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 British Virgin Islands.  Three new directors were appointed, all with links to Orb – including Charles Helvert, Orb’s finance director, as chairman. 

 

In July 2002, a 26% holding was acquired by Sunneynook, another company registered in the British Virgin Islands.  At this point Alexanders was effectively controlled by the two offshore companies, Craigen and Sunneynook.  The directors then proposed that cash and shares in the company should be issued to Orb in exchange for some quayside properties in Poole.  The effect of the deal was that Orb would receive most of the company’s cash pile, and also acquire a controlling 75% shareholding.  The company was to be renamed Quays Group.

 

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