Inmarsat Plc, Re Companies Act

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

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

That the Company’s explanatory statement preceding the scheme meeting had inadequately dealt with the Ligado contract and its potential upside;

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;

That the process of sanction should be delayed for as long as possible to see if the re-purposing was approved;

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”;

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.

This withdrawal of objection had been brought about because at 7.30am on 2 December

Bidco made an announcement that it was not prepared to extend the long-stop date

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

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: -

This practice was recently commented upon by Hildyard J in Re Stronghold InsuranceCompany 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

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

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

Having considered these respective submissions my conclusions are as follows:-

My discretion on costs under CPR44 is unfettered but the starting point is that I should exercise it in accordance with the guidelines that have evolved and are summarised in Buckley (see paragraph [11] above). As David Richards J said in Re Royal Sun Alliance at [37] “...there is much to be said for a degree of certainty in this area…”.

The Objectors advanced grounds of opposition in correspondence: once grounds of objection had been advanced in correspondence Inmarsat was duty bound (if making its application for sanction effectively ex parte) to bring them to the attention of the Court and to adduce any evidence relevant to its response to the objections.

The Objectors are in this case not to be criticised for seeking to appear at the hearing to explain and to seek to sustain their selected grounds of objection (for the reasons given in Stronghold and Ophir). (I emphasise the words “in this case” because here three objectors instructed two Counsel to argue points that had been taken by a number of other objectors: this is not a case in which there is multiple representation to argue substantially the same points or a plethora of discrete individual points).

The Objectors have stood upon their rights as shareholders: they have not advanced some collateral interest.

It does not follow that all shareholders must be treated the same when the discretion as to costs comes to be exercised. The justice of the case may well indicate that an established investor or creditor caught up in the crossfire of a takeover or a restructuring should be treated differently as regards costs from a speculator or “opportunity investor” who deliberately chooses to put himself in the firing line by acquiring equity in an anticipated or actual bid situation or debt in a company in distress. But caution is required in drawing such distinctions because it is rare that there are “bright lines” dividing one category from another.

The primary consideration is not the identity of the objector but the nature and substance of the objection. Here the objections (apart from

The purpose of seeking to delay sanction was fairly obviously to elicit an increased offer from Bidco. That is why it was made plain that the “need” for a further scheme meeting could be avoided if Bidco would offer a CVR over and above the premium.

It is plain that as soon as the prospect of an enhanced offer disappeared so also did opposition to the immediate grant of sanction.

This is not a case in which objection with the aim of increasing Bidco’s offer should rewarded by the costs of doing so being defrayed by Inmarsat. The Objectors cannot be labelled “speculators”. But they were in the business of exploiting opportunities and they must bear the costs of seeking to achieve their commercial objective.

But on balance this is not a case in which they should pay Inmarsat’s costs. On the one hand, no encouragement should be given to objections the substantial effect of which is to add significantly to scheme costs whilst contributing little to the scrutiny of what is (from the standpoint of an ordinary shareholder) a fundamentally sound scheme: adding to scheme costs in that way will only tend to depress scheme consideration. On the other hand, whilst plainly Inmarsat could not engage on an individual basis with the Objectors it could, in response to wider rumblings, have made an early market announcement conveying the information about its treatment of the Ligado contract later contained in its evidence; and that would have removed that ground for criticism and strengthened the case for an adverse costs order.

This is not a case in which the Objectors should pay Bidco’s costs of considering their evidence or of appearing at the sanction hearing. In normal circumstances the usual undertaking to be bound by the scheme (the general role of companies such as Bidco at the sanction hearing) can be given through Counsel for the company. Bidco appeared at the sanction hearing to defend its commercial interests (as was entitled to do): but, since it did not draw to the attention of the Court any improper conduct on the part of the Objectors that had been overlooked by

I will make no order as to costs.

I do not expect attendance of legal representatives when this judgement is handed down.