B e f o r e :
SIR ALISTAIR NORRIS ____________________
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Mr Michael Todd QC and Mr Andrew Thornton (instructed by Clifford Chance) for Inmarsat plc Mr James Potts QC (instructed by Kirkland and Ellis International LLP) for Connect Bidco Ltd Mr David Chivers QC and Mr Stephen Horan (instructed by Herbert Smith Freehills LLP) for Oaktree Value Opportunities LP and Oaktree Capital Management LP Mr Martin Moore QC and Mr Ben Griffiths for Kite Lake Capital Management LLP and Rubric Capital Management LP Hearing date/written submissions: 4,5 and 6 December 2019 ____________________
HTML VERSION OF JUDGMENT ____________________
Crown Copyright ©
Sir Alastair Norris:
This judgment deals with the costs of the Part 8 Claim brought by Inmarsat plc ("the Company") seeking approval of the scheme of arrangement by means of which it was acquired by Connect Bidco Ltd ("Bidco"). I approved the scheme on 3 December 2019 for reasons given the following day (the citation to which is [2019] EWHC 3470 (Ch) ). The avoid repetition, this judgment proceeds on the footing that the reader is familiar with that sanction judgment.
The grant of sanction was originally opposed by Oaktree Value Opportunities LP and Oaktree Capital Management LP ("Oaktree"), who instructed Leading Counsel to appear at the sanction hearing to argue against the immediate grant of sanction; and also by Kite Lake Capital Management LLP and Rubric Capital Management LP ("Kite Lake/Rubric") who did likewise. (I will refer to Oaktree and Kite Lake/Rubric together as "the Objectors"). Each submitted skeleton arguments setting out the grounds of opposition. In essence those grounds were
ii) That recent press reports had suggested that that upside might immediately be realised because a hearing to approve the "re-purposing" of the "L-band" spectrum over which Ligado held rights derived from the Company was imminent;
iii) That the process of sanction should be delayed for as long as possible to see if the re-purposing was approved;
iv) That before sanction was given the scheme shareholders should be given the chance to consider both additional material explaining how the Ligado contract had been taken into account in the recommendation of Bidco's offer and the "change in circumstance";
v) That a further shareholder meeting could be avoided if Bidco agreed to revise its offer to include a "contingent value right" ("CVR") under which any "upside" derived from the "repurposing" of Ligado's spectrum rights would be shared with the Company's shareholders notwithstanding the acquisition of the Company by Bidco.
But on the morning of the sanction hearing this opposition was withdrawn and both Oaktree and Kite Lake/Rubric supported the grant of sanction, uniting in the submission that none of their objections had touched upon the Court's jurisdiction to sanction the scheme (as not being one approved at a properly convened and properly informed meeting) and all had been directed at how the Court should exercise its discretion.
This withdrawal of objection had been brought about because at 7.30am on 2 December 2019 Bidco made an announcement that it was not prepared to extend the long-stop date in the scheme (which was 10 December 2019) nor was it prepared to offer a CVR or to increase its offer. Successful opposition would thus mean that the scheme would lapse, and the shareholders would lose the 43% premium over the undisturbed share price which Bidco offered and the statutory majority had accepted.
So far as Oaktree is concerned the position was spelt out in this way: -
It was not suggested by Mr Moore QC that the position of Kite Lake/Rubric was materially different.
Counsel for the Company and for Bidco both submitted that it was appropriate that Oaktree and Kite Lake/Rubric should be ordered to pay to the Company and to Bidco the additional costs incurred by them respectively in responding to opposition that was ultimately abandoned and was directed at increasing an offer that was itself sufficient.
Counsel for Oaktree and for Kite Lake/Rubric both submitted that it was appropriate that the Company should pay their costs of raising the grounds of opposition which, although not pursued, were raised for the assistance of the Court.
It is right to begin with first principles. The starting point for an order about costs is CPR 44.2(1), which confers the discretion. CPR 44.2(2) contains the general rule about how that discretion will be exercised (by reference to who is "the unsuccessful party" and who is "the successful party") but confirms that the Court may make a different order. CPR 44.2(4) and (5) list in a non-exhaustive way some of the material considerations that might lead to a different order. Orders about costs in relation to schemes are subject to this regime.
The "general rule" will ordinarily have no application to Part 8 proceedings seeking the court's approval of a scheme: note that I say nothing about individual applications within such proceedings. The Part 8 proceedings seek the approval of the Court, not a remedy against another "party"; Re Royal & Sun Alliance [2006] EWHC 2947 per David Richards J at [23]. Save in relation to the company itself it is not meaningful to speak of an "unsuccessful party". Such proceedings are likely to lead to "a different order". Indeed, there are very many instances in which the Court has done so; so many that it is said that there have emerged "rules" which govern the position.
