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Having the rug pulled out.

Thursday, 16th August 2018 13:26 - by Eric Chalker

Infrastructure funds took a hammering last autumn, when the possibility of a Corbyn Labour government was seen to threaten punitive nationalisation of their assets.  Many income seeking private investors might be worried about this, but others might not, so it’s a matter of choice.  Except for those in the John Laing Infrastructure Fund, though, whose choice has been made for them.

Seeing the sharp share price fall, opportunistic institutional investors have seized their chance and made a bid.  As is so often the case these days, JLIF directors have not only succumbed for their own handful of shares, but have been persuaded to recommend that all JLIF investors should accept the bid too.  This means it will be given effect under Part 26 of the Companies Act, which almost guarantees that the bid will succeed.  This is despite the fact that in the opinion of some, including the eminent Lex column in the Financial Times, “The threat of nationalisation is overblown and this takeover is underpriced.

Unfair schemes of arrangement

Takeovers under Part 26 are known as ‘schemes of arrangement’.  Any ordinary reading of this part of the Act would show that its purpose is to facilitate restructuring of a company’s own capital, but it has become used as a streamlined way of transferring a company’s capital into another company’s ownership.  This gives a number of advantages to the acquirer.   The most valuable of these is that the takeover can be carried through with the backing of only a minority of the shareholders.  Newspaper reports tend to disguise this, which for a number years fooled me, because there is a requirement for 75 per cent approval.  What is not usually mentioned though is that this is 75 per cent of the shares that are actually voted, which may be – and in my experience has been – no more than a small fraction of the total.

There is an additional advantage for the acquirer here, in that with one minor exception, there is no requirement for investors with shares in nominee accounts to be informed that a takeover is taking place.  In English law, the nominee is the shareholder – thus making, bizarrely, Hargreaves Lansdown one of the biggest shareholders in the stockmarket.  The one exception is investors in nominee accounts given ‘information rights’ by their nominee provider, but it’s minor because hardly any are.  Whereas the Takeover Panel requires all investors using nominee accounts with information rights to be treated the same as actual shareholders, it couldn’t care less about those who aren’t.  That’s shocking, but it is a fact.

Of course, some other nominee account providers do ensure that their investors are made aware of impending schemes of arrangement and some even enable them to vote.  While some also make documentation available, this may be only on screen and therefore unsatisfactory.  Those without a full opportunity to study the case for surrendering their shares are clearly disadvantaged.  So it is often the case that a large number of private investors are sidelined when a takeover is proposed using a scheme of arrangement.  This could not happen with a straightforward takeover, because the nominee provider is then obliged to put directly to each investor the decision whether or not to accept the offer being made.

There are at least two other ways in which a takeover by scheme of arrangement pulls the rug out from under private investors’ feet.  One is that they always come with the target company’s directors recommending the takeover.  This may make one think that the takeover must be a good thing.  It is often put, for example, that the company, its employees and its customers will benefit by being taken over, so surrendering one’s shares at a low price and perhaps even at a loss is a virtuous thing to do!  But when did directors’ opinion of their own company’s value ever demonstrate better judgement than shareholders’?  Why should investors submit to opinions which might even be self-serving?

In the case of JLIF, of course, there is no company interest to protect, because JLIF is an investment vehicle, not a business with employees and customers.  It’s just private shareholders who want JLIF’s dividend yield (still 4.8% as I write) who need protection, from directors behaving in a cavalier fashion.

Cold feet, or the easy option?

Last March, the chairman told us, “The Board continues to believe there is an important role for private investors in the provision of infrastructure assets.”  He also dismissed any worries about political risks and added, “We believe the greatest opportunity in the short to medium term lies in overseas markets…..”   Now, to justify his new belief that the company should be sold, despite it being “a highly attractive investment”,  he plays up the political risks and the “additional exchange rate risk” of overseas investments.  Shame on him and his colleagues.

This brings us to the final advantage of a takeover by scheme of arrangement.  Instead of the acquirer being obliged to offer a high enough price to persuade investors holding at least nine tenths of the shares to part with them, all it has to do is persuade the directors that the offer price is “fair and reasonable”.  Even if it is, why should investors have to part with their shares at that price?  If someone knocks at your door and offers a “fair and reasonable” price for your home, would you automatically sell, or only if you wanted a change?  The answer is surely obvious.  If you did not want to sell, you would want a much higher price to persuade you otherwise.

What makes JLIF directors think the price offered for the company is “fair and reasonable”?  Why, because JP Morgan Cazenove and Rothschild have told them so!  This may be their opinion, or it may be what Donald Trump would call a fake opinion that merely suits the circumstances as defined by the directors, but why should private investors accept that opinion?  Since when was there ever a single opinion of what a share price should be?  Investors who think they are being robbed might well have a more valid opinion.




The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.


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