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

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

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

So far as Oaktree is concerned the position was spelt out in this way: -

“Mr Chivers QC: Oaktree’s position has been consistent throughout, that the sanction hearing should be delayed for as long as possible, consistent with the longstop. Subject to that, the scheme should go back to shareholders for their approval or that a CVR should be negotiated so as to render that approval unnecessary. Oaktree has never said that the scheme should not be sanctioned altogether. But the practical impossibility now…

Judge: Can I just ask, has Oaktree ever said that no reasonable shareholder, having regard to his own interests as a shareholder, could reasonably approve the scheme as it originally stood?

Mr Chivers QC: No.

Judge: So, the contingent value right was all about improving the terms of the scheme that had been negotiated and would be acceptable to a reasonable shareholder, looking after his own interests?

Mr Chivers QC: My Lord, that’s right. It has to be looked at in the context of the criticisms that Oaktree have made of the disclosure in the first place. But, my Lord, that is right……… [M]atters that were the subject of the request, a further shareholder vote or a CVR, are no longer possible. So, we find ourselves in the position where, for purely commercial reasons, and these are reasons that are not peculiar to Oaktree, these are reasons that apply to all shareholders, the matters that we asked the company to put in place can no longer be put in place. So, the matters that we were going to ask the court, last week, to hold up the scheme approval for, not to refuse approval but to hold up approval, those matters can no longer be asked for. They are simply not on any commercially rational shopping list. That leaves us where we are today, withdrawing our objection to the scheme because that is the inevitable outcome of the process that has happened….”

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: -

“Where opposition to the sanction by the court of the scheme of arrangement fails, but it was not frivolous, it is the practice of the court on application under this section to order the successful applicant to pay the costs of the unsuccessful opposing creditors or members if their arguments were of assistance to the court; or alternatively to make an [presumably a misprint for “no”] order as to costs. Ultimately the award of costs is a matter for the discretion of the court”

The “practice of the Court” is based upon the order made and reasons given in ReNational Bank Ltd [1966] 1 WLR 819.

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]):-

“In case this reluctance or disinclination [to appear at the court sanction hearing] is the result of concerns that attendance may trigger some exposure to costs, I would wish to make clear my understanding (and certainly my own practice) that, unless the objections are wholly improper or irrelevant, obviously collaterally motivated, or sprung on the scheme company without affording proper opportunity for their discussion, there is very little likelihood of any adverse order for costs at that stage; and indeed there will usually be a real prospect of the relevant creditor recovering its reasonable costs of helpful and focused representation, fairly outlined in good time before the convening hearing to their proper consideration, on the class issues raised.”

This observation was endorsed by Snowden J in Re Ophir Energy plc [2019] 1278 (Ch) who said (at para [39]):-

“It is worth re-iterating that parties who have genuine issues to raise as to the adequacy of the information provided to members or creditors should not be deterred from appearing at a sanction hearing by concerns over costs.”

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

“…the Takeover Offer materials contained materially inadequate disclosure with respect to Ligado… and that, as the Explanatory Statement was defective, the Court should not give effect to, or rely on, the vote at the Court meeting.”

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

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.