Inmarsat Plc, Re

Yesterday, I sanctioned a scheme of arrangement proposed in relation to the affairs of Inmarsat plc. These are my reasons for doing so.

Inmarsat Plc is a globally recognised provider of mobile satellite services through a fleet of 13 satellites. It was formed in 1979 as a treaty-based organisation, with an initial objective of providing maritime communications. Both its structure and its activities have since changed.

Since 2005, it has been a listed English Plc. There are some 463,058,610 shares in issue. There are also some convertible bonds which contain favourable conversion terms. There also exist share employee share plans and long-term incentive plans under which shares are due to be issued. None of the detail of this matters and I can simply approach the matter on the footing that there is a single class of shareholders.

The activities of the company now focus on the provision of “data on the move” to governments and to other financially secure institutions under long-term contracts. As part of this business, Inmarsat is entitled to certain radio spectrum rights. One growth area is the commercial airline cabin connectivity market which Inmarsat is seeking to exploit.

One group of such long-term contracts related to the licensing of part of the L-Band low to mid-range radio spectrum to a business which, ignoring its various incarnations and restructurings, can conveniently be called “Ligado”. Ligado is a US satellite communications business which is seeking to develop a terrestrial mobile data network. In December 2007, Inmarsat granted Ligado a series of options to use some of the Inmarsat radio frequencies in North America in return for scheduled payments. The bargain was contained in what is called “the Cooperation Agreement”.

The options relate to frequencies at present allocated to mobile satellite services and they lie close to parts of the spectrum which are used for global positioning systems (“GPS”). Ligado does not want to use the option licence frequencies for mobile satellite services; it wants to use them as a basis for its intended terrestrial communications network, possibly 5G. For this, it needs the permission of the US Federal Communications Commission (“FCC”), to “repurpose” the spectrum. A licence modification, such as that needed by Ligado, is not straightforward. Since at least 2010, the repurposing of the Ligado spectrum has been opposed by the US GPS community. The FCC requires that dispute to be resolved. In that regard, it will rely, in part, on the advice of the National Telecommunications Information Administration (“NTIA”) as to whether the issues are properly resolved; and it will also require approval by the Interdepartment Radio Advisory Committee (“IRAC”), which represents 19 US federal agencies relating principally to defence and to transport but intimately connected with GPS.

The modification of the Ligado spectrum is opposed not only by the GPS community but also by a competitor of Inmarsat called “Iridium Communications”. It has filed ten opposition filings relating to alleged interference with its networks. The proposed modification is also opposed by The Coalition of Geospatial Organisations. This has largely been the position for the past 4 years.

It is important for the purpose of this case to understand the relevance of this issue. A modification of the Ligado licence will not create any value for Inmarsat. What it will do is to reduce the commercial risks currently attaching to payments due from Ligado under the Cooperation Agreement. The inability to build the network has put Ligado's funding position under pressure and it has already been through a Chapter 11 restructuring. As part of that, it negotiated with Inmarsat a pause in the payments due under the Cooperation Agreement. There are thus substantial deferred payments, and a programme to recommence payments and to pay off the arrears. This is the “commercial contingency” to which I refer.

In summary, payments due from Ligado were, in 2012, suspended until March 2014 to facilitate the restructuring. There was then a further amendment to the Cooperation Agreement, permitting further deferments. But in 2016, 2017 and 2018, Ligado did make aggregate payments in respect of current liabilities and deferred payments of about US$108 million in 2016, US$111 million in 2017 and US$118 million in 2018. However, further deferred payments of US$35 million remain outstanding. What was agreed was that there would be a full payment deferral in 2019 and that quarterly payments would resume (i) in the quarter in which the FCC approved the Ligado licence modification or (ii) in any event, on 31 March 2020. This revenue stream is estimated at $US136 million per annum, growing thereafter at 3 per cent, compounded over the next 89 years. Accordingly, the Cooperation Agreement, and the liabilities of Ligado under it, represent an important income stream for Inmarsat, but one which is attended by considerable risks.

