England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand London WC2A 2LL
		26th June 2008

1. Actually I had considered this and it accords with the way I wish to do things. I still need a little more time just to tidy up the judgment that I am going to deliver, but I am mindful that I told everyone to be here at 3 o'clock and I can therefore announce that my decision is that I refuse the application for an adjournment. What I would propose, and I am sorry, very sorry to cause inconvenience to everyone concerned, but I will deliver judgment at four o'clock.
(A short break)
2. MR JUSTICE RICHARDS: There is before the Court an application by Expro International Group plc (the company) for the sanction under part 26 of the Companies Act 2006 of a scheme of arrangement with its members. The purpose and effect of the scheme is the acquisition by a consortium of investors, acting through a company formed for the purpose called Umbrellastream Limited, of the entire issued share capital of the company not already owned by the consortium. It is therefore a takeover scheme of an entirely conventional sort.
3. The proposed acquisition and its terms were put forward to shareholders in the context of some interest from Halliburton Company, a US based corporation. The price per share payable under the scheme is £16.15 but this has been the result of two increases since the scheme was originally announced on 17 April 2008. At that stage the price was £14.35 but it was increased on 23 May 2008 to £15.50. This increase was made by Umbrella Stream in response to an approach by Halliburton to the company on the same day with an indicative offer of £15.25. The second increase to £16.15 was made unilaterally by Umbrellastream on 13 June 2008.
4. The first preliminary proposal from the consortium behind Umbrellastream came in late February 2008 and was announced on 29 February. The proposal was rejected by the board of the company. On 14 March 2008 a revised proposal at £14.39 was put to the board. These events prompted interest from a number of parties. The board held discussions with those parties. Halliburton was one of them and on 18 April 2008 it announced that it might make an offer for the company and that any such offer, if made, would be in cash at a premium to the price proposed by Umbrellastream.
5. The company applied to the court in the usual way for directions to convene a meeting of shareholders to consider the scheme embodying the Umbrellastream proposals. Notice was given on 9 May 2008 to shareholders for the meeting which was fixed for 2 June 2008.
6. The circular accompanying the notice explained the earlier approaches and expressions of interest and, after referring to Halliburton's announcement of 18 April 2008, stated that as at 9 May Halliburton continued to conduct due diligence on the company, but that there could be no certainty that a formal offer would ultimately be made.
7. On 23 May 2008 the company announced that it had received a proposal from Halliburton indicating that it was prepared to offer £15.25 per share. The proposal did not amount to a firm intention to make an offer and was subject to preconditions. As I have mentioned Umbrellastream's revised proposal of a price of £15.50 was made the same day.
8. On 27 May, 2008 the company announced that it would seek the adjournment of the meeting convened for 2 June to 9 June. A further circular was sent to shareholders on 27 May. The circular recorded terms reached between the company and Umbrellastream, whereby the company agreed not to seek to postpone or further adjourn either the meeting to be held on 9 June or the court hearings for the sanction of the scheme and the confirmation of reduction of capital involved in it, fixed for 23 and 25 June.
9. This however was subject in the case of the court hearings to:

"An independent competing offeror not announcing a higher cash offer in accordance with the requirements of rule 2.5 of the Takeover Code on or before 20 June, 2008."

10. In this way, it may be observed, some degree of certainty could be brought to an otherwise uncertain situation.
11. The Takeover Code to which the circular refers governs the conduct of public offers for companies in the UK. The City Panel on Takeovers and Mergers (the panel) is responsible for drawing up and administering the Code. The underlying purpose of the Code is described in the introduction to the Code in the following terms:

"The Code is designed principally to ensure that shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders of the same class are afforded equivalent treatment by an offeror. The Code also provides an orderly framework within which takeovers are conducted. In addition, it is designed to promote, in conjunction with other regulatory regimes, the integrity of the financial markets.

"The Code is not concerned with the financial or commercial advantages or disadvantages of a takeover. These are matters for the company and its shareholders. Nor is the Code concerned with those issues, such as competition policy, which are the responsibility of government and other bodies.

"The code has been developed since 1968 to reflect the collective opinion of those professionally involved in the field of takeovers as to appropriate business standards and as to how fairness to shareholders and an orderly framework for takeovers can be achieved."

