J. A. Clyde-Smith, Esq., Commissioner and Jurats Nicolle and Liston.
IN THE MATTER OF THE REPRESENTATION OF SAMVARDHANA MOTHERSON GLOBAL HOLDINGS LIMITED AND DR ALFRED SCHEFENACKER
AND IN THE MATTER OF ARTICLE 121 OF THE COMPANIES (JERSEY) LAW 1991.
Advocate N. A. K. Williams for the Representors.
1. On 22nd April, 2014, the Court made an order under Article 121 of the Companies (Jersey) Law 1991 ("the Companies Law") authorising the representors to give notice of the compulsory acquisition of shares in a Jersey Company, Samvardhana Motherson Reflectec Group Holdings Limited ("the Company"), pursuant to Article 117(1) of the Companies Law.
2. By way of summary Article 117(1) of the Companies Law allows an offeror in a takeover to buy out minority shareholders if the offeror has already acquired or contracted to acquire 9/10ths of the nominal share value of the shares to which the offer relates. This is done, initially, by notice to the minority shareholders. Article 121 of the Companies Law allows, in certain circumstances, untraceable shares to be included in the computation of whether that threshold has been exceeded or to put it another way, for the 9/10ths threshold to be lowered and this was the relief sought in this case.
3. The background to this matter begins with a company called Visiocorp Plc, which had been successful in manufacturing rear view mirrors for four-wheel drive vehicles. However, like many other companies, its financial condition deteriorated in the course of the global economic crisis and its decline resulted in the appointment of administrators. Samvardhana Motherson Global Holdings Limited ("Samvardhana Motherson") is a Cypriot company. It is part of the broader Samvardhana Motherson Group of companies which focus on manufacturing and employs in excess of 60,000 people. It was unconnected with Visiocorp Plc but saw this as an opportunity to acquire the business of Visiocorp Plc as part of what is described as a "pre-pack" sale. In England a pre-pack sale is the pre-arranged sale of an insolvent company's business and assets to a third party upon (or soon after) the commencement of the company's administration, which has the benefit of preserving the value of the business and assets of the company and potentially saving the jobs of those concerned rather than simply letting it go out of business. It made the acquisition through the Company which it then wholly owned. As part of the deal with the administrators, it was agreed that those who had been the creditors of Visiocorp Plc would receive an equity stake in the Company.
4. The creditors, Samvardhana Motherson and the Company entered into a Shareholder Agreement dated 13th March, 2009, which governs their relationship. This confirms that it was a condition precedent to the agreement that the sale of the business of Visiocorp Plc be agreed between the Company and the administrators.
5. Clause 3.2.2 of the Shareholder Agreement confirms that Samvardhana Motherson were to apply for and receive 2,999,999,998 shares, which added to the original 2 shares in issue meant there would be 3,000,000,000 (three billion) shares in issue. The creditors were to be provided with 150,000,000 of those shares.
6. This left 50,000,000 unissued shares. Clause 8.2.26 confirmed that the Company "... may allot and issue further Shares to any person or persons as the Company may determine from time to time without restriction". Clauses 8.2.27 and 8.2.28 confirmed that any further allotment of shares should also result in a further offer to other shareholders on a pro rata basis.
7. Subsequently, there were changes to the shareholding structure the most relevant of which was that the Company issued and allotted a further 45,000,000 shares to Dr Schefenacker, one of the representors, and who had been the original owner of Visiocorp Plc. This increased the issued share capital of the company to 3,045,000,000.
8. As at 26th March, 2014, the shareholdings in the Company were as follows:-
The balance was held by the former creditors ("the Minority Shareholders"). The representors together therefore held approximately 95.1% of the Company.
9. Of the directors of the Company, two, namely Simon Mackenzie and Jo Pitcher are independent directors employed by Ogier Fiduciary Services. Mr Williams informed us that Ogier Legal were advising the representors in this matter, but not the Company or the independent directors to whom we will refer in a moment.
10. Mr Williams took us through the audited accounts of the Company for the year ending 31st March, 2013, which showed that as of that date and by way of summary:-
(i) The total assets in the Company were €512,563,000 (up from €448,924,000 in the previous year).
(ii) The total liabilities in the Company were €372,467,000 (up from €331,794,000 in the previous year).
