The Takeover Appeal Board has dismissed appeals made by a Ladbrokes shareholder, regarding alleged non-compliance with the requirements under the City Code on Takeovers and Mergers (the Code) in connection with a proposed merger.
The Takeover Appeal Board’s decision provides guidance on the meaning of ‘material contract’, ‘in the ordinary course of business’ and ‘in connection with the offer’ as used in the Code.
The merger and arrangements with Playtech
22 June 2015 – Ladbrokes plc confirmed that it was in discussion with Gala Coral Group Ltd regarding a possible merger of Ladbrokes and the Coral Group (the principal part of Gala Coral’s group of companies). Ladbrokes’ shares are admitted to trading on the Main Market of the London Stock Exchange.
23 July 2015 – Ladbrokes and Playtech plc, the world’s largest online gaming software and services supplier, entered into amendment agreements in respect of two contracts entered into in March 2013, one a Marketing Services Agreement (MSA) and the other a Software Licence Agreement (SLA). Under the terms of the MSA amendment agreement, the existing payment terms in the MSA were replaced with new terms including that Ladbrokes would pay Playtech £40 million on completion of the merger with Coral Group (to be satisfied by the issue of new shares) and £35 million in cash within 42 months of the merger. The SLA amendment agreement also contained revised fee arrangements effective from completion of the merger.
The MSA amendment agreement was entered into to ensure that Playtech’s remuneration under the MSA would not be linked to factors unrelated to its performance. The key purpose of the MSA was to reward Playtech for any increase in the profits of Ladbrokes which were generated by the marketing efforts of Playtech. Due to the way the MSA was drafted, Playtech could have been rewarded for value created as a result of the merger rather than as a result of the marketing efforts of Playtech.
24 July 2015 – Ladbrokes and Gala Coral announced that the terms of the merger had been agreed and that Ladbrokes had agreed to acquire the Coral Group in exchange for new shares in Ladbrokes, representing 48.25% of its enlarged issued share capital at the time of the merger. The merger would constitute a reverse takeover under the Listing Rules.
The issue of consideration shares by Ladbrokes required a waiver from the Takeover Panel of the obligations on Gala Coral and its concert parties to make an offer under Rule 9.1 of the Code to all Ladbrokes shareholders, as the issue of consideration shares would result in Gala Coral holding more than 30% of the voting rights of Ladbrokes for a limited period.
A waiver by the Panel requires a ‘whitewash’ resolution of independent shareholders on a poll, to approve the waiver of the mandatory bid obligation under Rule 9.1. The requirements of the Panel (set out in Appendix 1 of the Code) include approval in advance by the Panel of the circular setting out the proposals and specific content requirements, including the requirements of Rule 25.7 (which includes summaries of material contracts) and Rule 26 (documents to be published on a website). The Panel Executive agreed to grant the waiver.
Ladbrokes also announced a non-pre-emptive placing to existing and new institutional investors. 22.9% of the shares issued in the placing were placed with Playtech.
30 October 2015 – Ladbrokes issued a circular to its shareholders which included a notice of a general meeting setting out the necessary resolutions to approve the merger, including a ‘whitewash’ resolution.
The circular stated that Playtech and Ladbrokes had agreed to accelerate the determination of amounts due to Playtech under the MSA (the agreed amount being £75 million to be satisfied as set out above) and that no material contracts had been entered into within the preceding two years, save for the two original agreements and the two amendment agreements between Playtech and Ladbrokes, summaries of which were included in the circular.
None of these agreements was published on a website as required by Rule 26.3. In the case of a ‘whitewash’ transaction, all the documents specified in Rule 26 are required to be published on a website from the time of publication of the ‘whitewash’ circular until the conclusion of the general meeting to approve the Rule 9 waiver resolution. However, following a request from Mr Dermot Desmond (a significant shareholder in Ladbrokes) the amendment agreements were published by Ladbrokes on a website as a gesture of goodwill.
Concerns raised by Mr Desmond
Mr Desmond raised concerns with the Panel Executive that:
- all material contacts listed in the circular should be available for inspection;
- the amendment agreements were ‘practically unintelligible’ without the original agreements; and
- Playtech was not independent and was therefore precluded from voting at the general meeting on the ‘whitewash’ resolution.
Ladbrokes maintained that the original agreements contained highly sensitive and commercially confidential information, the disclosure of which would damage its and Playtech’s commercial interests.
Mr Desmond published advice to Ladbrokes’ shareholders to vote against the merger.
