Takeover Panel’s ‘pragmatic solution’ fails private shareholders

“The first and most fundamental objective of the Code is to ensure equality of treatment between shareholders whether large or small.” These are not my words but those of the Director General of the Takeover Panel, Philip Remnant, writing in the latest edition of A practitioner’s guide to the City Code on takeovers and mergers. As leader of a group of private shareholders who made the most recent appeal heard by the Panel, I believe that if this objective is to be met, some of the Panel’s procedures need to change.

The Takeover Panel is the City regulator for takeovers and mergers. Day-to-day regulation is carried out by the Panel Executive. There is a right of appeal to the full Panel, comprised of City practitioners drawn from various interest groups, but (notably) no representation of the viewpoint of individual shareholders.

Our appeal concerned a reverse takeover by the Jersey-based Orb group of Alexanders Holdings, an AIM-listed cash shell with over 1500 private shareholders. The deal depended on a discretionary “rule 9 waiver” granted to Orb by the Panel.

The deal involved a transfer of most of the company’s cash and an issue of shares to Orb, in exchange for a number of properties. A similar change of direction from cash shell to property company was reportedly opposed last summer by institutional shareholders at Izodia, another cash shell company linked to Orb.

The circular describing the Alexanders deal was approved by the Panel before being sent to shareholders. Following its publication, shareholders pointed out a number of concerns. These included an agreement for an offshore company, Gateside Holdings, to buy shares from an “independent director” of Alexanders; a link between Orb and another offshore company which had recently acquired shares in Alexanders; and past or present connections between the “independent directors” of Alexanders and Orb.

On a straightforward application of the takeover code, any of these points appeared sufficient to call into question the Panel’s approval of the deal. However, the Panel’s approach seemed to be that concerns raised by private shareholders were obstacles to be finessed, rather than reasons to withhold its discretionary waiver from the deal.

One example of this approach concerned the agreement for an offshore company to buy the shareholding of an “independent director.” Under the takeover code, this appeared fatal to the proposed deal. But the Panel suggested that this could be circumvented by retrospective “cancellation” of the agreement. In a 28-page statement on the Panel’s website, this artifice was described as “a pragmatic solution.”

Following the Panel’s dismissal of our appeal on 15 August, the takeover went ahead. By the end of the year, the Quays Group share price had retreated to 6p (compared with a cash pile of 25p per share before the deal). On 30 December the company’s nominated adviser resigned. On 10 January the shares were suspended from trading on AIM pending appointment of a new adviser. This unpromising outcome is no surprise to the private shareholders, and should not have been a surprise to the Panel.

What lessons should be learned from this affair? Perhaps the most salient lesson the 1500 private shareholders in Quays Group have learned is that we cannot expect much protection from the Takeover Panel. Even where one’s case based on the takeover code seems clear, the Panel may help deal-makers to overcome minority shareholder objections with “a pragmatic solution” – such as “cancelling” past transactions.

However there are a number of more constructive lessons which might be drawn.

First, all appeals against decisions of the Panel Executive should be heard in public. In our appeal, the private shareholders asked for the hearing to be public, but the Panel refused, thus avoiding public and press scrutiny of its handling of private shareholders’ complaints.

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. A new team should be appointed to consider the objection. In our appeal, the perception amongst private shareholders was that the Panel’s “pragmatic solution” was motivated partly by a desire of the regulators most closely involved to justify their earlier approval of the deal.

Third, the Panel should review how it deals with complaints from private shareholders generally. Inexperienced parties with imperfectly articulated but potentially valid complaints should be given help and guidance in making their case. In our appeal, the Panel appeared to provide detailed help and guidance to the company and its expert advisers, but no help at all to the unadvised private shareholders. This led to an impression amongst private shareholders that the Panel was not impartial.

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 private shareholder in Izodia remarked recently: “what is the point of investing at all, if you can never trust anyone?”

Guy Thomas