Restructuring Alert
August.24.2016
Focus on the AB InBev and SABMiller merger
Having received the sanction of antitrust regulators in Europe, the U.S., China and South Africa, the planned merger of brewing giants AB InBev and SABMiller was scrutinised this week by the High Court in London on a topic very familiar to those acquainted with English law restructurings: class composition. The outcome of the hearing, that not all members of SABMiller should be considered to be in the same class for scheme voting purposes, raises some interesting questions around class composition because of the unusual circumstances of the proposed merger.
Background
The merger, valued at a British record of £79 billion, is set to be carried out by an English law scheme of arrangement. Similar to their use in the restructuring market, schemes are frequently used in mergers because of their ability to force dissenting members to sell their shares whether or not they vote in favour of a scheme, thereby offering certainty of acquisition of 100% of the target for the bidder.
The issue of class composition is very important: in order for any proposed scheme to be approved, each separate class of members1 must vote in favour by a majority in number representing 75% in value of the members or class of members voting. Non-consenting classes cannot be affected by the scheme and thus dissenters wishing to thwart a takeover may try to claim they (or another member or group of members) constitute a different class, thereby splitting the vote and making the voting threshold harder to reach.
Class test
Class composition is dealt with at a court directions hearing which takes place before the members' vote. At such a hearing, the court will direct the terms of a meeting of the members and (importantly in the present case) consider how members are to be divided (if at all) by class.
So how are classes determined by the courts? The basic rule is that a class is confined to those whose rights against the scheme company are "not so dissimilar as to make it impossible for them to consult together with a view to their common interest"2 .
Courts apply this rule to the specific circumstances of each case. Being subject to fairly wide legal interpretation, the broad consequence of the rule is that rights of members need not be identical and the concept of class can be quite loosely applied: the test has been used to disregard variations in rights ranging from interest rates and maturities to lock-up agreements and inducement fees.
Notwithstanding this, the courts have frequently found that consultation between two groups of members would be impossible in circumstances where there are highly material differences between the rights of those members which could impact on voting.
The case of SABMiller
In the case of SABMiller, two significant shareholders holding a combined 40.38% of the issued shares (Altria and BEVCO) have signed binding lock-up agreements to vote in favour of the proposed scheme. Such agreements are very common in schemes to give some certainty that the 75% threshold will be reached.
In this instance however, SABMiller has stated its intention to ask the court to treat Altria and BEVCO as being in a separate class. This would mean that for the scheme to be successful, holders of 75% of the remaining 59.62% of shareholders would have to vote in its favour and just 15% of the company's shareholders could block the transaction.
Arguments for separate classes revolve chiefly around the nature of the offers made to SABMiller shareholders which many see as favouring Altria and BEVCO.
One offer, accepted by Altria and BEVCO under the lock-up agreement, includes mixed consideration of unlisted AB InBev shares and cash. Initially valued at a total of £39.03 per share, following the Brexit referendum and fall in the value of sterling, the mixed offer is now worth over £50 per share. The second offer is cash only and currently stands at £45 per share.
Shareholders may freely accept either offer, but the mixed offer was designed specifically for the benefit of the largest shareholders, Altria and BEVCO, who wish to maintain a stake in the brewing industry and for whom a cash offer would attract significant tax penalties. Ordinary shareholders on the other hand question the value to them of unlisted and restricted AB InBev shares as partial consideration and may even in certain circumstances be unable to hold them through their intermediaries.
Given that the SABMiller board recommended the cash only offer to shareholders, its decision to ask the court to treat Altria and BEVCO as being in a separate class seems strange, as it could threaten the merger. Its behaviour may be explainable however as a compromise to activist shareholders who, noticing the disparity in valuation between the cash only and mixed offers, have agitated in favour of a higher cash only offer.
Conclusion
Reading his judgment on Tuesday (23 August), Mr Justice Snowden ordered that Altria and BEVCO should not vote in the same class as the other SABMiller shareholders.
Taking into account that either AB InBev offer is freely open to any shareholder to accept, this could seem surprising, but citing the major shareholders' existing relationship agreements and other rights to accrue following the merger (including the significant right to appoint one or more directors), Snowden J found that the classes must be split. Taking what he referred to as a "flexible" and "purposive" view of the legislation, he also put much weight on the fact that SABMiller is not excluding Altria and BEVCO from voting in the scheme, those shareholders have instead waived their right to do so as they are freely able to.
Setting these arguments aside, we consider an additional point to have been a key factor in this decision. When determining class composition, a study of the relevant "appropriate comparator" (or the circumstances that would come into being if the scheme were not sanctioned) is usually made. In creditor schemes (typically of financially distressed companies) the stated relevant comparator is ordinarily an insolvent liquidation. Insolvent liquidations act as a great leveller of creditors meaning that differences in their rights (for example when repayment of a loan is due and how much interest is payable) lose their importance.
Appropriate comparator arguments have frequently been used by scheme companies to cram creditors with obviously differing rights into the same class because when the alternative is an insolvent liquidation those differences lose their distinction. In the case of SABMiller, nobody could propose that the alternative to the scheme was insolvent liquidation, and as a consequence the differing rights of Altria and BEVCO were not so easily dismissed.
1Or, as is more typical in financial restructurings, creditors.
2This rule is found in Re Hawk Insurance Co Ltd [2001] EWCA Civ 241 and codified in a Practice Statement on 15 April 2002.