Panel Executive and Hearings Committee
The Panel Executive ruled that the original agreements were not material contracts entered into by Ladbrokes in connection with the merger and therefore were not required to be published on a website in accordance with Rule 26.3 and that the effect of the amendment agreements was capable of being understood without reference to the full text of the original agreements. Mr Desmond appealed to the Hearings Committee, which dismissed his appeal. The Panel Executive also ruled that Playtech was not independent, which Ladbrokes announced in a merger update on 19 November 2015.
Mr Desmond subsequently also complained that:
- The circular contained material omissions (including the basis of calculation of the £75 million) and inaccuracies which rendered it misleading, so that Ladbrokes shareholders voted on a false premise. The primary purpose and real rationale for the payment and the agreement of amended terms with Playtech was to remove what would have otherwise been a substantial commercial impediment to the merger in the MSA; and the real cost of procuring Playtech’s support for the merger was not just the payment, but also permitting Playtech to participate in the placing and substantially increase its shareholding in Ladbrokes. Playtech was the only subscriber in the placing not scaled down as a result of over-subscription.
- The original agreements and amendment agreements with Playtech were an inducement to deal for the purposes of Note 11(a) on the definition of acting in concert referred to in Rule 26.2(c).
- Appeals before the Takeover Appeal Board
Mr Desmond’s appeal to the Takeover Appeal Board included appeals against the rulings of the Hearings Committee that:
- the original agreements with Playtech were not material contracts entered into in connection with the merger and access to the full text of the original agreements was not necessary in order to understand the amendment agreements;
- sufficient information had been disclosed by Ladbrokes in its circular; and
- the original agreements and amendment agreements between Ladbrokes and Playtech did not amount to an inducement to deal.
All the appeals were dismissed by the Takeover Appeal Board.
Takeover Appeal Board’s reasoning
‘Ordinary course of business’
- It was not in issue that the amendment agreements were material and within the two-year time limit in Rule 25.7(a) (offeree board circular) and therefore a summary was required in the circular.
- The expression ‘ordinary course of business’ comprised ordinary words of the English language, which must be interpreted in the light of the meaning that business people would give them in the particular context in which they are used, the context being the disclosure of information about contracts which fall outside the normal activity of the company.
- An amending agreement which involves the payment of an aggregate of £75 million unrelated to future performance or success and conditional only on implementation of the merger was, having regard to the size of Ladbrokes’ business, plainly outside the normal activity of the company and hence outside the ordinary course of its business. Ladbrokes was therefore right to make the disclosure in the circular and to publish the amendment agreement on its website.
‘In connection with the offer/merger’
- In 2010, the list of documents required to be made available for inspection was amended so as to include only material contracts if they were entered into in connection with the offer and were summarised or referred to in the offer document or offeree board circular. The rationale was that it was possible to justify a higher standard of disclosure in relation to matters that had a direct bearing on an offer (for example, an implementation agreement or irrevocable commitments to accept the offer obtained by an offeror), but it was more difficult to justify requiring copies of material contracts that were not related to the offer to be put on display
- The Board ruled that the amendment agreements were made in connection with the merger
- ‘In connection with the offer’ in Rule 26.3(d) (Documents to be published on a website) are also ordinary words of the English language and must be given a common sense interpretation. If the question is asked, was the MSA amendment agreement made in connection with the merger, the answer must be yes. Its rationale was to avoid certain significant consequences of the MSA which would have been caused by the merger had it not been amended. This is very different from the run-of-the-mill adjustments to commercial agreements occasioned by the enlargement of a group.
Adequacy of Disclosure
- The Board ruled that the level of disclosure in relation to the amendment agreements was adequate, in particular the amount payable under the agreements had been disclosed.
- The Board agreed with the Hearings Committee that the circular could have given more contextual information about the justification for the £75 million payment, but it also agreed that if there had been fuller disclosure, there is no rational basis for concluding that the outcome of the shareholders’ meeting could have been different
- Inducement to Deal and Note 11(a) on the definition of ‘acting in concert’ referred to in Rule 26.2(c) (Documents to be published on a website)
- Mr Desmond argued that the agreements came within Note 11(a) on the definition of ‘acting in concert’, referred to in Rule 26.2(c)
- The Board rejected the argument. Even on the widest interpretation of the Note, the Board was entirely unable to see how the original or amended agreements between Ladbrokes and Playtech could be characterised as an inducement to deal.
The Takeover Appeal Board’s decision provides some guidance and clarification on the appropriate interpretation of a ‘material contract’ as used in the Code and when disclosure of a material contract is required on a website.
This decision is a reminder of the common sense approach that the Executive, the Hearings Committee and the Takeover Appeal Board take in relation to the interpretation of the Code.