The twin demands of (i) unreliable receipts under the Cooperation Agreement with Ligado (which I should note, has associated costs which must be borne by Inmarsat, notwithstanding the non-receipt of funds from Ligado); and (ii) investment in developing cabin connectivity, led in 2017, to a dividend cut by Inmarsat. As the Inmarsat Chairman explained in his 2017 report:

That also had an impact on the share price. The Chairman also referred to that in his statement, saying:

So much for Inmarsat and its prospects and vulnerabilities in the spring of 2018. It is now convenient to introduce the predator seeking to take advantage of those vulnerabilities. Connect Bidco Limited (“Bidco”) is a consortium of four equal partners. Two are private equity funds, Apax Partners LLP or funds advised by them, and Warburg Pincus International LLC or funds advised by them. Two consortium members are Canadian pension funds: The Canadian Pension Plan Investment Board and the Ontario Teachers' Pension Plan Board.

On 25 March 2019 the Inmarsat and the Bidco boards jointly announced, in accordance with the rule 2.7 of the Takeover Code, the terms of a recommended cash offer by Bidco for Inmarsat. The total offer price was US$7.21 per share. This comprised $7.09 cash consideration and the payment of a previously announced final dividend of 12 cents per share, payable on 30 May 2016. The offer price represented a 46 per cent premium to the undisturbed share price; and it represented a 35 per cent premium over the volume weighted average price of Inmarsat shares for the three months preceding the announcement.

The offer came with the unanimous recommendation of the Inmarsat board, advised by JP Morgan Securities Plc, PJT Partners UK Limited and Credit Suisse International. It was proposed that the takeover should be implemented by way of a scheme of arrangement under part 26 of the Companies Act 2006 and would be followed by de-listing and a reregistration of Inmarsat. On 18 April 2019, Inmarsat circulated an explanatory statement in relation to the scheme and a chairman's letter.

The Chairman's letter told the shareholders that the Inmarsat board remained confident in the long-term prospects of the business. It said that in particular, the board believed that Inmarsat's existing strategy, including its seeking a strong position in the growing market for commercial airline connectivity’s, should continue to generate attractive returns on investments. But it then added:

Accordingly, the Chairman recommended acceptance of the offer (which placed a value of some £2.6 billion on the entire issued and to be issued ordinary share capital). The issue facing the shareholders, their present position in the market when compared with their prospects and the costs of achieving those prospects, was thus fairly placed before those who had to consider the proposal.

The Explanatory Statement contained a paragraph relating to Inmarsat's current trading and prospects. It drew attention to the fact that on 7 March 2019, Inmarsat had announced its unaudited financial results for the year ending 31 December 2018 and to the fact that the key highlights included the information that 2018 group revenue, “excluding Ligado” had increased by some £71.6 million or 5.7 per cent and its group EBITDA (again “excluding Ligado”) had increased by £27 million or 4.4 per cent. The paragraph went on to say that on 27 March 2019 Inmarsat had published its 2018 Annual Report which included financial statements for the year ended 31 December 2018 and that the financial information relating to Inmarsat was incorporated by reference in the Explanatory Statement.

The material that was incorporated by reference contained a crisp summary of the Cooperation Agreement and of the deferred payments due from Ligado. It pointed out that the deferment of payments due from Ligado had certain accounting consequences which were carefully explained on page 121 of the 2018 accounts. It pointed out that the Ligado impact was largely related to balance sheet items.

Although not incorporated by reference, the published 2018 Annual Accounts and Report had made further disclosures about the Ligado contracts. It pointed out that in 2018, there had been an increase in the payments received under the Cooperation Agreement and it drew attention to the fact that payments not made in 2019 (which might amount to £132.3 million in aggregate) together with prior deferred payments would become due for payment by Ligado (with interest from their original date of payment) by no later than 30 June 2021.

As to the commercial risk, the Business Overview noted:

That was the material available to the shareholders for consideration at the scheme meeting.

The scheme meeting was held on 10 May. The turnout at the court meeting was 27.3 per cent in number and 62.61 per cent in value of the shareholder population. 484 of the 628 scheme shareholders who participated in the court meeting, holding some 229 million scheme shares, voted in favour of the scheme. 144 scheme shareholders, holding just over 61 million scheme shares, voted against the scheme. The majority was, therefore, 77.07 per cent in number of the participating shareholders, representing 78.95 per cent in value of the shares.