12. When formed in 1968 and for many years thereafter there was no direct statutory or other formal backing for the Code or the Panel. A description of the Panel in those days may be found in the judgment of Sir John Donaldson MR in Reg v Panel on Takeovers and Mergers, ex p Datafin plc [1987] QB 815. Now the panel is the designated supervising authority in relation to takeovers pursuant to the EU Directive on Takeover Bids (2004/25/EC) and its functions are set out in chapter 1 of part 28 of the Companies Act 2006.
13. One of the purposes served by the Code is to bring a degree of certainty in the conduct of bids for the benefit of all shareholders. To this and other ends the code contains a number of provisions. Announcements of bid approaches are required by rule 2.2. Rule 2.4B provides:

"At any time following the announcement of a possible offer (provided the potential offeror has been publicly named) the offeree company may request that the Panel impose a time limit for the potential offeror to clarify its intentions with regard to the offeree company. If a time limit for clarification is imposed by the Panel the potential offeror must, before the expiry of the time limit, announce either a firm intention to make an offer for the offeree company in accordance with rule 2.5 or that it does not intend to make an offer for the offeree company, in which case the announcement will be treated as a statement to which rule 2.8 applies."

14. Rule 2.5(a) provides:

"An offeror should only announce a firm intention to make an offer after the most careful and responsible consideration. Such an announcement should be made only when an offeror has every reason to believe that it can and will continue to be able to implement the offer. Responsibility in this connection also rests on the financial adviser to the offeror."

The identity of the offeror, the terms of the offer and other matters prescribed by rule 2.5B must be included in the announcement.

15. Rule 2.7 provides:

"When there has been an announcement of a firm intention to make an offer, the offeror must normally proceed with the offer unless, in accordance with the provisions of rule 13, the offeror is permitted to invoke a precondition to the posting of the offer or would be permitted to invoke a condition to the offer if the offer were made."

16. Rule 2.8, which is of particular importance in the present case, provides:

"A person making a statement that he does not intend to make an offer for a company should make his statement as clear and unambiguous as possible. Except with the consent of the Panel, unless there is a material change of circumstances or there has occurred an event which the person specified in his statement as an event which would enable it to be set aside, neither the person making the statement, nor any person who acted in concert with him, nor any person who is subsequently acting in concert with either of them, may within six months from the date of the statement (a) announce an offer or possible offer for the offeree company ..."

I need not read the rest of that:

"(b) acquire any interest in shares of the offeree company if any such person would thereby become obliged under rule 9 to make an offer."

I need not read (c):

"(d) make any statement which raises or confirms the possibility that an offer may be made for the offeree company, or (e) take any steps in connection with a possible offer for the offeree company where knowledge of the possible offer might be extended outside those who need to know in the potential offeror and its immediate advisers."

Rule 2.8 goes on to provide that:

"Failure to comply with this rule may lead to the period of six months referred to above being extended."

17. Rule 19.3 provides that:

"Parties to an offer or potential offer and their advisers must take care not to issue statements which while not factually inaccurate may mislead shareholders and the market or may create uncertainty. In particular an offeror must not make a statement to the effect that it may improve its offer, or that it may make a change to the structure, conditionality or the non-financial terms of its offer, without committing itself to do to doing so and specifying the improvement or change."

I need not read the rest of that, but I should read the first note to that rule, headed "Holding statements":

"While an offeror may need to consider its position in the light of new developments, and may make a statement to that effect, and while a potential competing offeror may make a statement that it is considering making an offer, it is not acceptable for such statements to remain unclarified for more than a limited time in the later stages of the offer period. Before any statements of this kind are made the Panel must be consulted as to the period allowable for clarification. This does not detract in any way from the obligation to make timely announcements under rule 2."

18. Finally, and again of some particular relevance in this case, rule 32.5 provides, under the heading "Competitive Situations":

"If a competitive situation continues to exist in the later stages of the offer period, the Panel will normally require revised offers to be published in accordance with an auction procedure, the terms of which will be determined by the Panel. That procedure will normally require final revisions to competing offers to be announced by the 46th day following the posting of the competing offer document but enable an offeror to revise its offer within a set period in response to any revision announced by a competing offeror on or after the 46th day. The procedure will not normally require any revised offer to be posted before the expiry of a set period after the last revision to either offer is announced. The Panel will consider applying any alternative procedure which is agreed between competing offerors and the board of the offeree company."

