Takeover Panel’s “pragmatic solution” assisted Orb dealmakers
by Guy
Thomas
The events
of recent months at Izodia, the defunct software
company now under investigation for alleged misappropriation of funds, have
brought a sense of déjà vu to the 1,500 private shareholders in Quays
Group. But there is one difference: in
Quays Group, the shareholders’ grievances are directed as much at the City
regulatory authorities as at the Orb group.
Like Izodia, Quays Group is currently suspended from its AIM
listing, and has Orb as its largest shareholder. Also like Izodia,
the Quays story starts with a defunct business – in Quays’ case, a motor
distributor known as Alexanders Holdings. The company sold its operations and became
an £11m cash shell in the summer of 2000.
In October 2000, a 29% shareholding was acquired by Craigen
Estates Overseas, a company registered in the
In July
2002, a 26% holding was acquired by Sunneynook,
another company registered in the
The nature
of this deal – a transfer of most of the company’s cash pile and an issue of
shares to Orb, in exchange for properties owned by Orb – was remarkably similar
to the proposed deal involving Thistle properties which Izodia’s
institutional shareholders rejected last summer.
As is normal
for this type of deal, the Takeover Panel – the City’s corporate finance
regulator – scrutinised the proposed Orb deal for compliance with its Takeover
Code, and approved a circular before it was sent to shareholders. In the light
of all that subsequently emerged, this approval was surprising.
The Takeover
Code includes a requirement for deals of this type to be recommended to the
company’s existing shareholders by one or more “independent directors.” In this case, three directors initially
purported to be independent: Jacques Delacave,
Stephen Sinclair, and Roger Humm.
Mr Sinclair
was required by the Takeover Panel to withdraw after shareholders pointed out
that he had recently been appointed to the board of another quoted company,
Newport Holdings, as a representative of Orb.
Shareholders
also discovered that Mr Delacave had been a director
of Orb Estates plc from 1998 to 2000.
The Takeover Panel, however, rejected this objection, stating that “Mr Delacave can fairly be regarded as independent of Orb
Estates for the purposes of this transaction.”
This left
only Mr Humm, the former chief executive, who had
remained on the board from Alexanders’ days as a
motor distributor. Mr Humm was the only director with
no overt links to the Orb group. He was also the only director with a
shareholding, owning just over 3% of the company.
Following
publication of the circular approved by the Takeover Panel, shareholders
pointed out a number of inconsistencies and non-disclosures in the
document. Most significantly, it emerged
that although the independent director Mr Humm was
recommending the deal to other shareholders, he had no intention of remaining a
shareholder himself. Instead he had made
an agreement to sell all his shares to an offshore company, Gateside
Holdings, for a price of 30p per share.
The most recent traded price of Alexanders’
shares at the time of this agreement was 15.5p.
The Takeover
Code prohibits “special deals” between an acquirer (or parties acting in
concert) and independent directors or other favoured shareholders. In response
to shareholders’ complaints, the Takeover Panel conceded that Gateside Holdings appeared to be acting in concert with
Orb. Mr Humm’s
agreement with Gateside was therefore a
“disqualifying transaction,” which under the Takeover Code was fatal to the
proposed deal. The Panel had only to apply the Code to these facts in a
straightforward manner in order to prevent the deal with Orb from going ahead.
However, the
Panel declined to do this. Instead it
contrived to assist Orb by suggesting that if the offending agreement were
retrospectively “cancelled,” Mr Humm's “independent”
recommendation to other shareholders could be allowed to stand. Effectively the Panel was asking shareholders
to accept that there was no connection between Mr Humm’s
recommendation of the deal and the offer from an Orb-related offshore company
of nearly twice the market price for his entire shareholding; and also that no
penalty should be applied for the non-disclosure of the terms of this
astonishing agreement in the circular to shareholders.
Private
shareholders in the company found these assertions absurd. Consequently an appeal against the Panel
Executive’s decision to approve the Orb deal was made the full Panel. This was highly unusual – only three other
appeals have been made in the past three years, none of them by private
shareholders.
Appeals can be
heard either in public or in private, at the discretion of the Panel. The shareholders asked for the appeal to be
heard in public, but Orb asked for it to be private; the Panel sided with Orb.
The “non-public” status of the appeal was then used by the Panel as the pretext
for a ruling that only a single individual shareholder, Guy Thomas, would be
admitted to the appeal hearing; his supporters would not be admitted to the
hearing. (Two shareholders nevertheless
turned up anyway, and the Panel admitted them.)
The Panel
dismissed the shareholders’ appeal, and allowed the deal with Orb to go
ahead. On 19 August, the Panel published
on its website a 28-page statement giving reasons. This document defies concise précis. However the Panel’s key device to defeat the
private shareholders, the retrospective cancellation of the “disqualifying
transaction” between Mr Humm and Gateside,
was described by the weasel words “a pragmatic solution.” To the shareholders, this appeared to mean a
solution which rescued the deal which the Panel had already agreed with Orb
from the inconvenient and embarrassing observations by private shareholders.
Although it
had rejected private shareholders’ complaints and given its blessing to the Orb
deal, the Panel appeared embarrassed by the affair. In a statement published on its website on 29
August it publicly criticised Alexanders’ advisers
Corporate Synergy, stating that their conduct had fallen short of the standards
required of advisers.
Prior to the
deal with Orb, Alexanders’ cash pile amounted to 25p
per share. Following the deal, the share
price retreated to 6p. On 30 December, the company’s Nominated Adviser Hoodless
Brennan resigned. On 10 January, the
shares were suspended from trading on AIM pending appointment of a new
adviser. Prospects for the minority
shareholders appear increasingly bleak.
What lessons
should be learned from this affair?
Perhaps the most salient lesson we have drawn is that as private
shareholders we cannot expect fair regulation from the Takeover Panel. No matter how strong one’s case based on the
Takeover Code, it seems the Panel will bend over backwards to assist
self-styled "deal-making machines" such as Orb to defeat
any private shareholder objection with “a pragmatic solution” – such as
“cancelling” past transactions.
However
there are a number of lessons which the Panel might privately draw, if it were
minded to regulate more fairly and effectively in future.
First, all
appeals against decisions of the Panel Executive should be heard in
public. It seems possible that on this
occasion the refusal to hold the hearing in public was motivated partly by a
desire to avoid public and particularly press scrutiny of the Panel’s treatment
of small shareholders.
Second, the
Panel should consider the issues of natural justice which arise where the Panel
has already approved a document, and then a shareholder objects to that
approval. In the present case, the suspicion amongst shareholders was that the
Panel’s “pragmatic solution” was motivated primarily by a desire to defend its
earlier decision to approve the deal with Orb, rather than by impartial
application of the Takeover Code to the new facts that emerged.
Third, the
Panel should review the manner in which it deals with complaints from private
shareholders generally. In the present
case, private shareholders gained the strong impression that the Panel was
working with Orb and its advisers to circumvent our objections, rather than
applying the Takeover Code rules in an impartial manner.
That
regulators should be impartial, and be seen by shareholders to be impartial, is
important because shareholder confidence and willingness to invest depend on
it. As one exasperated Izodia shareholder remarked recently: “what is the point of
investing at all, if you can never trust anyone?”
Guy Thomas