(iii) The net assets (i.e. the intrinsic value in the Company) were €140,096,000 (up from €117,130,000 in the previous year).
11. In short, the financial position of the Company was improving and the representors wish to take full control. They saw the business of the Company as a profitable one and one in which they would like to make further investment. It was felt that the Minority Shareholders (who became shareholders as a result of the pre-pack arrangement) would wish to exit the business at the right price.
12. The offer to the Minority Shareholders was calculated as follows:-
(i) The net asset value of the Company as at 31st March, 2013, was €140,096,000.
(ii) The profit from the period 1st April, 2013, to 30th September, 2013, was approximately €10,000,000.
(iii) These two figures have been added together to give a figure of €150,096,000.
(iv) That figure has then been rounded up to €155,000,000. It has then been doubled to €310,000,000. That amount has then been split equally across the shares in issue (3,045,000,000) giving a price per share of €0.1018. This has been rounded up to €0.102 for the purposes of the offer to the Minority Shareholders.
13. The representors are, therefore, offering approximately two times the net worth of the Company, which they said should represent adequate compensation to the Minority Shareholders for their holdings in the Company The representors submitted that the price of the offer was fair and reasonable and provided a generous estimation of future growth (in effect, the doubling of the net asset value of the Company).
14. The offer was made to the Minority Shareholders by letter dated 17th January, 2014, and has been subject to three separate suites of amendments all at the request of the Minority Shareholders, who are all sophisticated and specialist investors.
15. All of the Minority Shareholders accepted the offer, save for the following:-
(i) Satellite Senior Income Fund LLC ("Satellite") 32.18% - who were untraceable.
(ii) Oesterreichische Volksbanken AG 1.74% - who rejected the offer.
16. The percentage figures above represent the percentage of the shares under offer (i.e. the 4.9% of the shares in the Company not already controlled by the representors). The offer was accordingly accepted by Minority Shareholders representing 66.09% of the target shareholding, with one shareholder representing 1.74% rejecting the offer (the reason for the rejection given by Oesterreichische Volksbanken AG was that "... the offer is far too low for us") and one shareholder representing 32.18% being untraceable.
17. However, matters have moved on in that on 17th April, 2014, Oesterreichische Volksbanken AG informed the representors that "after intense internal discussions, we decided to sell the shares to you." There are therefore no Minority Shareholders who oppose the offer, although the change in heart of the dissenting shareholder was received after the deadline for acceptance of the offer.
18. The manner in which Satellite's shareholding is treated had a material effect on whether the offer from the representors had achieved in excess of 9/10ths of the Minority Shareholder acceptances to allow them to acquire, on a compulsory basis, the remainder. If it is counted in the "acceptances", then this is achieved. If it is not counted in the "acceptances" then this is not achieved; hence the application.
19. The affidavit of Michalakis Hadjimichael, a director of Samvardhana Motherson, sets out the extensive steps taken to try and trace Satellite, including the commissioning of a professional firm of tracing agents, Hill & Associates, and without going into the detail of the steps taken, it is clear that Satellite was part of a hedge fund that ceased operating in or around May 2009. There are no premises or staff and the founders appear to have moved on; attempts to contact the founders have been unsuccessful.
20. According to Article 116(1) of the Companies Law, a takeover means an offer to acquire all the shares in a company "other than shares which at the date of the offer are already held by the offeror". Therefore, the shares of the representors are excluded for the purposes of the various calculations required. Article 122(1) confirms that takeover offers can be made jointly between two or more persons.
21. According to Article 117(1) of the Companies Law:-
"If, in a case in which a takeover offer does not relate to shares of different classes, the offeror has by virtue of acceptances of the offer acquired or contracted to acquire ... in the case of a par value company, not less than 9/10ths in nominal value of the shares to which the offer relates ... the offeror may give notice, to the holder of any shares to which the offeror has not acquired or contracted to acquire, that he or she desires to acquire those shares."
22. On the facts of this case, we note that:-
(i) The shares in the Company are all one class.
(ii) The Company is a par value company.
(iii) The threshold of 9/10ths nominal value applies to the shares to which the offer relates i.e. the calculation is by reference to the shares of the minority shareholders alone, and excludes the shares of the representors.
