The cat lives (Metlifecare takeover)

I had blogged a few months back about Asia Pacific trying to use the MAC clause to get out of an agreement to buy shares in Metlifecare (Shrodinger’s arrangement). As it turns out, a new agreement was entered into and approved by the court. Some interesting arguments regarding the role of hedge funds came up in litigation regarding the new agreement.

Asia Pacific was set to acquire shares in Metlifecare at $7 per share as set out in a Scheme Implementation Agreement (SIA) prior to the onset of Covid19 and its consequent impact of the economy. Asia Pacific had attempted to use  the MAC clause in the SIA to terminate the agreement. While this matter was still being litigated, Asia Pacific made a new non-binding offer which offered $6 per share. A revised SIA indicating the new offer price was entered into. The earlier litigation was settled as a condition of entering into the new SIA. A shareholders meeting to consider and vote on the new SIA was then convened. The new offer price was still kosher as per the independent audit report which set the price of Metlifecare’s shares in the range between $5.80 and $6.90 per share. The resolution was passed with 90.7% majority and Metlifecare sought the High Court’s approval of the scheme as required by s 236 of the Companies Act.

One shareholder, ResIL opposed the resolution. Although ResIL later withdrew its application, Lang J noted that the court must still consider it while determining the application to approve the SIA. One of the things considered was the Takeover Panel’s no-objection statement. As Lang J said, “the fact that …the Takeovers Panel has independently concluded that Metlifecare provided shareholders with sufficient material to satisfy Takeover Code requirements is obviously a matter of considerable significance in the present context”.

However, ResIl’s arguments with respect to the role played by hedge funds are interesting. REsIl argued that the hedge funds and other foreign institutional investors had acquired shares in Metlifecare after the first Asia Pacific offer was made and were now pressuring the board to accept the offer on the table so as to make a profit on the shares they had acquired. ResIl argued that shareholders were not informed of the role of hedge funds in pressuring the board to agree to the new offer price until the meeting where the resolution to approve the Scheme was put.

The Metlifecare board’s version of what transpired is that although the board came under pressure to enter into the replacement transaction with Asia Pacific from at least one hedge fund shareholder, the hedge funds did not force it to enter into the new SIA. “Rather, the directors unanimously considered it was in the interests of shareholders to consider the new proposal and made the decision to enter into the new SIA for that reason”.

Lang J went on to say that the Scheme booklet (provided to shareholders) need not have contained the level of detail about institutional investors as argued by ResIl. He further says [at 36 and 37]:

It was for shareholders to decide whether to vote for or against the scheme based on their own circumstances and not those of other shareholders. As Mr Arthur points out on Metlifecare’s behalf, in any publicly listed company the aims and aspirations of shareholders will inevitably differ. Some will acquire shares with a view to realising capital gains and/or dividends over time whilst others will hope to sell within the short to medium term. The respective positions of these two groups may be irreconcilable where, as here, an offer is made for the acquisition of all the shares in a company for a cash consideration.

Metlifecare’s shareholders therefore needed to consider their own positions when deciding whether to vote in favour or against the resolution. They did not need to know the identity of the institutional shareholders who had already indicated their support for the scheme or why those shareholders held that view. If individual shareholders were interested in those issues they were free to attend the meeting and to ask questions about them.

ResIl had also “whether the scheme was such that an intelligent and honest business person might reasonably approve it”. The court noted that “an intelligent business person would also have been aware that rejection of the scheme would inevitably cause the company’s share price to fall sharply in the short and medium term”. The price could even fall lower than the share price prior to Asia Pacific’s second offer because the institutional investors would have sold their shares once it was clear that the scheme would fail.

Ironically, as the court pointed out, ResIl was itself not a long term shareholder and had only bought the shares after Asia Pacific’s offer had been announced.

Cross border M&A with a side of French style crony capitalism

Cross border M&A is expected to run into cultural and political issues. However, the LVMH Tiffany story is a case of crony capitalism.

LVMH has been in the news for backing out of a merger agreement to buy Tiffany. The agreement was entered into prior to the onset of Covid-19. The initial reason provided by LVMH was that “a succession of events which undermine the acquisition of Tiffany & Co” had caused the board to review the situation. This obviously spoke to the Covid related losses suffered by the luxury sector. The board concluded that it would not be able to conclude the deal by the date set in the merger agreement (November, 2020). However, LVMH later said that it had been directed by the French government to extend the date of acquisition to January, 2021 as a reaction to the threat of taxes on French products in the US.