19. The provisions of the Code are drafted with conventional bids or offers of a contractual nature in mind but the Code applies to all takeover transactions however structured. Apart from conventional bids the most commonly used alternative structure is a scheme of arrangement. A scheme of arrangement is, in its legal incidents, very different from a conventional bid. A bid involves an offer that can be accepted in accordance with its terms, thereby subject to the terms of the bid concluding a contract between the bidder and accepting shareholder. The Code lays down a bid period, which may be extended in certain circumstances, to prevent offers continuing indefinitely with all the uncertainty which that could involve. There is a statutory provision giving a bidder a right to acquire the shares of non-accepting shareholders, but only in general after the offer has been accepted by the holders of at least 90 per cent in value of the shares to which the offer applies.
20. A scheme, by contrast, is not a contract but involves a statutory process overseen by the court. It involves a meeting of the relevant shareholders convened on the directions of the court, and if the meeting approves the scheme by a majority in number representing three-quarters in value of those voting at the meeting, there follows a hearing at which the court will decide whether to sanction the scheme. If the scheme is sanctioned and the court's order is lodged with the registrar of companies, the scheme binds the company and its members. As applied to a scheme involving a bid it means that all the shares subject to the bid can be transferred or cancelled at one time.
21. The Code nonetheless applies to bids structured as schemes as set out in appendix 7 to the Code. Of importance in the present case is paragraph 4 of appendix 7 which provides under the heading "Holding statements":
22. "(a) If a statement of the kind described in note 1 on rule 19.3 [which I have read out] is made during an offer period involving a scheme of arrangement, the Panel will normally require the statement to be clarified by a date, to be specified by the Panel, in advance of the date of the shareholder meetings.
23. "(b) Where appropriate, however, taking into account all relevant circumstances, including (i) the interests of offeree shareholders and the desirability of clarification prior to the shareholder meetings, and (ii) the time which the offeror or potential offeror has had to consider its position, the Panel may permit clarification after the date of the shareholder meetings but before the date of the court sanction hearing."
24. In the case of a scheme, therefore, there is a dual jurisdiction as it might be described of both the Panel and the court.
25. Returning to the facts of this case, and having regard to the terms of the agreement between the company and Umbrellastream to which I have referred, the Panel determined without formal objection from Halliburton that 20 June 2008 should be the date by which, under the Code, Halliburton should either issue a rule 2.5 announcement of an offer or issue a rule 2.8 announcement of a withdrawal. In short Halliburton was required, as one of its officers puts it in his witness statements in these proceedings, to "put up or shut up" by midnight on 20 June 2008.
26. The adjourned meeting took place on 9 June, 2008. At that stage there was no announcement from Halliburton under either rule 2.5 or rule 2.8. The position was therefore at that stage uncertain. The meeting was attended by members representing some 28 per cent in number and 43.8 per cent in value of the members entitled to vote at the meeting. The scheme was approved at the meeting by 88.5 per cent in number representing 91.3 per cent in value of the members present in person or by proxy and voting at the meeting.
27. The further increase in the price being offered by Umbrellastream, to which I have earlier referred, to the present price of £16.15 was announced on 13 June 2008. A circular giving details was sent to shareholders on 16 June 2008. Both the announcement and the circular reiterated what previously had been stated as follows:

"Expro has confirmed that it will not postpone or adjourn either the first court hearing past 23 June 2008 or the second court hearing past 25 June 2008 as a result of the revised offer unless an independent competing offeror announces a higher cash offer in accordance with the requirements of rule 2.5 of the Takeover Code on or before 20 June 2008."