An analogous position arises where the Court is asked to admit a will to probate: in that context in Re Kostic [2007] EWHC 2909 Henderson J (as he then was) said that whilst costs orders were governed by the CPR, the considerations of policy and fairness which underlay the existing "rules" about costs remained as valid today as they were before the introduction of the CPR and should continue to guide the Court in deciding what "different order" to make, acting as guidelines not straitjackets: see paragraphs [4] and [6]. In Re Peninsular & Orient [2006] EWHC 3279 Warren J had made the same point in relation to the "special rules" that had emerged in the scheme context: see para. [3]. It is in my judgment the correct approach to costs in relation to schemes of arrangement.
The position set out in Buckley on the Companies Acts at para [16-245] is: -
The "practice of the Court" is based upon the order made and reasons given in Re National Bank Ltd [1966] 1 WLR 819.
This practice was recently commented upon by Hildyard J in Re Stronghold Insurance Company Ltd [2018] EWHC 2909 (Ch) at paras [142]-[145]. The judge noted that on applications to convene scheme meetings there was a growing tendency for opposing creditors to trail generic points in opposition without explanation, elaboration or evidential base with the expressed expectation of returning to these points at the sanction stage; and then not to be represented at the sanction hearing. The effect of this was to increase the burden on the court. Hildyard J continued (at [145]):-
This observation was endorsed by Snowden J in Re Ophir Energy plc [2019] 1278 (Ch) who said (at para [39]):-
Based upon those comments Mr Chivers QC submitted on behalf of Oaktree (supported by Mr Moore QC on behalf of Kite Lake/Rubric) that the Court had extended an open invitation to those who have genuine objections to a scheme to fully engage with the process, to instruct solicitors and Counsel and to appear at Court; and that objectors had been so invited on the basis that (i) that they would not be facing an adverse costs order and (ii) that there was a very real prospect of them getting an order in their favour.
The point of the observations of Hildyard and Snowden JJ (which I wholly endorse) was to emphasise that if objections are to made to a scheme then they should be fully articulated and properly argued and defended, and that the Court should not be left to assess, unassisted, the weight of (sometimes vague) criticisms in correspondence when called upon to scrutinise the scheme at the sanction stage. Neither of those experienced scheme judges would have intended their words to be taken as an encouragement to objection itself, or as providing a "tick box" list which (if met) would result in a particular order thereby introducing rigidity into the undoubted discretion as to costs (going beyond a "guideline"). I do not think that they intended to depart from the view expressed by Warren J in Re Pensinsular and Orient [2006] EWHC 3279 (Ch) at [47]:-
That remark reflects the fact that a balance has to be struck between assisting the Court to discharge its scrutiny function on the one hand and on the other encouraging objection in the knowledge that the costs of doing so will be defrayed by others.
Concerning Oaktree, the relevant facts are these. Oaktree's business, at its core, is to buy securities based on fundamental research at a discount to intrinsic value. Oaktree began building a holding in Inmarsat in September 2018 because it thought the Inmarsat's core business had growth prospects and that its "L-band" spectrum was under-utilised and had potential. Prior to the announcement of the scheme Oaktree had built up a holding of 2.7 million shares. The scheme was announced on 25 March 2019. The scheme meetings were fixed for 10 May 2019. Between announcement and the scheme meeting Oaktree increased its holding to 3.17 million scheme shares. At the scheme meeting Oaktree voted against the scheme because it considered that the offer price (albeit at a 43% premium to the undisturbed share price) undervalued the company: but the scheme was approved. After the scheme meeting Oaktree increased its holding in Inmarsat to 13.23 million shares. It might have done so (i) because it bought at a discount to the offer price and hoped the scheme would be sanctioned (so yielding a profit equal to the discount); or (ii) because it hoped the scheme would be defeated and it would be left with a holding which would ultimately be valued above the offer price; or (iii) because it hoped to achieve an improvement on the offer price through use of the scheme dynamics (threatening to delay sanction unless a CVR was included).
