressed by the Court was the ability of the Panel to intervene at the initial order phase of the Companies Act process. This ability had been challenged by the amalgamating companies.

The Court expressed some sympathy for this challenge, particularly given the potential for such intervention to lead to expensive disruptions of procedures put in place by an applicant. The Judges also noted the submission of counsel for the amalgamating companies that there was a real sense in which the applicant must take responsibility for the appropriateness of the initial orders. But they went on [50]:

 “… the scheme of the section contemplates involvement at the initial order stage by parties other than the applicants. We agree that the initial orders under s236(2) will almost necessarily be made at the instance of the s 236(1) applicants. But there is nothing in s236(2) to indicate that the parties who may apply for initial orders are confined to the s236(1) applicant. For instance, if the s236(1) application is made by a shareholder, it would be odd if the company was not entitled to apply under s236(2) in relation to the initial orders. Further, the fact that s236(2) permits an initial order to be made also at the instance of “interested parties” (who will not be s236(1) applicants) implies a power to revise orders.” Their Honours noted that Stevens J had relied primarily on r259 of the High Court Rules to justify changing the initial orders. Although acknowledging that this rule may well also have authorised the approach adopted by the Judge, for themselves [51]: “we prefer to approach the case on the basis that s236(2) itself contemplates further orders.”

Their Honours noted that Stevens J had relied primarily on r259 of the High Court Rules to justify changing the initial orders. Although acknowledging that this rule may well also have authorised the approach adopted by the Judge, for themselves [51]:

“we prefer to approach the case on the basis that s236(2) itself contemplates further orders.”

The Court commented [52]:

“It is important to recognise that the initial orders made by the Court, while not conclusive as to process or substance, are likely to be significant in terms of what happens later. First, shareholders may well assume that the proposal and associated procedure does have the approval of the High Court. Whatever rules are fixed will plainly affect promoter and shareholder alike. Further, compliance with the initially ordered procedure is likely to be a significant factor on the application for final approval especially given the expensive nature of the exercise which will by then have been carried out.”

The Judges concluded [53] that they could see no procedural objection to Stevens J reviewing and supplementing the earlier orders.

Footnotes:

[1] Dominion Income Property Fund Limited and Ors v Takeovers Panel (Unreported, 26 October 2006, Court of Appeal CA 229/06).