28. On 20 June 2008 Halliburton approached the Board of the company with a proposal for an offer at a price which it said would be in excess of Umbrellastream's price of £16.15, on terms that the company would, without necessarily recommending the proposal, cooperate with the proposal being put to shareholders in a scheme of arrangement.
29. It was not, however, until 11.03 that night, literally for once the 11th hour, that Halliburton stated that its proposed price was £16.25. The Board, or the independent members of it who had conduct of the bid from the company's point of view, with the benefit of advice from its financial advisers, considered this offer. They concluded that the additional 10p over Umbrella's offer price of £16.15 was insufficient for them to agree to Halliburton's proposal, in the light of two factors.
30. The first was the delay in payment from early July, in the case of Umbrellastream, to some time in September. Even depositing Umbrellastream's price in an ordinary high street bank account would yield more than 10p over the relevant period. The second was the risk that either because of the need for antitrust clearance in the United States or material adverse changes in circumstances over the intervening period, Halliburton would not proceed with its bid to completion. This was described as "transactional risk".
31. The Board therefore rejected the proposal, but it remained open to Halliburton to make a straight bid in accordance with rule 2.5. If it had taken that step the effect under the company's agreement with Umbrellastream would have been to require the adjournment of the court hearing fixed for 23 June.
32. As it was, Halliburton made a statement under rule 2.8 in terms, and subject to certain reservations, agreed with the Panel.
33. The rule 2.8 announcement stated that Halliburton had terminated talks with Expro and no longer intended to make an offer for Expro, but continued that Halliburton had reserved the right to make an offer for Expro in certain circumstances, including if the court declined to sanction or there was a delay of 14 days or more in sanctioning the Umbrellastream scheme. That particular reservation is set out in the announcement as the first reservation.
34. At the hearing today, which has been adjourned from 23 June, certain shareholders of the company appear and seek an adjournment of the company's application for the sanction of the scheme to 7 July, being 14 days after the 23 June.
35. The shareholders appearing before the court today are two funds or groups of funds which between them hold some 15 per cent of the company's issued share capital.
36. In addition, letters and e-mails of support have been received from other shareholders holding a further 7 per cent or so of the company's issued share capital. There is also support expressed by a number of investors who have contracts for differences in relation to the company's shares, but for present purposes I regard as the important constituency those who hold shares in the company. The contracts for differences relate to a further 3 per cent or so of the company's share capital. I need not consider on this application any issue as to whether they are persons whose interests ought to be taken into account on an application of this sort.
37. It would appear that many of the acquisitions of shares by the shareholders represented today and those who have expressed support are recent. In particular, one of the shareholders represented today, with a holding of in excess of 7 per cent, became a shareholder on 23 June, having previously held contracts for differences and having closed them out by taking the shares.
38. Neither of the shareholders represented today voted at the meeting and as is clear in the case of at least one it was not a shareholder at the date of the meeting. It is not known whether and if so how the other shareholders who have given expressions of support voted at the meeting.
39. The purpose of the adjournment, although it was not put quite as bluntly as this by Mr Hildyard on behalf of the shareholders, is, in essence, to give Halliburton the opportunity of expressing further interest in making a bid one way or another for the company. It would be permitted to do so under the first reservation to its rule 2.8 announcement, although any offer would under the terms of that reservation require the approval of the company.
40. On behalf of those shareholders Mr Hildyard QC submits that there should be an adjournment to see how events unfold. He submits that the decision of the board on 20 June to reject Halliburton's proposal was flawed. As regards the timing differences between payment under the current scheme in July and payment under an alternative Halliburton scheme in September, he points to the current market price which would enable shareholders who wish to cash out to sell in the market at a price in excess, I believe, of the Halliburton indicative price, and therefore remove the timing difference. That is a fair point, provided that not too many shareholders take that course.
41. His main criticism is that the board appeared not to have taken into account that acceptance of Halliburton's proposal would have triggered an orderly auction process overseen by the Panel under the provisions of rule 32.5 of the Code, and that such an orderly auction process could have resulted in an increased price to the benefit of shareholders.
42. I do not accept the criticisms that are made of the board by these shareholders. It is clear that the possibility of an auction process was alive on 20 June. After Halliburton's initial approach on 20 June at a stage when it was not indicating or stating its proposed price, there had been discussions between the Panel, the Company, Umbrellastream and Halliburton as to the structure for such an auction process.
43. In paragraph 18 of his witness statement dated 25 June, 2008, Mr McAlistair, a director and general counsel of the company, said:

"The Expro independent directors via their rule 3 adviser [that is their financial adviser] have been encouraged by the Takeover Panel to think about a potential further auction process should Halliburton company issue a rule 2.5 announcement, thereby becoming a competing offeror for the purposes of the Takeover Code. Accordingly the advisers to the Expro independent directors have prepared an outline of an auction procedure... an e-mail from the company's rule 3 adviser stated that the Panel had asked JP Morgan Cazenove to think about how we might conduct an auction assuming Halliburton makes a rule 2.5 announcement this week. It was on this basis that the outline of the auction procedure was presented, both for Umbrellastream and to Halliburton Company."

