How would you like to own an asset, have proper title to it, and be forced to sell it for a specific price? Might-is-right legislation, concocted back in 1963, can force minority shareholders to hand over their shares to a bidder. The bidder, however, must have received acceptances from shareholders representing 80 per cent of the value of the shares and 75 per cent of the numbers. This legislation, enshrined in the Companies Act, 1993, was designed to tidy up loose ends, and to make it easier for the bidding company to integrate an acquired company under its wing. It also erases the possibility of disgruntled minority shareholders taking court action against the directors over the way their company is being run.
This Irish legislation is, of course, more draconian (from the minority shareholders point of view), than in Britain. There the majority shareholder has to get 90 per cent of the value before the minority shareholders can be compulsorily acquired. If that legislation existed in Ireland, then the Dr Tony O'Reilly consortium would have found it much more difficult to succeed with its bid for Fitzwilton. The debate over the rights of minority shareholders reemerged last week with one institutional shareholder, Scottish Provident (it is opposed to the consortium bid), complaining that the compulsory takeover level is too low. Also that institution called for the elimination of a loophole in the law which allows offerors to include shares they already own within the 80 per cent threshold. That begs the question; has Stoneworth, the vehicle used by the O'Reilly consortium, breached the spirit of the Companies Act, 1963?
In normal takeover bids, the bidder's shareholding is excluded when arriving at the thresholds. There are many examples. Take, for instance, the Unilever Ireland bid for Lyons Irish Holdings. It owned 75 per cent of Lyons and made a bid for the remainder. Unilever only managed to push this up to 80.8 per cent because it was rejected by the independent board members. Unilever could not compulsorily acquire the outstanding shares because its 75 per cent holding was excluded from the count.
Fitzwilton's takeover is decidedly different, but not unique. Dr O'Reilly, and his associates, by setting up the Stoneworth company, as the takeover vehicle, were able to include their joint 27 per cent shareholding in Fitzwilton, as part of the 80 per cent they would need to compulsorily acquire the outstanding shares. Even the statement declaring the bid "wholly unconditional" issued by Salomon Smith Barney, on behalf of Stoneworth, makes it quite clear that all the members of the consortium "are acting or are presumed to be acting in concert with Stoneworth".
The acceptances from the consortium, together with normal acceptances, brought the acceptances just above the 80 per cent threshold, at 80.2 per cent. What, it should be asked, would have been the result had the 27 per cent been excluded?
The percentage of the value would fall to 72.7 per cent, or well under the threshold. It would need extra acceptances from shareholders representing 14.5 million shares to reach the required level, or over 5 per cent of Fitzwilton's equity. If Dunnes Stores continued to sit on the fence with its 10 per cent stake, and with Scottish Provident opposed, then compulsory acquisition would be more difficult. Scottish Provident also opposed a similarly structured bid in 1993 when DCC set up a vehicle, in conjunction with Printech directors, to takeover Printech. It threatened legal action over attempts to compulsorily acquire its 7.1 per cent stake, but in a deal, ended up with 12.3 in Printech, which it sold to DCC three years later. Stoneworth has not yet gone for compulsory acquisition. Instead, it has extended the offer "until further notice".
The compulsory avenue is in contrast to the approach adopted by Waterford Wedgwood, another Dr O'Reilly controlled company, when it made its bid for German porcelain group, Rosenthal. It built up a 84.6 per cent stake in the company, and the minority shares are quoted on the Frankfurt Stock Exchange. As the shares are bearer shares, and a minority cannot be traced, Waterford Wedgwood has said it is content to have minorities. Yes, indeed. But then it has little option to do otherwise; the holdings of minority shareholders cannot be compulsorily acquired in Germany.
As the countdown to harmonisation among EU countries continues, and as the Frankfurt and London stock exchanges link up - much to the annoyance of the French - laws on the compulsory acquisition of minorities will be harmonised. It would be better for the formulators of Irish company law to free up the rights of minority shareholders now before we are forced to by future EU legislation.