Amongst those who voted in favour of the scheme was Kite Lake Capital Management UK LLP (“Kite Lake”). This was a fund which originally held derivatives but by the record date for the scheme meeting, had converted those derivative interests into 2.6 million shares or about 0.55 per cent of the relevant shareholding. Another who voted in favour was Rubric Capital Management LP (“Rubric”). They, likewise, held contracts for difference but because of doubts about whether the scheme might be approved, converted those contracts for difference into shares.

One of the parties that voted against the scheme was Oaktree Value Opportunities Fund LLP (“Oaktree”). It had begun purchasing shares in Inmarsat in September 2018 based on a belief that the L-band spectrum would acquire value as demand for 5G increased.

Further, Oaktree thought that because Ligado had before the FCC an application to modify the spectrum licence, the deal ought to have been structured to include a “contingent value right”. The majority of voting shareholders did not share this view and the scheme was approved,

From the beginning of October 2019, Kite Lake, Rubric and Oaktree became active objectors to the scheme. Inmarsat received indications of support for the objectors’ position from other dissentient shareholders, though some of those held derivative economic interests which did not confer any voting rights.

In general, the thrust of the objections was, first, that the Explanatory Statement was not sufficiently clear about the Ligado contract, so that the integrity of the vote at the scheme meeting was suspect. Secondly, that because of the possibility of the FCC permitting a modification to the Ligado spectrum, a contingent valuation right should have been negotiated. Thirdly, that there had, in any event, been a material change in circumstances since the May scheme meeting. In October here had been a press story that the FCC would approve the Ligado modification shortly and so the parties objecting thought that there ought to be an extension to the timetable of the takeover and an adjournment of the sanction hearing. There was, lastly, a general allegation that the board had failed to negotiate hard enough, possibly because of their prospective interests in the business under new ownership.

Of course, all of these objections were predicated on a degree of flexibility on the part of Bidco; that Bidco could be persuaded to add some sort of contingent value right over and above the significant premiums that it was paying or that Bidco could be persuaded to postpone the timetable, in order to see if the FCC modification came through and, if so, whether that might lead to a renegotiation of the price. But the possibility of flexibility on the part of Bidco came to an abrupt end at 8.30 am on 2 December 2019, when Bidco announced to the market that it would not increase its offer and that it would not agree to any extension.

The scheme contained a longstop date of 10 December 2019r. There was in correspondence with the objectors some indication of a dispute as to the true construction of the longstop date and whether it was 10 December 2019 or 21 March 2020. But that dispute has now fallen by the wayside. Everyone now accepts that the longstop date for the scheme is 10 December 2019; and, accordingly, the decision facing the Court on the sanction hearing would be whether to sanction the scheme or whether, in refusing sanction, to cause the scheme to collapse, the result being that Bidco could not put in a fresh offer for the company for the period of restriction laid down in the Takeover Code.

This is the sanction hearing to which I have made reference. The role of the Court at the sanction hearing is well settled. A further summary of familiar principles by me would benefit no one. The relevant questions will be apparent from my detailed findings and holdings which follow. But I should, in the context of this previously contested scheme of arrangement, draw attention to four matters, familiar though they are.

The first is that the fundamental question at the sanction hearing is one of fairness. The Court considers the fairness of the scheme, binding as it does, dissentient and absent shareholders. The test is generally put in this way: that the Court must be satisfied that the arrangement is such as an intelligent and honest man, a member of the class concerned, acting in respect of his interest as such, might reasonably approve.

Secondly, the reference to the scheme being one such as might reasonably be approved, makes clear that the scheme need not be the only fair scheme or even in the Court's view, the best scheme. There are, necessarily, reasonable differences of opinion on these matters, as David Richards J (as he then was) pointed out, in Re Telewest Communications (No. 2) [2004] EWHC 1466 at paragraph 20.

Thirdly, when considering the question of fairness, the court, of course, takes account of (but is not bound by) the views expressed at the scheme meeting. Of longstanding is the enunciation of the principle by Lindley LJ in Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 409, but it bears repetition in the context of this case. Lindley LJ said of the creditors’ scheme before the Court

The fourth point to emphasise, as is apparent from that passage, that the Court is obliged to undertake independent scrutiny of the scheme. It is not relieved of that obligation by the fact that there is no opposition to the scheme, nor by the fact that objectors have withdrawn their objections and now no longer oppose the scheme.