44. It would be obvious to anyone involved, particularly those who are commercially sophisticated, that an auction process could lead to a higher price, but the board had concerns that it could well not do so. So, in paragraph 18 of Mr McAlistair's earlier witness statement of 23 June, 2008, he states as follows:

"The Expro independent directors also considered that there was a higher general transactional risk for Expro shareholders in accepting the Halliburton proposal. The first area of risk was, had the Halliburton proposal been accepted, there could be no certainty that Umbrellastream would have participated in any subsequent auction of Expro. If Umbrellastream did not, Expro shareholders would have been left only with the Halliburton proposal, which represented a lower value offer to Expro shareholders than the revised [Umbrellastream] offer."

Mr McAlistair returned to this point in paragraph 28 of his witness statement of 25 June, expressing the concern that Halliburton would potentially have been able to use the auction process to delay the currently more favourable offer from Umbrellastream to a time at which it was lower in value than Halliburton's offer.

45. In my judgment, no criticism can be made of the Board's assessment of the relative benefits and risks associated with accepting or rejecting Halliburton's proposal made late on 23 June. As Mr Thornton on behalf of the company put it, the certainty of Umbrellastream's offer which could become fully effective in a short time outweighed commercially either a firm offer from Halliburton of £16.25 or the uncertainty of a higher offer in due course from either Halliburton or Umbrellastream. Halliburton could have made a rule 5.2 offer but it chose not to do so. Mr Hildyard further submits that the events of 20 June and the possibility of Halliburton coming back with a bid if an adjournment is granted represents a material change in circumstances since the meeting of members on 9 June, which could not by its very nature have then been known to shareholders. He accepted that shareholders are the best judges of their own commercial interests, but it follows from the above, he submitted, that the court should not attach the same degree of weight to the outcome of the meeting as normally it would.
46. I accept that if there is a material change of circumstances between the meeting and the time at which the court is called upon to consider whether to sanction the scheme, the court is bound to have regard to that material change in circumstance in deciding how it should proceed.
47. Mr Hildyard's submission, however, in my judgment, disregards the fact that the uncertainty inherent in the potentially competitive situation created by Halliburton's interest and existing throughout the process of the scheme was well known and clearly addressed in the circulars which I have quoted.
48. In particular, shareholders were told before the adjourned meeting that the court hearings would not be adjourned unless a rule 2.5 offer were announced on or before 20 June 2008.
49. It was on that basis that shareholders voted at the meeting and approved the scheme by the majorities which I have indicated.
50. Mr Thornton submits that the directors, in seeking today to obtain the court's sanction to the scheme, are doing no more than what they told shareholders they would do.
51. In my judgment, the adjournment proposed by Mr Hildyard's clients would perpetuate the uncertainty to the potential disadvantage of shareholders. It was this which led the Board to reject Halliburton's proposal last Friday. In all the circumstances where shareholders have approved the scheme with knowledge of the possibility of a further bid being made by Halliburton and the cut off date which is provided and set out in the scheme circular, it is not appropriate for the court at this stage to permit a further adjournment.
52. There is one further matter which I wish to mention. Unusually, I think perhaps uniquely, the Panel was represented on this application, by leading counsel, Mr Mabb QC. With evidence from the Director General of the Panel, he has helpfully explained the relevant provisions of the Code and the procedures of the Panel.
53. The Panel has also been concerned that Halliburton, by its presence on this application, should not itself breach rule 2.8. Mr Moore QC, representing Halliburton, has been scrupulous in not doing so and made clear that Halliburton's representation on this hearing gave no indication as to what its intentions might be if the court were to grant the adjournment sought.
54. In his submissions Mr Mabb drew attention to the fact that the reservation in Halliburton's rule 2.8 announcement, in particular the one in point today, was agreed with the Panel. He made clear that the Panel was not submitting that the court should refuse the adjournment because its effect would be to undermine the provisions of rule 2.8.
55. I have approached this application by the shareholders represented by Mr Hildyard entirely on its own merits and in accordance with the established principles applicable to the consideration of schemes of arrangement. I nonetheless should say that I have concern that there should, if possible, be a common approach to the conduct of bids, whether they are structured as an offer or as a scheme. I would not think it desirable that the court procedure involved in a scheme should allow in an undesirable level of uncertainty which the provisions of the Code have successfully reduced or eliminated in the case of ordinary offers.
56. In the result, I refuse the application for an adjournment.