(iv) The offer has only been accepted by approximately 2/3rds in value of the relevant nominal shareholdings and the threshold has not, therefore, been crossed. The representors cannot therefore send out the notice (the "Squeeze Out Notice").
(v) The shares which the representors have not yet acquired or contracted to acquire include both the (formerly) dissenting minority shareholder (Oesterreichische Volksbanken AG) and the untraceable shareholder (Satellite).
23. The 9/10ths threshold can be lowered, however, where the shortfall is due to untraceable shareholders. Article 121(5) of the Companies Law is in the following terms:-
"(5) Where a takeover offer has not been accepted to the extent necessary for entitling the offeror to give notices under Article 117(1) or (2) the court may, on the application of the offeror, make an offer authorizing the offeror to give notices under that Article if satisfied -
(a) that the offeror has after reasonable enquiry been unable to trace one or more of the persons holding shares to which the offer relates;
(b) that the shares which the offeror has acquired or contracted to acquire by virtue of acceptances of the offer, together with the shares held by the person or persons mentioned in sub-paragraph (a), amount to not less than the minimum specified in that Article; and
(c) that the terms offered are fair and reasonable,
but the court shall not make an order under this paragraph unless it considers that it is just and equitable to do so having regard, in particular, to the number of shareholders who have been traced but who have not accepted the offer."
24. This provision would allow the representors to issue a Squeeze Out Notice if the conditions are satisfied in relation to Satellite and we consider each part in turn. We note that there is a paucity of authority in relation to the application of Article 121 of the Companies Law (or its English equivalent, section 430C(5) of the Companies Act 1985 and its mirror-replacement sections 986(9) and (10) of the Companies Act 2006). Mr Williams informed us that searches had revealed no direct case law authority. The leading text books also provide no additional guidance on the interpretation of the provision.
25. The first question was whether the representors have, after reasonable enquiry, been unable to trace Satellite. We accepted the evidence of Mr Hadjimichael that as a matter of fact, the representors have been unable to trace Satellite. We also accept as a matter of fact that there has been an enquiry. The shorter Oxford English Dictionary defines "reasonable" as "of such an amount, size, number etc. as is judged to be appropriate or suitable to the circumstances or purpose". Whether the enquiry has been reasonable must be a matter for the Court dependent upon the circumstances of the particular case and in this case, we found the steps taken by the representors were both appropriate and suitable; in other words there had been "reasonable enquiry".
26. Whilst Satellite would no longer appear to be in existence and its founders have moved on to other pastures, ultimately there must be investors in the hedge fund with an interest in this shareholding, which, on the basis of the offer, is worth €4,797,833.60. To require the representors at this stage to take further steps to trace through to those investors would, in our view, go beyond what can reasonably be expected. We note, however, these provisions under Article 118(10) and (11) of the Companies Law in relation to funds held by the Company for untraceable shareholders (assuming the takeover proceeds):-
"(10) Where after reasonable enquiry made at such intervals as are reasonable the person entitled to any sum or other payment held on trust by virtue of paragraph (8) cannot be found and 10 years have elapsed since the sum or other payment was received or the company is wound up, the sum or other payment (together with any interest, dividend or other benefit that has accrued from it) shall be paid to the Viscount.
(11) The expenses of any such enquiry as is mentioned in paragraph (10) may be defrayed out of the money or other property held on trust for the person or persons to whom the enquiry relates."
27. Accordingly following the takeover the Company will undertake further enquiries and that may lead to the ultimate investors in the hedge fund.
28. The proportion of the shares of those minority shareholders who have accepted the offer is 66.09% of the nominal value of the total target shares. The proportion of Satellite's shares is 32.18% of the nominal value of the total target shares. The 9/10ths threshold would clearly be exceeded were Satellite's shareholding to be included.
29. Although there is no analysis of what comprises "fair and reasonable" for the purposes of Article 121(5) of the Companies Law, the issue of fairness has been considered in relation to the English law statutory equivalent to Article 121(1) (the right of a minority shareholder to object to the Squeeze Out Notice). Authority may be found in relation to section 209 of the Companies Act 1948, which largely mirrors the provision in the Companies Act 1985 and the provision in the Companies Law.
