UK High Court Rules on Share Splitting
Summary: The High Court has now confirmed, in the Dee Valley case1, that a scheme of arrangement to effect a takeover should be sanctioned by the court even where the statutory requirement for the resolution at the court meeting to approve the scheme to be passed by a "majority in number" of shareholders voting is not satisfied due to a "share splitting" exercise being undertaken by a shareholder who does not support the scheme.
Detail: The case concerned the proposed takeover by Severn Trent Plc of Dee Valley Group Plc via a scheme of arrangement. Under Section 899 of the Companies Act 2006, at the court meeting to approve the scheme, the resolution must be supported by "a majority in number representing 75% in value" of the shareholders present and voting.
In the Dee Valley case, an individual who opposed the scheme bought shares and then transferred a single share each to 443 separate individual shareholders, each of whom then appeared on Dee Valley's register. The individuals were opposed to the scheme for reasons such as the potential impact the takeover would have on employees and the wider community and all of them voted against the scheme at the scheme meeting.
If the court had allowed all of these votes to count at the court meeting, the scheme would not have been approved by a majority in number of the shareholders and would therefore have failed. The court instead allowed the Chairman of the meeting to disregard the votes of the individual shareholders to whom the single shares had been transferred, the Chairman did disregard such votes and on that basis the requisite majorities in number and by value of shareholders supported the scheme.
The court then endorsed this approach at the court sanction hearing. The basis for the court's approach was that at the court meeting shareholders must vote "in the interests of the class [i.e. the shareholders] as a whole and not in their own specific interests if they are different from the interests of the class". This could be distinguished from the rights of shareholders to vote in their own individual interests at general meetings of the company (where there is no "majority in number" requirement for resolutions to be passed). The court went on to find that "The Chairman was entitled to protect the integrity of the Court Meeting against manipulative practices such as share splitting that would frustrate its statutory purpose".
Comment: The findings of the court in this case are critical to the continued use of schemes of arrangement both as a method of choice to effect recommended takeovers and more broadly. Had the court reached the opposite view, that share splitting was a legitimate and permissible practice that could be used to vote down a scheme at the court meeting, this would have materially increased deal execution risk for any scheme of arrangement where one or more shareholders orcreditors (as applicable) could oppose the scheme and then use this technique to defeat it. As such, given the increase in activist tactics such as "bumpitrage", permitting share splitting may effectively have sounded the death knell for the use of schemes of arrangement in takeovers in particular. Instead, the court has preserved the ability to use schemes of arrangement to effect transactions including takeovers and has removed one potential threat from the armoury of activists and dissenters.
1 Re Dee Valley Group PLC  EWHC 184 (Ch) (8 February 2017)