Inmarsat: Court considers the proper scope of objections to schemes of arrangement and the sufficiency of disclosure in explanatory statements

 Michael Todd QC and Andrew Thornton of Erskine Chambers consider issues arising out of the High Court’s sanction of the Inmarsat scheme.

In Re Inmarsat plc [2019] EWHC 3470 (Ch), the court sanctioned an unexceptional scheme of arrangement between Inmarsat plc (Inmarsat) and its members. What makes the court’s decision of some significance and interest is its approach to: (i) objections as to the sufficiency of disclosure in the explanatory statement; and (ii) an alleged material change of circumstance after the scheme meeting, but before sanction.

The purpose of the scheme was to effect the acquisition of Inmarsat by a corporate vehicle (BidCo), owned by a consortium of funds. The offer price represented a 45% premium over the undisturbed share price (ie prior to press speculation about a potential offer) and a 35% premium over the volume-weighted average traded price for the three months preceding the announcement of the possible offer. The scheme having been approved by the requisite majorities of members at the court-convened meeting held to consider the proposals, sanction was initially opposed by three groups of objectors (Objectors). The grounds of objection were that:

(i) the explanatory statement was inadequate;

(ii) the board should have negotiated for further consideration; and

(iii) there had been a material change in circumstances since the court meeting.

Accordingly, it was said, the court should require another meeting to be convened. Any such meeting could only have taken place after the scheme’s long-stop date.

After filing of skeleton arguments by the Objectors, BidCo announced that it would neither increase the offer price nor delay the long-stop date. Thereafter, the Objectors’ opposition to the scheme’s sanction was withdrawn. However, as (a) one of the grounds of objection went to the jurisdiction of the court to sanction the scheme; and (b) the objections were repeated in correspondence by others who objected to the court sanctioning the scheme (but were not withdrawn), the court considered each of the objections at the sanction hearing.

Inmarsat: background

Inmarsat provides mobile satellite services, in respect of which it is entitled to certain radio spectrum rights. Ligado (a US satellite communications business) was seeking to develop a terrestrial mobile data network. Inmarsat granted Ligado a series of options to use some of the Inmarsat radio frequencies in North America in return for scheduled payments. The options granted by Inmarsat related to frequencies allocated to mobile satellite services, but Ligado wanted to use them for a terrestrial communications network. For that purpose, it needed a licence modification from the US Federal Communications Commission (FCC). However, the licence modification was opposed by interested stakeholders, including some in the global positioning systems (GPS) community. Modification of the licence would not create any value for Inmarsat; it would merely reduce the commercial risks attaching to Ligado’s ability to meet its payment obligations to Inmarsat. The modification application had been outstanding for some four years.

The scheme of arrangement was approved at a court-convened meeting of Inmarsat’s shareholders held in May 2019. In October 2019, before the date originally set for the sanction hearing, a press report appeared speculating that opposition to the licence modification might be overcome, to the extent that the FCC’s approval might shortly be forthcoming. The Objectors then notified Inmarsat of their objections to sanction of the scheme, which led to the sanction hearing being rescheduled.

The objections (1): adequacy of the Explanatory Statement

The substance of the first objection was that the explanatory statement was not sufficiently clear about the Ligado contract.

The starting point for any consideration of the sufficiency of an explanatory statement in relation to a scheme of arrangement is s 897 Companies Act 2006 (CA 2006). S 897(1) requires that every notice summoning a scheme meeting must be accompanied by a statement complying with that section (known as the explanatory statement). S 897(2) provides that that statement must explain the effect of the compromise or arrangement, and give certain particulars about directors’ interests.

It has long been established at common law that notice of a company meeting must contain sufficient information to enable shareholders to decide whether to attend the meeting, to make further enquiries or to leave it to others to determine the matter of which notice is given: Tiessen v Henderson [1899] 1 Ch 861. This suggests that something more than merely explaining the effect of the compromise or arrangement is required.

That something more is required is clear. Companies Act 1929 did not require provision of an explanatory statement or circular. Yet, by 1933, it had become the practice to send out such circulars. The court took the view “that it is essential to see that the explanatory circulars sent out by the board of the company are perfectly fair and, as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote”: Re Dorman Long & Co Ltd [1934] 1 Ch 635 (per Maugham J at p657).

