What does the Re Sirius Minerals judgment tell us about schemes of arrangement?

Beneficial holders are a formidable phantom constituency for schemes. Targets and advisers need to work even harder to take this stealthy minority with them

19 June 2020

Following publication of the High Court’s judgment in respect of Re Sirius Minerals, the scheme of arrangement through which Anglo American plc ('Anglo American') has acquired Sirius Minerals plc ('Sirius'), we consider what this tells us about the status and role of beneficial holders in takeovers of this kind now and in future. In brief, the court has re-affirmed that, in a scheme, it is the rights and votes of those holding legal title to a target’s shares, including the nominees of any beneficial holders, that ultimately count. However, this aspect of schemes could change. This judgment and the Sirius scheme is also a critical reminder that beneficial holders represent a powerful phantom constituency when putting schemes to the vote and, therefore, the importance of identifying and canvassing them.

Background

In January, Anglo American announced its recommended cash offer for Sirius, at 5.5 pence for each Sirius Share. At the Sirius shareholder meeting convened by the court to approve the scheme which implemented the takeover, the necessary voting thresholds were met, being a majority in number representing 75% or more in value of those shareholders (being the legal holders of Sirius shares) present and voting either in person or by proxy. Like many listed companies, a significant number of investors held their shares in Sirius via one or more nominees, giving them only a beneficial interest in them. This meant that, under the relevant provisions of the Companies Act 2006 (the 'Companies Act'), they were not legally entitled to receive information from Sirius regarding the scheme, nor were they able to vote directly at the shareholder meeting to approve it. Only their nominees, holding full legal title to the shares in question and appearing on Sirius’ shareholder register, enjoyed these rights.

The beneficial holders would have had to rely on their nominees to share any information received regarding the scheme, such as the scheme circular sent to Sirius’ shareholders, and to request their instructions regarding how they should vote on the beneficial holders’ behalves. The arrangements governing the relationships between nominees and beneficial holders are a function of the nominee’s appointment terms and can vary considerably. Where one nominee is positively required to consult the beneficial holder regarding how they should vote at a shareholder meeting, another need only wait and see whether the beneficial holder will exercise their right to instruct them. Even then, they might have discretion to act contrary to such instructions. Similarly, the lengths to which a nominee must go to forward information to the beneficial holder can differ from one nominee appointment to another.

Objections from beneficial holders

At the court hearing to sanction the scheme, the last significant step prior to completion of a takeover via this mechanism, objections were received from a number of beneficial holders who had invested in Sirius. Broadly, they argued that the voting at the shareholder meeting to approve the scheme did not represent their views. They also contended that, in some cases, they had received little information from their nominees regarding the takeover and had little time in which to instruct them regarding how to vote on the scheme. The issue of shareholder interests was particularly sensitive in this case because, even by the standards of companies listed on the Main Market, it appeared that a large number of relatively unsophisticated private investors held beneficial interests in Sirius shares via nominees. Many of them had also acquired these interests at 20 pence or more per share and therefore stood to lose considerably from their investment. This prompted significant negative publicity regarding the deal, as seen in this article on BBC News. These beneficial holders insisted that, in effect, two classes of shareholders existed for the purposes of the scheme: On the one hand, those legal holders, such as the nominees, who received information and could vote on the scheme and, on the other, those beneficial holders who did not and could not.

The court’s judgment

The court sanctioned the scheme in the face of these objections on the basis that the relevant legal requirements had been met, which are only concerned with the information received and votes cast by legal holders of a target’s shares, including any nominees. What is more, the judgment underlines that Sirius had been under no direct obligation to keep the beneficial holders informed and, even had they been, there would be no way of determining the effect that this might have had on the votes cast. The court also took comfort from the fact that there were significant numbers of votes and speakers against the scheme even among the legal holders present at the meeting to approve it. Indeed, the percentage of those shareholders voting in favour of the scheme was significantly lower than the overwhelming majorities that are often seen in takeovers of this kind. On that basis, the court suggested that there had been a range of opinion represented at the shareholder meeting even among the legal holders, even if the views of the beneficial holders had not been perfectly reflected in the voting of their nominees. The court also noted that, had the scheme not been approved, the only other realistic outcome was that Sirius would have entered administration, resulting in an even smaller return of value to shareholders. It would be interesting to speculate regarding what the judgment’s contents might have been if the scheme had sailed through the shareholder meeting and where administration was not the likely alternative. However, it still seems likely that, having complied with the current letter of the law, the ultimate outcome would still have been the scheme’s sanction.

The court noted that the beneficial holders’ objections did represent a genuine issue about shareholder democracy, acknowledging the growing movement to review this area of the law. Among other things, the court might have been alluding to the Law Commission’s recent consultation regarding possible changes to the law in relation to the rights of beneficial owners, including in respect of schemes. The judgment itself might bring greater focus to the question of whether further systems are necessary in order to allow investors to influence corporate processes of this kind, given the apparent disconnect between, on the one hand, their financial exposure to their investments and, on the other, their ability to influence issuers in whom they hold shares, albeit indirectly. It is worth noting that many who invest in listed companies such as Sirius, particularly unsophisticated private individuals, do so via CREST, and that in many cases it would be unrealistic for them to do so other than via a nominee.

Implications for schemes now and in future

If momentum does build to change the law in this area and grant beneficial holders greater rights and influence in respect of schemes, it will be more important than ever for targets and their advisers to identify and engage with their ultimate investor base, beyond the simple list of legal holders on their register of members. This is not necessarily straightforward to establish and achieve if, as in the case of Sirius, there is a significant hidden “tail” of unsophisticated individuals with relatively small investments who are concealed behind a tapestry of nominee holdings. Even now, these beneficial holders can constitute a potent hidden conclave behind the shareholders voting on a scheme, a spectral swing vote that is difficult to grasp. Indeed, this might have been a factor in the relatively low majorities in favour of the Sirius scheme. Therefore, careful forethought and research are needed to canvass this camouflaged electorate of beneficial holders, both now and perhaps to an even greater extent in future.

How can we help?

Burges Salmon has assisted issuers and their advisers on a number of recent schemes of arrangement in which these and other complex issues have arisen. If you require advice on schemes or other areas of corporate law, please contact Nick Graves or Rupert Weston.

Key contact

Nick Graves

Nick Graves Partner

  • Corporate Advice
  • Mergers and Acquisitions
  • Reorganisations and Demergers

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