In October 2019 Oaktree began actively to promote its opposition to the scheme. Its initial position (set out in a letter of 29 October 2019) was that
This challenge to the jurisdiction of the Court to sanction the scheme was subsequently softened. First, in its letter to Inmarsat of 5 November 2019 Oaktree said that it proposed to invite the court "to examine… very carefully" the disclosure questions (and also whether there had been a "material change" in the light of press speculation about the progress of Ligado's application to "repurpose" the "L-band"). Then, second, in its evidence filed on 20 November 2019 (which took into account the evidence filed by Inmarsat as to how it approached the Ligado contract and the "repurposing" when preparing the Explanatory Statement) Oaktree said that there should be a further shareholders meeting before sanction was considered. Finally, in the skeleton argument filed on its behalf Oaktree's position was spelt out as being that the scheme should go back to shareholders for reconsideration, but that such a necessity could be avoided if Inmarsat and Bidco were prepared to take steps to provide for the future uncertainty about the "L-band" approval by way of a CVR.
Concerning Kite Lake, the relevant facts are these. Kite Lake thought Inmarsat's exposure to Ligado was intriguing. There was an approach to take over Inmarsat by a prospective purchaser in July 2018. Kite Lake bought into (and subsequently sold out of) that bid situation through "contracts for difference" ("CFDs"). In March 2019 when the possibility of a new bid emerged Kite Lake again bought CFDs. At the time of the announcement it had CFDs relating to 1.7 million shares. By the date of the scheme meeting it had increased this and converted it into shares, so that Kite Lake held 2.6 million voting shares, which it used to support the scheme. It subsequently increased its holding via further CFDs. During October 2019 Kite Lake came to consider that approval for the "repurposing" of the "L-band" was approaching a key decision point, and it preferred not to rush the sanctioning of the scheme in view of what it regarded as "a material change" in the position presented to the shareholders at the scheme meeting.
Concerning Rubric, it first acquired an economic interest in Inmarsat through CFDs in April 2018 relating to 722,000 shares. By the date of the scheme circular this had increased to 8.25 million CFDs. Following conversion and some dealing, at the date of the scheme meeting Rubric held 4.42 million scheme shares beneficially (which it voted in favour of the scheme) and 1.02 million CFDs. Rubric viewed what it understood to be events concerning the "repurposing" application in October 2019 to be significant and in a letter dated 5 November 2019 requested Inmarsat to "maximize the available time that precedes the Long Stop Date" and to delay the sanction hearing.
Mr Todd QC (for Inmarsat) submitted that in view of their acceptance that the deal approved at the scheme meeting was one which an intelligent and honest shareholder, protecting his own interests, could reasonably approve, the Objectors were by their objection, evidence and appearance simply indulging in a naked attempt to extract a better deal from Bidco by utilising or weaponizing such legal arguments as they could muster to achieve their aim of an increased price over and above the one that was properly before the Court; and that that was a collateral purpose. There is force in that broad characterisation.
The response of Mr Chivers QC (for Oaktree) and of Mr Moore QC (for Kite Lake/Rubric) was to emphasise the detail. The Objectors had bought their shares in the market as anybody could. With the purchase (whenever made) came the inherent possibilities (i) that a scheme (which possibly undervalued the shares) might succeed; or (ii) that a scheme which offered a premium over the undisturbed share price might not be sanctioned or might fail to clear regulatory hurdles and the share price fall back; or (iii) that a material event might occur between scheme meeting and sanction hearing (such as a competing bid or a change in commercial circumstances) which put sanction in jeopardy or caused the company itself to reassess. To any of these emergent possibilities the Objectors must be free to respond. The acquisition of the shares had conferred complete equality with all other shareholders, and it was not possible fairly to distinguish shareholders who were funds or institutions from other shareholders.
They further submitted that in the instant case the Objectors were shareholders exercising their rights as such ; whatever they achieved was to the benefit of all shareholders. The Objectors were not now saying that the deficiencies in disclosure were such that the result of the scheme meeting could not be accepted. They were now saying only that as a matter of discretion the court such not sanction the scheme at the sanction hearing (originally listed for 24 November 2019) but should adjourn the hearing to enable the company (if it wanted) to convene a further meeting of shareholders. They were indeed seeking to improve the scheme: but that was a perfectly legitimate commercial objective that was consistent with an acceptance of the proposition that the scheme voted on at the meeting was one satisfied the "adequacy test". The abandonment of their opposition cannot be held against the Objectors: they should be applauded not penalised for accepting the commercial reality that what they sought (an adjournment of the sanction hearing) was no longer realistic since its inevitable consequence would be the lapse of the scheme, given Bidco's "no increase announcement". Because the opposition had been abandoned the strength of the Objectors' position had never been the subject of supportive argument, and the Court's findings, in the absence of argument on the point, cannot be held against the Objectors.
Having considered these respective submissions my conclusions are as follows:-
I will make no order as to costs.
I do not expect attendance of legal representatives when this judgement is handed down.