I, therefore, turn to my detailed findings.

First, and this has not been a matter of any debate, I am satisfied that the scheme is indeed an “arrangement” within Part 26 of the 2006 Act.

Secondly, I am satisfied that the statutory provisions have been complied with, by which I mean both the direct statutory obligations and the proper compliance with the orders of the Court, as to the convening and conduct of the scheme meeting.

I should, however, expand upon one element of my satisfaction that the statutory provisions have been complied with. The statutory provisions include in section 897, a requirement that there be circulated a “statement”. According to section 897(2), the statement must "explain the effect of the compromise or arrangement". I am satisfied that the Explanatory Statement circulated by Inmarsat fulfils that statutory test, as illuminated by subsequent decisions of the Court. As was pointed out in Re Heron International [1994] 1 BCLC 667 by Sir Donald Nicholls V-C, an explanation of the “effect” of the scheme requires an explanation of how the scheme will affect a shareholder commercially. The shareholder needs to be given such up-to-date information as can be reasonably provided about the scheme and as to what can be expected as an alternative to the scheme. This is the “sufficient information” duty.

This is a relatively straightforward scheme. But it is nonetheless wise to bear in mind the words of Maugham J in Re Dorman Long, [1934], 1 Ch 635 at 657. Noting that in many cases, participation at the shareholder meeting itself tended to be limited, Maugham J. said:

I have considered the arguments advanced by Oaktree, Kite Lake and Rubric as to the criticisms that might be levelled at the Explanatory Statement about the way in which it dealt with the Ligado arrangements. None of them was able to identify something in particular that ought to have been explained about the Cooperation Agreement over and above what was made public in the 2018 Annual Report and Accounts. The simple fact of the matter is that the Ligado payments are, as has been consistently reported in Annual Reports since at least 2014, subject to commercial contingencies. Ligado cannot afford to make the payments on a regular basis and is dependent for the future upon an ability to modify the Ligado licence by agreement with the FCC and thereafter, to create and fund a network through which to conduct its terrestrial business. That was the position at the date of the Explanatory and I do not think there was anything that could have been put in the Explanatory Statement which could have illuminated that further. One has to remember what the essential issue facing the shareholders was. Given that all relevant information was in the market, in order realise value from their shareholding, did they want to rely on the present and prospective market estimation of that value or did they want to lock into a substantial premium, over and above that market value? That is a straightforward question. It does not require the Explanatory Statement to descend into detail about prospective payment flows from a variety of contracts which Inmarsat has with federal agencies, financially secure institutions or Ligado. In my judgment, the Explanatory Statement was clear, fair and sufficient.

The next question to be examined is whether the Court meeting was properly convened and conducted, and was attended by a fair representation of the shareholder base. In my judgment, each of these requirements is satisfied.

Fourthly, I must be satisfied that the requisite statutory majorities were achieved at the scheme meetings. I have given the figures and I am so satisfied.

Fifthly, I must be satisfied that the business was fairly put before the meeting. As I have indicated, I consider the Chairman's Letter and the Explanatory Statement, fairly to put before the meeting the essential issue for decision.

Sixth, I must be satisfied that the requisite majority at the meeting was acting bona fide and that there was no oppression of any minority. There has been no suggestion in this case of any element of oppression or that those who voted in favour of the scheme were doing so for reasons other than a desire to realise, immediately, a substantial premium over the market value of their holdings.

I must, seventh, be satisfied that the “fairness” test is passed; that is to say, that an honest and intelligent class member could reasonably approve the proposal that was put before the meeting. Now, here, it is important to understand that even the objectors accept that that test is passed. None of the objectors has ever said that the scheme is not such as might reasonably be approved by an honest and intelligent shareholder. Their point has been that it might be possible to get a better deal. That has been the entire object of the campaign conducted by the objectors.

