Jardine Strategic fails to strike out claims from dissenting shareholders seeking 'arbitrage profit'

JARDINE Strategic has failed to convince the Bermuda court to strike out the claims of dissenting shareholders who are seeking the court’s appraisal of fair value of the shares because they had bought the shares after the announcement of its amalgamation.

The Chief Justice of Bermuda, Narinder Hargun, in his judgment published on Monday (Apr 25), held that the right to request the court to appraise fair value can be exercised by any shareholder who holds shares that were taken from him by the company as a result of an amalgamation or merger which he did not approve and provided that such an application is made within the time stipulated.

On Mar 8 last year, Jardine Strategic and Jardine Matheson announced plans to simplify the structure of the Jardine group, in which Jardine Matheson would acquire about 15 per cent of the issued share capital of Jardine Strategic that it did not already own at US$33 a share.

Jardine Strategic had a primary listing in the United Kingdom, and secondary listings in Bermuda and Singapore.

The acquisition was carried out by way of an amalgamation under the Companies Act of Bermuda, where Jardine Strategic was incorporated. Under Bermuda law and the Jardine Strategic’s bye-laws, the amalgamation required the approval of at least 75 per cent of the votes cast by shareholders. 

Jardine Matheson had undertaken that it and its wholly owned subsidiaries, together holding nearly 85 per cent of shares, would support the resolution. The requisite approval was therefore certain to be secured.

But 87 shareholders challenged the acquisition price in the Bermuda court, seeking the determination of the fair value of the shares.  

Jardine Strategic argued, however, that only shareholders who had the legal title or a beneficial interest as at Mar 17, 2021 can apply to request the court to appraise fair value.

According to the company, a number of event-driven hedge funds accustomed to undertaking appraisal arbitrage in other jurisdictions were among the buyers of its shares after the amalgamation announcement. Maso Capital Investments and Blackwell Partners, 2 of the “short-term shareholders” in this case, were also the dissenting shareholders in a number of recent Cayman Islands appraisals, said Jardine Strategic, citing them as examples.

Its analysis showed that approximately 84 per cent by value of the plaintiffs are short-term shareholders who bought Jardine Strategic shares after the amalgamation announcement with the knowledge that the corporate action would take place and for the sole purpose of pursuing these proceedings.

Jardine Strategic said it is not open to a party to “buy in” to an amalgamation for the purpose of pursuing an appraisal action. The purpose of an appraisal is to provide a remedy to pre-existing shareholders who are locked into a fundamental change in the corporation which is proposed after they acquired their shares. 

Therefore, it is difficult to see why a shareholder should be provided with an exit – and compensation - mechanism if he deliberately acquires more shares in the company after he is informed it is going to be subject to a merger and after he has given notice that he objects to or dissents from it, said Jardine Strategic, citing a previous judgement.

In that judgment, it was noted that acquiring more shares is a free choice and indeed right; but choices have consequences, and it is not the task of the legislature to save an investor from them. “There is not even a penumbra of unfairness about it. As the adage goes, ‘you make your bed, you lie in it’.”

The purpose of the appraisal is manifestly not to provide opportunities for hedge funds to conduct arbitrage through the court’s process by acquiring shares after a proposed transaction has already been announced, Jardine Strategic reiterated through its team of Queen's Counsel.

Jardine Strategic also criticised these shareholders for pursuing these proceedings to profit from the claims, saying that their action is thus an abuse of the court process.

The dissenting shareholders contended that there is nothing in the relevant section that restricts its application to shareholders who acquired their shares before the notice of special general meeting was issued.

Since the sum that the company is required to pay is simply the “fair value” of the shares, neither the company nor the shareholder obtains any windfall; the shareholder deprived of his shares simply receives what they were properly worth, argued the dissenting shareholders who were also represented by Queen's Counsel.

Chief Justice Hargun noted that buying securities in anticipation of a plan of arrangement, and other examples of so-called "event arbitrage", are an important and legitimate use of the stock exchange. Transactions of this sort promote liquidity and the constant resetting of the market price.

He said: “The fact that they may have invested in pursuit of a profit is neither here nor there; that is true of many (if not all) investors.”