Defect in new Act concerning dissenting shareholder rights

The Companies Act, 2014, which comes into force today (Monday, June 1st), has been widely welcomed, and seems overall to be a fine piece of work.

But its provision relating to the rights of dissenting shareholders in a takeover when an offer is made to acquire the shares in a company suffers from a serious defect. This defect could be important in the pending takeover of Aer Lingus, where the major shareholders may well have reasons for accepting a lesser offer not shared by other shareholders.

Most of these other shareholders are likely to be people of modest means who have saved to buy their shares and deserve fair play.

Under the Act a person or company making a takeover bid for a company such as Aer Lingus is entitled to acquire all the shares in a company if those holding 90 per cent of the shares in the company accept the offer.

As a safeguard for dissenting shareholders, they have long had the right to appeal to the High Court against such compulsory acquisition. However, they face an uphill battle in court as acceptance by those holding the vast majority of shares is usually taken as proof that the price offered is fair.

Special reason

However, such an inference is not always justified. The shareholders accepting the offer may have links with the bidder or some other special reason or motive for accepting a lower price that is not shared by other shareholders.

For this reason, and because the power of compulsory acquisition is considered draconian, the right of recourse to the court to challenge the fairness of the terms of a takeover offer is essential to avoid injustice.

Judges recognised that dissenting shareholders with modest holdings could not be expected to take the risk of challenging the terms of a takeover in court if they faced the prospect of being ordered to pay the legal costs of the bidder if the challenge failed.

An exception was made to the general rule that the unsuccessful party in litigation is liable to pay the legal costs of the successful party.

In England this practice found its way into legislation providing that no order to pay the costs of the person making a takeover bid should be made against a dissenting shareholder who applies to court challenging the terms of the offer made unless the application was unnecessary, improper or vexatious, or there had been unreasonable delay bringing it.

In Ireland, however, the law developed differently. In 1998, Neal Duggan, a shareholder in Fitzwilton, challenged in the High Court the compulsory acquisition of his shares following a bid by Stoneworth, a company controlled by Sir Anthony O'Reilly.

There were grounds for Mr Duggan’s disquiet as many shares in Fitzwilton were held by associates of Sir Anthony so their acceptance was not indicative that the price offered was fair.

Despite this Mr Justice Peter Kelly not alone dismissed Mr Duggan's application but also ordered him to pay the costs incurred by Stoneworth defending in court the terms of the takeover. An appeal to the Supreme Court failed. Mr Duggan, who had argued his case in person, had to pay £IR70,000 to cover Stoneworth's costs.

Issue of costs

This precedent has created a situation where dissenting shareholders do not dare to challenge the terms of a takeover bid in court, and has rendered the protection afforded by the right of recourse to the court illusory.

Incredibly, the Company Law Review Committee, upon whose recommendations the Companies Act 2014 was based, failed even to address this issue of costs let alone consider legislation along the lines of that in England precluding awards of costs against dissenting shareholders.

It was a serious omission in a much praised report and has resulted in legislation that fails to restore to vulnerable shareholders the protection they enjoyed prior to Mr Justice Kelly’s judgment.

Charles Lysaght is a lawyer, author and journalist. He was formerly professor of company law at King’s Inns.