The full court decision in this poison pill injunction case (3D Investment Partners v Toho HD) makes for very interesting reading and is major victory for shareholders.
We wrote about the decision last month before the full judgment was available (see: https://senjincap.com/huge-win-for-activists-as-court-enjoins-tohohd-takeover-defence/ ), and are now adding additional commentary having read the detail of the judge’s reasoning.
First, there are some limits to the judgment’s broader application due to the facts of the case. Second, the judgment comes from a court of first instance, so we need to see what happens when the company appeals.
However, the biggest question the case raises, is whether all non-emergency takeover defence measures can be enjoined if there is no intention on the part of the acquiror to take control of the company (provided of course that the shareholder is engaging appropriately with the company)?
Or, would a court in those circumstances, take the view that the shareholder began acquiring knowing the measures were in place, therefore cannot seek to have them set aside after the fact?
The decision is silent as to the likely outcome in this scenario, as such a fact pattern was not the case before it.
Some key quotes from the decision highlight the court’s reasoning (machine translated):
“at least in this case, it is not appropriate to conclude that the common interests of shareholders have been harmed by the acquisition of debtor [company] shares by creditors [the activist investor], etc., based solely on a resolution of the shareholders’ meeting.”
This statement was based on the reasoning that because the acquiror had promised not to acquire more than 27%, there was no risk of the activist gaining control of the company. The company needed to show shareholder interests risked actual harm, it was not enough that shareholders approved the defence measures. For similar reasons, the acquisition was not “coercive” in nature.
The company claimed 3D’s requests and suggestions regarding its management harm the common interests of shareholders: The court said that 3D’s proposals were quite:
“ordinary proposals from institutional investors seeking to improve capital efficiency, and cannot be considered to be aimed at pursuing their own interests at the expense of the common interests of shareholders, nor can the other proposals themselves be said to be unreasonable.”
The court also looked at 3D’s behaviour in the Fuji Soft deal, determining that it did not act in a way where its interests were different to other shareholders, so there was no evidence of past behaviour showing detriment to the common interests of shareholders.
Interestingly, this could distinguish 3D’s record from that of activists which have previously participated as limited partners in Private Equity-sponsored take-private transactions, where the activist had a significant shareholding in the public company. This could be viewed as the activists having different interests in the privatisation transaction vs those of the other shareholders.
This is a developing area of law as the corporate reform progresses. This decision is a step in the right direction from an investor’s perspective. Hopefully the higher courts follow similar reasoning.
