Ophir Energy Plc v Medco Energi: Clarifying Court’s Discretion in Sanctioning Schemes of Arrangement under the Companies Act 2006

Introduction

The case of Ophir Energy Plc v Medco Energi ([2019] EWHC 1278 (Ch)) addresses the procedural and substantive aspects of sanctioning a scheme of arrangement under the Companies Act 2006 ("the Act"). This application was brought before the England and Wales High Court (Chancery Division) by Ophir Energy Plc ("the Company") to obtain court sanction for a takeover scheme proposed by Medco Energi Global PTE Ltd ("Bidco"). The key issues revolved around the adequacy of disclosure in the Explanatory Statement, the treatment of dissenting shareholders, and the court’s discretionary power in sanctioning the scheme.

Summary of the Judgment

Justice Snowden presided over the case, ultimately sanctioning the scheme of arrangement proposed by Medco Energi. The Scheme aimed to transfer the entire issued and to-be-issued ordinary share capital of Ophir Energy Plc to Bidco in exchange for cash consideration of 57.5 pence per Scheme share. Key points in the judgment included:

The Scheme was recommended unanimously by the Company's directors, who also committed to vote in favor of it.
There were rival interests from Soco International plc and Coro Energy plc, both of which ultimately withdrew their proposals.
A significant institutional shareholder, Sand Grove Capital Management LLP ("Sand Grove"), increased its stake and negotiated an increased offer.
Legal & General Investment Management ("LGIM") raised concerns regarding the adequacy of the Explanatory Statement but did not attend the court meeting to formally oppose the Scheme.
The Court assessed the Scheme against established legal principles and found no substantial defects, leading to its sanctioning.

Analysis

Precedents Cited

The judgment referenced several key precedents that guided the court’s approach:

Buckley on the Companies Acts: Outlined the discretionary nature of the court’s sanction, emphasizing the need for compliance with statutory provisions, fair representation, and bona fide actions by the majority.
Re TDG plc [2009] 1 BCLC 445: Identified four critical considerations for sanctioning schemes, reinforcing the depth of scrutiny applied by courts.
Re Dorman Long & Co. Limited [1934] Ch 635 and Re Heron International [1994] 1 BCLC 667: Highlighted the necessity for comprehensive and accurate Explanatory Statements to enable shareholders to make informed decisions.
Stronghold Insurance Company Limited [2018] EWHC 2909 (Ch): Addressed the challenges posed by last-minute objections lacking substance or proper representation.

Legal Reasoning

The Court, led by Justice Snowden, applied the established legal framework to evaluate the Scheme:

Statutory Compliance: Ensured that the Scheme adhered to the procedural requirements of Part 26 of the Companies Act 2006.
Fair Representation: Assessed whether the shareholders present at the meeting fairly represented the entire class of Scheme shareholders.
Bona Fide Actions: Examined if the majority acted in good faith without coercing the minority, which was supported by the Directors’ unanimous recommendation and increased offer.
Intelligent and Honest Approval: Determined if a reasonable shareholder would approve the Scheme based on the information provided and the premium offered.
Absence of Defects: Concluded that there were no significant deficiencies in the Scheme that would warrant withholding sanction.
Consideration of Objections: Addressed LGIM’s concerns regarding the Explanatory Statement, noting the lack of timely and substantive engagement by LGIM to support their claims.

Impact

This judgment reinforces the judiciary’s approach to sanctioning schemes of arrangement by:

Affirming the high threshold for courts to refuse sanction, emphasizing the importance of majority shareholder approval and the premium offered.
Clarifying that dissenting shareholders must adequately substantiate their objections and engage proactively during the sanction process.
Highlighting the court's reluctance to entertain last-minute or unfounded objections without substantive evidence or representation.
Emphasizing the necessity for comprehensive disclosure in Explanatory Statements, while also underscoring the court’s discretion in addressing potential information asymmetries.

Future cases will likely reference this judgment when evaluating the sufficiency of shareholder information and the conduct of dissenting parties during sanction hearings.

Complex Concepts Simplified

Scheme of Arrangement

A scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors, often used for mergers, acquisitions, or restructuring. It requires approval from the requisite majority of shareholders or creditors and subsequent court sanction to become binding.

Explanatory Statement

An Explanatory Statement is a detailed document provided to shareholders outlining the specifics of the proposed Scheme. It must contain all necessary information for shareholders to make an informed voting decision.

Sanction Hearing

A sanction hearing is a legal proceeding where the court reviews the Scheme of arrangement and decides whether to approve (sanction) it based on statutory criteria and equitable considerations.

Asymmetry of Information

Asymmetry of information refers to situations where one party has more or better information than another. In this context, LGIM alleged that shareholders lacked sufficient information to assess the Scheme thoroughly.

Conclusion

The judgment in Ophir Energy Plc v Medco Energi serves as a pivotal reference in the realm of corporate restructurings and takeovers via schemes of arrangement. It underscores the court’s balanced approach in sanctioning such Schemes, weighing statutory compliance, shareholder representation, and the integrity of the Scheme's terms. Additionally, it delineates the expectations placed on dissenting shareholders to present substantial and timely objections supported by evidence. This case reinforces the importance of clear and comprehensive disclosures in Explanatory Statements, ensuring that all shareholders are adequately informed to make decisions in their best interests.

In essence, the judgment affirms the judiciary’s role in ensuring fairness and transparency in corporate reorganizations while safeguarding against opportunistic or unfounded challenges that could impede legitimate and beneficial Schemes of arrangement.