The Takeover Appeal Board, upheld a previous ruling that the Takeover Code was breached during the acquisition of shares in Rangers International Football Club plc.

On 13 March 2017, the Takeover Appeal Board published its decision to dismiss an appeal by the Chairman of Rangers International Football Club plc (“Rangers”), David King. The appeal concerned a ruling that Mr King had cooperated with three other individuals in acquiring shares in Rangers and did not offer to purchase the shares of the remaining shareholders, as he was required to do under the Takeover Code (the “Code”).

The Code

The Code is managed by the Panel on Takeovers and Mergers, whose remit is to supervisor and regulate takeovers of Public companies. This matter concerned two main parts of the Code:-

1. Mandatory bid obligation (Part 9 of the Code )

When any person or persons ‘acting in concert’ (defined below) acquire an interest in shares that carry 30% or more of the voting rights, they are obliged to extend an offer to acquire the remaining shares of the company in question. The primary responsibility for complying with this obligation falls on the person whose acquisition triggers the mandatory bid (ie: the person whose purchase means its goes over the 30% threshold).

2. ‘Acting in concert’ (Code definitions)

This is where one person cooperates, either formally or informally, with others to (a) consolidate control of a company (which is defined as either (i) an interest in shares, which is outright ownership of the shares OR (ii) the right to own shares, that equals 30% or more of the voting rights) OR (b) frustrate the successful outcome of an offer for the company. When applying this definition it is assumed that where a person’s close relatives or related trusts are involved, they will be ‘acting in concert’ (“Presumption 5”).

Background

The matter concerned two acquisitions (the “Acquisitions”):-

1. On 31 December 2014, Mr George Letham, Mr George Taylor and Mr Douglas Park (the “initial buyers”) acquired an interest in Rangers shares at 20p a share. Mr Lathem subsequently admitted he had ‘acted in concert’ with the other two other buyers to acquire these shares which all together constituted 19.8% of Rangers; and

2. On 2 January 2015, Mr King acquired an interest in Rangers shares at 20p a share, using a company incorporated in the British Virgin Islands called New Oasis Asset Limited (“Oasis”). Oasis was in turn owned by a company incorporated in Gibraltar called Sovereign Trust International Limited (“Sovereign Trust”). Sovereign Trust had one corporate director, Sovereign Management Limited, which was a sister company of Sovereign Trust. In turn, Sovereign Trust is a trustee of Glencoe Investments Trust, incorporated in Guernsey, of which Mr King and his family own the beneficial interest.

It subsequently became apparent, through emails between Mr King and Mr Letham that they were aware of their respective purchases and that their Acquisitions would equal over 30% of the shares in Rangers. Shortly after the completion of the Acquisitions in early 2015, Mr King’s nominees replaced the existing directors on the board of Rangers and Mr King was appointed chairman.

Panel on Takeovers and Mergers – Initial ruling of the Executive and the Hearing Committee

After an investigation which had lasted over a year, the Executive branch (who manage the day to day supervision of takeovers), ruled on 7 June 2016 that Mr King had ‘acted in concert’ with the Initial Buyers and that Mr King must make an offer to the remaining shareholders at 20p a share. Mr King requested that the Hearing Committee review the Executives’ decision. The Hearing Committee upheld the Executives’ decision for a number of reasons, including:-

1. It was apparent, through correspondence between all the parties that the purpose of the Acquisitions was to affect a change of control in the board of Rangers (which it achieved);

2. Mr King and Mr Letham had, prior to the Acquisitions, cooperated to try and gain control of Rangers. In October 2014, two joint proposals by Mr King and Mr Letham, had failed to materialise. The Committee pointed to this behaviour, as a strong indicator of the parties intentions during the Acquisitions (ie: to gain control of Rangers); and

3. Having deciphered the trust structure through which Mr King had acquired the shares in Rangers (see above), it was Mr King who was the ultimate beneficial owner and the mandatory obligation contained in the Code fell on his shoulders.

Appeal to the Takeover Appeal Board (the “Board”)

The Hearing Committees’ decision was appealed on a number of grounds, including:-

1. That Mr King himself did not acquire the shares in Rangers (see above trust structure).

Verdict: The Board pointed to Presumption 5 of the Code, which states that related trusts are presumed to be acting in concert with each other. There was no evidence to rebut this presumption and Mr King had to comply with the Code’s mandatory obligation under code 9.

2. Mr King stated his previous collaborations with Mr Letham in October 2014 were not relevant to the subsequent Acquisitions.

Verdict: The Board dismissed this argument and decided it was perfectly reasonable to consider previous behaviour to ascertain whether it was appropriate to infer the parties had acted in concert on the Acquisitions.

3. Mr King stated that the Hearing Committee had misunderstood his intentions (being to restore proper corporate governance to Rangers).

Verdict: The Board held that Mr King’s justification or motivations were not relevant to deciding whether the Code had been breached.

4. Mr King argued there was no benefit (to the shareholders) in him being required to offer the shares at 20p a share to the remaining shareholders, because they had since increased in value.

Verdict: This was dismissed, as any benefit or otherwise to shareholders of the complying with the mandatory obligation is not a consideration when deciding whether the Code has been breached.

As such the appeal was dismissed and Mr King had until 12 April 2017 to make the offer to the remaining shareholders at 20p a share.

Comment

This matter is useful in demonstrating how the Code is applied in three key ways:-

1. When Mr King drew the Board’s attention to the reasons behind his involvement in Rangers, he was seemingly claiming that ‘ends (improved corporate governance) justified the means (breaching the Code)’. The motivation and intention behind an acquisition (whether positive or otherwise), whilst important for the parties involved, have no bearing on the application of the Code;

2. Parties cannot circumvent the mandatory obligation under Code 9 by purchasing shares through an elaborate trust structure. On this basis the threshold for rebutting Presumption 5 of the Code, that related trusts are acting in concert, would seem to be high; and

3. Past dealings between the parties, whilst not conclusive evidence of future co-operation, act as helpful guidance when considering whether parties had ‘acted in concert’ as defined under the Code.

This article does not include all aspects of the ruling, for the full statement by the Board see their website