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West Coast Capital Limited recently initiated proceedings seeking an interim order to block Dobbies Garden Centres PLC’s, proposed Open Offer to shareholders.
What made the case more absorbing was that Dobbies, the garden centre retailer, was 65% owned by Tesco Plc, while West Coast Capital the investment vehicle of the Scottish entrepreneur and philanthropist Sir Tom Hunter, held 29.2% in Dobbies, which he has used as a 'blocking stake' to prevent Tesco from de-listing the company. Tesco would need 75% to follow such an option.
Dobbies claimed that “the Open Offer will enable the Company to progress its stated expansion plans and the Board believes that it provides access to funding on attractive terms in current market conditions which will be earnings enhancing,”
Last year, supermarket giant Tesco tried to take full control of Dobbies with a 1,500 pence a share, or 156 million pound, offer that was backed by Dobbies' board.
In order to keep his current percentage holding, Hunter would have to take up his full entitlements under the Open Offer at a cost of £43.8 million. If he did not he would risk Tesco's stake passing the 75 percent threshold.
The recent opinion of Lord Glennie on the Petition for an interim injunction under section 994 of the Companies Act 2006, demonstrates how in only very limited circumstances will relief be offered in a claim of unfair prejudice by regulating a company’s actions.
West Coast Capital claimed that they were being unfairly prejudiced because by increasing the share capital of the Company they would be forced to either make substantial further investments or allow their shareholding to be diluted; Tesco had appointed directors to the Company’s board, and those directors had consistently exercised their powers in Tesco’s interests; and the recent decision by the board to deviate from its usual policy and not declare a dividend was to discourage participation in the Company by minority shareholders.
Lord Gennie said that, “it will generally, though not invariably, be necessary for a petitioner to show that the conduct complained of was in breach of some agreement of duty. Secondly, the unfairness of which complaint is made must be unfairness to the shareholder in his capacity of a shareholder of the company….third, the court will not readily review the decisions of directors of questions of management of the company, such as raising finance or matters of commercial judgement, if arrived at in good faith.”
Lord Glennie stated that “what the court is then being asked to do is to adjudicate between competing commercial interests and to form views as to the motivation of the directors of the Company on the basis of an incomplete snapshot of what is going on.”
This demonstrates that the court will not readily infer bad faith into directors’ decisions just because their decisions do not benefit the minority shareholder and further, that substantial evidence will need to be provided to prove otherwise.
His conclusion was that, “ if ultimately, a sale of shares is ordered, the court has discretion to order that the shares be valued on such basis as will safeguard the party who has been unfairly prejudiced from the drop in value, if any, caused by the unfairly prejudicial conduct.”
Comment
In the event West Coast Capital lost its legal battle to block Tesco and Dobbies from raising £150m through the Open Offer and Sir Tom Hunter agreed to sell his 29.2 per cent stake in the garden centre chain. Tesco took full control of Dobbies paying West Coast Capital £12 a share for the stake, to give it 94.7 per cent of Dobbies' equity; bringing to an end an acrimonious power struggle between the world's third largest retailer and the Scottish philanthropist.
The case showed that in this example the company’s articles were not helpful in a when a minority shareholder finds he may well loose out. The power struggle between the two titans Tesco and Sir Tom gives us wider lessons.
By coincidence Pearson Hinchliffe Commercial Law recently advised a large PLC in the acquisition of a majority shareholding in another company. Happily both sides saw that without a suitable document to protect the interests of the minority shareholders, this could lead to great expense and testing litigation which would disadvantage both parties and the interests of the business as a whole.
Pearson Hinchliffe Commercial Law prepared a shareholder’s agreement to identify clearly the rights of the parties and method of valuation of the minority shares.
Click here to speak to a specialist commercial lawyer in this area of law.
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