First, they say there should have been a “contingent valuation right” incorporated. Now, as I have pointed out, it is not my task to say that this scheme is the best scheme that is possible. Perhaps the scheme might have been improved by a contingent valuation right but I am somewhat sceptical as to that. First, I do not see why it should be assumed that the present premium levels would have been maintained and a contingent valuation right added by way of further consideration. Second, I find some difficulty in identifying what the relevant “contingency” might be. The point is not that an FCC modification of the Ligado option spectrum would enhance value for Inmarsat. What it might do is to reduce the commercial risk at present attending payments due from Ligado. But that is something which is already reflected in the current share price and in the premium which has been negotiated over that current share price.

The ability at the sanction hearing to object to an approved scheme is not conferred to see whether some better deal might be negotiated. Commercially, that of course, is the objective of the objectors. But it is not a question with which the Court is ultimately concerned at that sanction hearing. The only question with which the Court is concerned is whether the scheme actually presented to it is such as might reasonably be approved by an honest and intelligent shareholder; and as I have said, everyone agrees that this scheme satisfies that test.

Second, I do not think that trying to negotiate an extension to the longstop date to see whether something might emerge out of the present FCC application process is a relevant consideration. Again, that is trying to achieve a better, and does not address the question whether the approved deal might be reasonably approved by honest and intelligent shareholders. So, I am satisfied that the fairness test is passed.

The last matter for consideration is whether I can properly, at this hearing, rely on the result of a scheme meeting in May 2019, in the light of the events which have transpired since the vote. This was part of the objectors’ case. It was in October 2019 that Kite Lake, Rubric and Oaktree became active objectors and various other supporters emerged. The context of that was that in October 2019, there was a press article which speculated that the Ligado modification application had been progressed and had been passed by the FCC to the NTIA for comment. Now it must be said that this is pure press speculation. On the available material (and of course, the FCC does not conduct its affairs entirely in public) it does not appear that the Ligado modification application is on the agenda for any meeting of the FCC or is in circulation for consideration.

But I received evidence from three “experts” two from the objectors and one from Inmarsat, to inform me (i) of their opinions as to the reliability of the press story and (ii) as to what the process and the time frame would be on the assumption that the press story is true. I did not find this evidence illuminating. No permission had been granted to adduce expert evidence (though given the tight time frame within which the sanction hearing had to be prepared, a prior application for permission might have been difficult). But the important point is that none of this evidence complied with CPR Part 35. I have no sense that the opinions expressed are the opinions of independent persons, not in the thrall of the party calling them as a witness, but owing a duty to the Court.

What has emerged since the Court meeting that the Secretary of State for Defense has added to the opposition from the GPS community and from Iridium. On 7 June 2019, the acting Secretary of State for Defense wrote to the FCC to express concerns that there were too many unknowns and the risks to GPS were too great to allow Ligado's proposed repurposing to proceed. The letter also communicated the view of the Space-Based Positioning, Navigation and Timing National Executive Committee, (“PNT EXCOM”). PNT EXCOM was unambiguous in its recommendation against the approval of the Ligado proposal, based on the risk of significant and unacceptable interference to GPS, a critical national security system. The Secretary of State therefore requested the FCC to reject the licence and not to allow the system to be deployed.

This was reinforced by a letter from the present Secretary of State on 18 November 2019, warning again that a modification to the Ligado spectrum could have a significant impact on military operations, both in peace time and war, and reiterating strong opposition to the licence modification. Mr Nathan Leamer, a witness adduced by the objectors, expresses his opinion that these letters are primarily a piece of political rhetoric which is unlikely to sway the FCC one way or another. I do not feel able to place reliance on that view.

In my judgment there has been no material change since the date of the court meeting such as would cause me to review the decision taken at that meeting. At the date of the court meeting, there was significant opposition to a modification to the Ligado spectrum. Since the date of the court meeting, there has been a press story which speculates that that opposition might be being in the process of being overcome, but there has been firm and repeated opposition to the modification from the Secretary of State for Defence, which supports the earlier opposition of the federal agencies. In short, as at today's date, the prospect of a modification to the Ligado licence remains as uncertain as it was when the scheme was put to the shareholders.

In the result, I am satisfied that I can sanction this scheme. No one suggests that there is any blot upon it. The scheme is simple and straightforward. It was properly put to a properly convened meeting. There is nothing to suggest that the outcome of that meeting should be subject to revision and in the circumstances, I have sanctioned the scheme.