High Court Umpires Fierce Row Over Pharmaceuticals Company's Future

Shareholder disagreements as to the direction a company should take are generally fought out behind closed doors. However, as a High Court case concerning the future of a troubled pharmaceuticals company showed, judges are always there to act as umpires where a private resolution cannot be reached.

Due to a combination of asset sales and the discontinuance of disappointing drug development programmes, the company was in a state of flux, with no products in commercial production or use. The value of its shares had plummeted from their heights, but it did have a cash pile in excess of $20 million.

In search of a way forward, the board of directors unanimously recommended the sale of the company's entire issued share capital to a purchaser engaged in developing anti-cancer drugs. Under the deal, shareholders' interests in the company would be exchanged for shares in the purchaser.

A shareholder meeting was convened and, of those attending, the majority in favour of the proposal was 70.83 per cent by number and 78.49 per cent by value. In those circumstances, the company sought the Court's approval of a scheme of arrangement to give effect to the proposal.

The application was, however, fiercely resisted by a shareholder who owned a 5.96 per cent stake in the company. It characterised the board's proposal as a terrible deal and effectively a gamble. It was convinced that liquidation of the company and a return of capital to shareholders was a much better option.

In strongly worded submissions, the objector asserted that the procedure adopted by the company had led to the oppression of minority shareholders and that one large shareholder that was in favour of the scheme should have been precluded from voting at the meeting because it also held shares in the purchaser.

In approving the scheme, however, the Court found that the directors had made a judgment call that the proposal offered good prospects of long-term gain and was to be preferred to the liquidation option. There had been real engagement between the board and shareholders and the latter had been provided with sufficient information to make their own choice.

Voting patterns at the meeting indicated that minority shareholders had been treated even-handedly and, although the objector's views had some weight and merit, other shareholders had taken a different position, which was no less valid for being less vocally expressed. In the circumstances, the Court could detect no grounds on which it could withhold its sanction from the scheme.