The adequacy of the explanatory statement is important because it goes to the integrity of the vote at the meeting. A company may not rely on a resolution passed on inadequate information: Kaye v Croydon Tramways Co [1898] 1 Ch 358 (at p373) and approval by the requisite majorities goes to the jurisdiction of the court to sanction a scheme: it is a precondition to sanction by the court (s 899(1) CA 2006).

In proceedings arising out of the acquisition of HBOS plc (HBOS) by Lloyds TSB Group plc (Lloyds), Sharp v Blank [2019] EWHC 3078 (Ch), the court was concerned with the adequacy of a circular giving notice of a general meeting of Lloyds’ members, which contained a letter from the chairman, Sir Victor Blank. Resolutions approving the acquisition were duly passed at general meetings of HBOS and of Lloyds. At paragraph 780 of his judgment, Sir Alastair Norris considered what he described as the “sufficient information” duty. He held, among other things, that:

a. shareholders must be given sufficient information to make informed decisions about the proposals to be put to them at shareholder meetings;

b. the performance of the duty is measured against the requirement of reasonableness or fairness in the circumstances, having regard to the interests of the company as a whole;

c. the sufficient information duty requires the directors to set out fairly and candidly matters within their own knowledge;

d. fair, candid and reasonable disclosure does not require the complete disclosure of everything that went into the decision-making process of the directors, nor every single piece of information that might affect shareholder voting; and

e. the sufficient information duty is directed at testing the validity of the decision of the meeting.

In Inmarsat, the judge considered the Objectors’ arguments as to the criticisms that might be levelled at the explanatory statement regarding the way it dealt with the Ligado arrangements, but rejected them. He found that “the Explanatory Statement was clear, fair and sufficient”. In so doing he relied on information concerning the Ligado contract given in Inmarsat’s annual reports and accounts for the financial years ending 31 December 2014 to 2018, which were in the public domain and the last two of which were incorporated by reference into the explanatory statement. The judge found that:

a. none of the Objectors were able to identify something in particular that ought to have been explained about the Ligado contract, over and above what was made public in the 2018 annual report and accounts;

b. the Ligado payments had been (as had been consistently reported in annual reports since at least 2014), subject to commercial contingencies;

c. Ligado could not afford to make the payments on a regular basis and was dependent for the future upon an ability to modify the Ligado licence by agreement with the FCC (and, thereafter, to create and fund a network through which to conduct its terrestrial business);

d. that was the position at the date of the explanatory statement;

e. there was nothing that could have been put in the explanatory statement which could have illuminated that further;

f. the essential issue facing the shareholders was: given that all relevant information was in the market, in order to realise value from their shareholding did they want to rely on the present and prospective market estimation of that value, or did they want to lock into a substantial premium (over and above that market value)?

g. that straightforward question did not require the explanatory statement to descend into detail about prospective payment flows from a variety of contracts which Inmarsat had with federal agencies, financially secure institutions or Ligado.

What to take away

In challenging or assessing the adequacy, or otherwise, of a circular or explanatory statement:

a. it is important to focus on the precise question upon which shareholders are being asked to vote;

b. it is also important to take into consideration information concerning that question which is already in the public domain, particularly that which emanates from the scheme company;

c. as was pointed out in Re Heron International [1994] 1 BCLC 667:

i. an explanation of the ‘effect’ of the scheme requires an explanation of how the scheme will affect a shareholder commercially;

ii. the shareholder needs to be given such up-to-date information as can be reasonably provided about the scheme and as to what can be expected as an alternative to the scheme; and

d. as to the information in a circular or explanatory statement, (based on the ‘sufficient information’ duty highlighted in Sharp v Blank), their adequacy is to be tested on a ‘need to know’, not a ‘nice to have’, basis.

