Takeover of ARM Holdings

Monday, 5th September 2016 08:30 - by Eric Chalker

ARM Holdings has been acquired by Japan’s Softbank Group.  Do you mind?  Some people do, either because they think ARM was sold cheaply, or because it’s yet another British champion sold overseas.  Alex Brummer, City Editor of the Daily Mail, calls it “an ill-conceived deal conducted with undue haste” and “an economic error”.

For 4 years until recently, I was principally responsible for policy matters at the UK Shareholders' Association. Both then and before, I made a particular study of and have frequently written about takeovers by what are known as ‘schemes of arrangement’.  These are facilitated by Part 26 of the Companies Act, but I often wonder whether Parliament realised that something intended to cover internal rearrangements of companies’ share capital would be used to ‘re-arrange’ a company’s capital into different ownership.  The ARM takeover, as for other overseas acquisitions of British companies, was by scheme of arrangement.

Such forms of takeover make it easy for the acquirer.  One reason for this is that a large body of investors are effectively disenfranchised because their holdings are in nominee accounts.  Except for the limited number of such investors who have been given special rights under Part 9 of the Act, investors in nominee accounts are dependent on their nominees for information about the proposals – and even for formal notification that an attempted takeover is taking place.  They will only be able to vote if allowed to by their nominees and then the time they will have to decide how to vote will be much less than the 21 days available to those who hold their shares directly.

Schemes of arrangement require sanction by the High Court.  As I experienced personally in 2008, this is little more than a rubber stamp, providing there has been no procedural error.  The procedures require two members’ meetings of the company being acquired, one called a ‘court meeting’ and the other a general meeting, but both are invariably chaired by the company’s chairman.  Now here is the thing: the only shares which count are those actually voted.  Providing there is a 75% majority of the shares voted, the acquirer gets all the company’s shares at one go.  It scoops the pool.  100% of the shares at one fell swoop.

This is wholly unlike the other form of takeover, where a would-be acquirer sends its offer individually to all shareholders and, by their terms of contract, nominees have to pass this offer onto their clients.  So everyone who has invested money in the company learns of the offer and individually has to decide whether or not to accept it.  Only if the offer is good enough to persuade those with 90% of the shares to part with them will the acquirer be able to obtain, by court action, the rest of them and thus achieve 100%.

What secured ARM for Softbank?

It has been reported that 95% of ARM's shareholders (meaning their shares) voted in favour of the scheme, but this is not so.  Only 60% of the shares in issue were voted in favour at the so-called court meeting and only 58% of them at the general meeting.  Despite this and whatever the reason for the shares not voted, Softbank’s use of a scheme of arrangement, recommended by the ARM directors, enabled the takeover to succeed and it thereby acquired 100% of the shares.

When, as is usually the case, a large body of shares is held by institutions and the directors, it must be relatively easy for an acquirer to secure a 75% majority of the shares voted, because there will always be another body of shares which are not voted and this will usually also be large.  In the case of ARM, it was 40% - two fifths.  Because it is easier to secure victory in such a situation, it is likely also to be far cheaper.  A higher price is likely to be required to gain acceptance by investors who will not be voting in favour in a scheme of arrangement; this stands to reason, doesn’t it?

In the case of ARM Holdings, 33% of the shares were held by just 7 institutions. Baillie Gifford, BlackRock, Thornberg, Fidelity, Morgan Chase and Legal & General.  This is equal to more than half the shares voted in favour and ten times the shares voted against, so it can reasonably be assumed that the outcome was effectively decided by the institutional shareholders, even though they did not do this alone (2,243 shareholders voted in total).  This could not have been the case if the takeover had been attempted by a contractual offer to all shareholders.

Eric Chalker, UK Shareholders’ Association Policy Co-ordinator & Director, 2012-2016

www.uksa.org.uk

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.