An extract of the letter from the French government to LVMH says:

In order to support the steps taken vis-a-vis the American government, you should defer the closing of the pending Tiffany transaction until January 6, 2021. I am sure that you will understand the need to take part in our country’s efforts to defend its national interests.

Tiffany’s response was to file a suit in a Delaware Chancery Court against LVMH for using the French government’s letter as a pretext to get out of the deal.

However, the French government publicly clarified that the letter to LVMH was merely a request and not a binding obligation. LVMH was thus left to invoke the now familiar MAE (material adverse event) clause saying that Tiffany’s handling of the pandemic had caused an MAE which would allow LVMH to walk.

Although LVMH has denied soliciting the letter, Harriet Agnew, in an article for the Financial Times suggests that LVMH might have played a part in the letter’s conveniently timed arrival. She points out that Mr Arnault (LVMH’s controlling shareholder) “holds unique sway in France, and his family are close to the Macrons”.  Although this is speculative, it does not sound implausible. Agnew rightly concludes that “it’s hard to shake off the perception that political interventionism and a cosy “who-you-know” capitalism are still the order of the day in France, despite Mr Macron’s attempts to modernise it”.

Shrodinger’s Arrangement

There’s been a lot written about MAC clauses in M&A in the recent days. Essentially, one of the parties to a merger agreement aims to walk away citing the Covid-19 pandemic and its impacts triggering the MAC (material adverse change/ effect) clause. Whether the party is successful in walking away will depend both on how the MAC is drafted and on the interpretation by courts in each country.

Until a determination is made by the court do the two parties have an agreement or not?

In a recent case, Metlifecare Limited v Asia Pacific Village Group Limited [2020] NZHC 1184, the High Court of New Zealand  wrote [24]:

It follows that, as matters currently stand, one party contends the arrangement remains in existence and the other party denies that it is. The arrangement for which orders are sought may therefore still be in existence or it may not.

So, it appears that we have a Shrodinger’s arrangement. (My words, not Justice Lang’s!)

This case arose in the shadow of Asia Pacific attempting to terminate a Scheme Implementation Act (SIA) it had entered into with Metlifecare on the basis of the emergence of Covid-19 constituting a MAC. (It also alleged that some acts of Metlifecare triggered another clause, the Prescribed Occurrences clause under the SIA.) On the other hand, Metlifecare initiated court proceedings seeking a declaration that the SIA remains in force (the termination litigation). While the termination litigation still pending, Metlifecare has now filed the instant application seeking directions under s 236(2) of the Companies Act, 1993 which deals with the court’s ability to make orders relating to approval of arrangements, amalgamations and compromises. Asia Pacific opposed this application.

As Justice Lang explains [20], “these provisions contemplate an applicant seeking approval for a scheme under Part 15 of the Act in two stages”. First, applications are made for initial orders under s 236(2) where “the applicant sets out the procedure it proposes to follow in calling a meeting of shareholders to consider and, if appropriate, approve the arrangement”. If the of shareholders approve the arrangement as required, “ the applicant applies for final orders under s 236(1) so the scheme can be implemented”.

The current application for orders under s 236(2) is unusual because Metlifecare is seeking orders with respect to a Shrodinger’s arrangement.

Justice Lang notes that although the court’s powers under the provision are discretionary, the parties usually are “willing participants” to the arrangement. Justice Lang found that the uncertainty of the arrangement in this situation was fatal to the application. Further, since the termination litigation was not likely to be decided before January 2021, there seemed to be no reason for Metlifecare to obtain approval from its shareholders about the possible arrangement with Asia Pacific. Instead, Metlifecare is probably aiming to get shareholder approval for the termination litigation. That issue, Justice Lang holds [at 33], is not within the scope of s 236(2). Instead, Metlifecare could simply obtain shareholder approval at a general meeting. Thus, Metlifecare’s application was dismissed.

Although the court did not dwell on it, it is interesting to note that one of Asia Pacific’s concerns [16] about this application was that the market would interpret the making of initial orders as the Court giving its endorsement to both the scheme and the litigation.