30. In Re Sussex Brick Co Ltd  Ch 289, which was concerned with section 209, the judgment of Maugham J in Re Hoare & Co Ltd (1933) 150 LT 374 was cited with approval (page 290):-
"... the mere circumstance that the sale or exchange is compulsory is one which ought not to influence the court ... the court ought to regard the scheme as a fair one inasmuch as it seems to me impossible to suppose that the court, in the absence of very strong grounds, is to be entitled to set up its own view of the fairness of the scheme in opposition to so very large a majority of the shareholders are concerned."
In other words, in circumstances where a large number of the shareholders conclude that the offer is fair, the Court should be careful about departing from those conclusions. In this instance, there was only one dissenting shareholder who controlled only 1.74% of the target shares, but even that shareholder no longer opposes the offer.
31. In addition, the notion of "fairness" (or more correctly "unfairness") was considered for the specific purposes of section 209 of the Companies Act 1948 (page 291):-
"... that the scheme is open to criticism I have no doubt, but can it be said therefore to be unfair? I think it is rather difficult to predicate unfairness in any case in which there has been perfect good faith on the side of the person who is alleged to be unfair. I think the applicant is faced with the very difficult task of discharging an onus which is undoubtedly the heavy one of showing that he, being the only man in the regiment out of step, is the only man whose views ought to prevail...."
32. Oesterreichische Volksbanken AG was the only man in the regiment out of step (excluding Satellite). Further:-
"A scheme must be obviously unfair, patently unfair, unfair to the meanest intelligence. It cannot be said that no scheme can be effective to bind a dissenting shareholder unless it complies to the extent of 100 per cent with the highest possible standards of fairness, equity and reason. After all, a man may have an offer made to him and, although he would prefer something better, would be quite prepared to accept it because there are good grounds in all the circumstances."
The offer has to be fair, and not perfect. If the Court has grounds to criticise the offer, that would not necessarily equate with it being unfair.
33. In its correspondence, there has been no suggestion by Oesterreichische Volksbanken AG or any of the other minority shareholders of any bad faith on the part of the representors. Oesterreichische Volksbanken AG merely considered the offer to be too low, and that could not be said to be "patently unfair". In fact, it now wishes to sell its shares at the offer price.
34. Finally, whilst the question of what is fair will turn on the specifics of each case, the Court in Sussex Brick did make a comment about the unattractiveness of saying that an offer was unfair when it was receiving twice the value of its original shareholding (page 292):-
"It is rather curious for him to say: 'It is a very unfair bargain I struck. True, I have shares worth twice as much as my former shares were worth, but still it is unfair because I think greater consideration ought to have been paid to various factors and I still say it is a very unfair scheme."
The minority shareholders in the Company are, of course, receiving more than twice the net asset value of the Company (pro rata to their shareholding) as at 31st March, 2013.
35. In regard to the fairness of the offer, the Court also had regard to the information provided to the minority shareholders. The City Code on Takeovers and Mergers ("the City Code") does not apply directly to this transaction, but it should apply as a matter of best practice. The City Code states that "Shareholders must be given sufficient information and advice to enable them to reach a properly informed decision on the merits or demerits of an offer. Such information must be available to shareholders early enough to enable them to make a decision in good time." This position was confirmed in Re Diamix  BCC 707 - see point 4 in the Headnote. The offer letter sets out clearly the rationale behind it by reference to the annual audited accounts to March 2013, which have been provided to the minority shareholders.
36. Analysis of the term in the context of Article 125 of the Companies Law (Schemes of Arrangement) may also be instructive by analogy.
37. In the Representation of FRM Holdings Limited  JRC 138A, it was held that there was an established three-stage test for the approval of a Scheme of Arrangement. The third limb is ... "whether the arrangement is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest might reasonably approve." In this case, the Court noted the overwhelming votes in favour and the fact that the Scheme was considered to be "fair and reasonable" by the professionals advising the board of directors.
38. Likewise, in the Representation of Cazenove  JRC 168, the Court noted as follows:-
"7. At a board meeting on 22nd March, 2013, Cazenove's board unanimously voted in favour of putting the scheme proposal to the shareholders and, having been advised by Evercore Partners that the terms of the acquisition are fair and reasonable, recommended that shareholders vote in favour of the scheme. We had no doubt that it was appropriate for the scheme to be put to the shareholders for their consideration."