The objections (2): failure to negotiate for further consideration

Sir Alastair considered the issue of an alleged failure to negotiate for a ‘contingent value right’ or ‘CVR’ (a type of deferred consideration) when addressing the ‘fairness’ test (ie whether the court can be satisfied that an honest and intelligent class member could reasonably approve the proposal that was put before the meeting). In so doing, he noted that none of the Objectors had ever said that the scheme was not one that might reasonably be approved by an honest and intelligent shareholder. Their point had been that it might be possible to get a better deal. Indeed, that had been the entire object of the campaign conducted by the Objectors.

But, as the judge said:

a. the reference to the scheme being one such as might reasonably be approved makes clear that the scheme need not be the only fair scheme or, even in the court's view, the best scheme; and

b. there are, necessarily, reasonable differences of opinion on such matters: Re Telewest Communications (No. 2) [2004] EWHC 1466 (at para 20).

Sir Alastair stressed that his task was not to say whether the scheme before him was the best scheme possible. He commented that perhaps the scheme might have been improved by a contingent valuation right, but that he was somewhat sceptical as to that.

As a basis for challenge, he said that the ability to object, at the sanction hearing, to a scheme approved at the court meeting is not conferred to see whether some better deal might be negotiated. While, commercially, that was the objective of the Objectors, it was not the question with which the court was ultimately concerned at the sanction hearing. The only question with which the court is concerned is whether the scheme actually presented to it is such as might reasonably be approved by an honest and intelligent shareholder.

What to take away

There are undoubtedly some lessons to be learned from the judge’s observations as to the purpose of the sanction hearing:

a. the role of the court is to consider the scheme before it;

b. the only question for the court is whether the scheme is such as might reasonably be approved by an honest and intelligent shareholder;

c. it is not the court’s role to see if it is the best deal, or whether the deal could be improved;

d. accordingly, the sanction hearing should not be used as a tool to see whether some better deal might be negotiated; and

e. to do so risks objectors being found to have abused the process of the court.

The objections (3): material change of circumstance

Finally, Sir Alastair considered whether he could properly rely, at the sanction hearing on the result of the court meeting in May 2019 (some 6 months earlier), in light of the events which had occurred since the vote at that meeting.

The change of circumstance relied on by the Objectors was characterised by the judge as pure press speculation.

In contrast, he noted that since the court meeting, the US Secretary of State for Defense had added to the opposition from the GPS community and others (as recently as 18 November 2019). The view expressed by a witness for the Objectors to the effect that the letters from the Secretary of State for Defense were “primarily a piece of political rhetoric which is unlikely to sway the FCC one way or another”, did not find favour with the judge, who indicated that he did not feel able to place reliance on that view.

Sir Alastair Norris found that there had been no material change since the date of the court meeting such as would cause him to review the decision taken at that meeting:

a. at the date of the court meeting, there had been significant opposition to a modification to the Ligado licence;

b. since the date of the court meeting, there had been a press story which speculated that that opposition might be being in the process of being overcome;

c. but there had been firm and repeated opposition to the modification from the Secretary of State for Defense, which supported the earlier opposition of the federal agencies; and

d. in short, as at the date of the sanction hearing, the prospect of a modification to the Ligado licence remained as uncertain as it had been when the scheme was put to the shareholders.

What to take away

Again, there are a number of important observations which should be borne in mind both by promoters of, and objectors to, a scheme of arrangement:

a. the greater the period between the court meeting and the sanction hearing, the greater the risk of events occurring which may amount to a material change of circumstance, such as would lead the court to refuse to sanction the scheme;

b. the court will require real evidence of the alleged material change of circumstance, and of its effect; and

c. allegations of a material change of circumstance should usually be based upon something more substantial than press speculation.

In Inmarsat, the court did not identify the test to be applied in determining whether the court should refuse to sanction a scheme/accede to a request for the directing of another court meeting as a result of an alleged material change of circumstance between the date of the court meeting and the sanction hearing – it did not need to. In Re Nisa Retail Ltd [2018] EWHC 1183 (Ch), the test agreed both by counsel for the company and counsel for the objectors (and applied by Morgan J) was whether there was a sufficient possibility that the result of the court meeting would have been different (and, in particular, the statutory majority not achieved) by reason of the shareholders becoming aware of the more recent event.

It therefore remains open to the courts to review, identify and rule on the correct test to be applied.

This case feature was first published by FromCounsel on 20 December 2019.