39. In other words, the Court will be assisted in determining the "fair and reasonable" question by the position taken in relation to the acquisition by the company itself.
40. In this respect, the Court had received a letter from Mr Mackenzie, one of the independent directors of the Company, dated 10th April, 2014, confirming that the independent directors had reviewed and considered the offer to the Minority Shareholders and considered the terms to be fair and reasonable. They noted that the majority of the Minority Shareholders had accepted the offer. In this respect, it is relevant to note that none of the Minority Shareholders (with one de minimis exception) have any form of connection with the representors.
41. The Court's discretion under Article 121 of the Companies Law is a wide and flexible one. Again, there is no direct authority in relation to this part of the Companies Law. However, in relation to Article 155 of the Companies Law (Just and Equitable Windings-Up): "the words 'just and equitable' in Article 155 of the 1991 Law should be given a flexible interpretation. Justice and equity cannot be confined within the four corners of specific instances" (per Bailhache B in Jean v Murfitt 1996/237).
42. However, Article 121 of the Companies Law does itself provide some assistance, saying that the Court should have regard to the number of shareholders who have been traced but have not accepted the offer. In this case, there was only one shareholder in that category, Oesterreichische Volksbanken AG, representing 1.74% of the target shares or 0.085% of the shares of the whole Company, but even that shareholder no longer opposes the offer.
43. We also noted that there is further protection given to the Minority Shareholders under the Companies law in that once a Squeeze Out Notice is sent, Article 118(5) provides for what might best be described as a cooling off period of six weeks. Under the provisions of Article 121(1), the Court may, on an application made by a shareholder within that six weeks:-
"(a) order that the offeror shall not be entitled and bound to acquire the shares; or
(b) specify terms of acquisition different from those of the offer".
44. In conclusion, the Court was satisfied that the requirements of Article 121(5) had been met. The Court is not an expert in the field of corporate valuations and in this case the offer had been accepted, in the end, by all of the Minority Shareholders other than the untraceable Satellite. These were sophisticated investors and the fact that they had accepted the offer raised a prima facie presumption that it was fair and reasonable. There would have to be something patently unfair about the offer "to the meanest intelligence" to justify the Court setting up its own views in opposition to the views of such a large majority. There was nothing in the circumstances of the offer, a blot on the landscape, that rendered it unjust or inequitable to make the order having regard in particular (as Article 121(5) requires) to the number of shareholders who had not accepted the offer-in the end no-one opposed it. We therefore made an order authorising the representors to issue Squeeze Out Notices to the Minority Shareholders under Article 117(1) of the Companies Law.
45. The representors had requested the Court at the convening hearing to convene the Company to the application, for the purpose, principally, of protecting the interests of the Minority Shareholders.
46. The representors did not think it necessary to convene any of the Minority Shareholders and in particular, the dissenting shareholder, on the basis that their interests were protected through the involvement of the independent directors of the Company. Furthermore, they all had the right to apply to the Court in the six week period following the issuing of the Squeeze Out Notices should they wish to object to the terms of the offer.
47. However, it seemed to the Court that the dissenting shareholder might also have wished to be heard on whether an order should be made under Article 121(5) of the Companies Law, i.e. on whether a Squeeze Out Notice should be issued at all. In the same way that beneficiaries who do not agree with a trustee's proposals or who might be adversely affected by any proposed order are ordinarily convened to an application by the trustee (see In re A Settlement  JLR 139) it would seem proper for shareholders who had rejected the offer and who might not agree with an application for an order under Article 121(5) of the Companies Law should at least be given the opportunity to be heard.
48. We allowed the matter to pass as Oesterreichische Volksbanken AG had changed its mind and decided to sell its shares at the offer price, so there were no dissenting shareholders, but we think that in any future applications under this article all of the minority shareholders should be notified of such an application so that they can have the opportunity at least of being heard if they wish to oppose it.
Companies (Jersey) Law 1991.
Companies Act 1985.
Companies Act 2006.
Companies Act 1948.
Re Sussex Brick Co Ltd  Ch 289.
Re Hoare & Co Ltd (1933) 150 LT 374.
Re Diamix  BCC 707.