The Bidvest consortium today served legal papers on its opponent in the takeover battle for pharmaceuticals group Adcock Ingram. Its key contention is that the Adcock board of directors has already authorised the company provides its Chilean partner CFR with financial assistance to do the deal. Here is the executive summary of Bidvest’s legal case. – AH
Executive summary:
1 Adcock Ingram Holdings Limited (”Adcock”) and CFR Pharmaceuticals S.A. (“CFR”) have proposed a transaction to Adcock’s shareholders in which, through a scheme of arrangement (“the scheme”), 100% of the ordinary shares in Adcock (excluding treasury shares) will be acquired by a subsidiary of CFR. The consideration to be paid for each Adcock share comprises a cash payment and shares in CFR.
2 BB Investment Company Proprietary Limited, a subsidiary of The Bidvest Group Limited, (“Bidvest”) has applied to the High Court to declare the scheme and associated agreements invalid and to prevent the implementation of the scheme.
3 Bidvest’s primary complaint arises from its contention that Adcock’s board has already authorised the provision of financial assistance by Adcock to CFR to enable it to pay the consideration to Adcock shareholders, in breach of section 44 of the Companies Act. This renders the scheme unlawful.
4 The scheme documents record that CFR’s payment to Adcock shareholders will be funded from a US$600 million (approximately R6 billion) bridging loan granted by a consortium of foreign banks (“the lenders”). However, Bidvest contends that CFR, as presently constituted, does not have the means to raise the loan or to repay the lenders and that in order to raise and meet the cover requirements of the loan, CFR has to obtain a guarantee from Adcock in favour of the lenders. Without the security of the Adcock guarantee, backed by Adcock’s assets, revenues and financial profile, it appears that the lenders would not agree to the loan and CFR would be unable to fund the acquisition of the Adcock shares.
5 Adcock’s current board is aware that certain resolutions required by section 44 of the Companies Act need to be passed in order for Adcock to provide the necessary financial assistance to CFR. This includes a special resolution by the shareholders of Adcock. They envisage that these resolutions can and will be proposed and passed by CFR and its appointees 30 minutes after CFR takes control of Adcock and do not need to be presented (with the attendant disclosures) to the current Adcock shareholders. Bidvest contends that this, too, would be unlawful.
6 Aligned to its primary complaint, Bidvest contends that Adcock has not made full and frank disclosure to its current shareholders in proposing the scheme or ensured that the requirements of section 114(3) of the Companies Act have been complied with. Firstly, no reasons are given to the current Adcock shareholders to justify providing the financial assistance to CFR. Secondly, the shareholders are not told squarely what the effect will be of the US$600 million loan on the potential returns to them (as shareholders of CFR) after the implementation of the scheme. Thirdly, the benefits of Adcock’s executive directors’ significant “Phantom Options” will be accelerated and paid out to them if the scheme is implemented. However, details of the cash amounts they will receive (which may amount to tens of millions of Rand) have been withheld. Fourthly, the details and effects of the new agreements concluded with Adcock’s BEE shareholders have not been fully disclosed to shareholders.
7 Bidvest will endeavour to ensure that the High Court application is heard as soon as possible. Although Bidvest does not ask the Court to prevent the meeting scheduled for 18 December 2013 from going ahead, it will approach Adcock and the Transactions Regulation Panel to arrange the postponement of the meeting to enable the Adcock board to make full disclosure on these matters to shareholders. If Bidvest is successful before the High Court the scheme proposed by Adcock and CFR will not be implemented.
8 Key Extracts of Bidvest’s complaint are set out below:
8.1 Adcock and CFR have taken extreme measures to avoid scrutiny and challenge. In doing so, they have failed to meet their statutory obligations to make full and frank disclosure to shareholders.
8.1.1 The circular and the prospectus fail to address the key elements surrounding the funding of the transaction and the adverse effects on Adcock shareholders.
8.1.2 The circular and the prospectus fails to disclose that the success of the transaction is completely dependent on financial assistance from Adcock.
8.1.3 This inadequacy is perpetuated in the “Independent Experts Report” prepared by JP Morgan, purportedly submitted in terms of section 114 of the Companies Act (“the JPM report”). The JPM report fails inter alia to directly address the funding arrangements, the application of section 44 and the consequences for the soon-to-be CFR shareholders.
8.1.4 From the outset, Adcock and CFR have withheld important underlying documents from inspection by shareholders and imposed unreasonable restrictions on the inspection and consideration of those documents so that Bidvest (and probably other shareholders) have been prejudiced in considering and evaluating the scheme.
8.2 The unavoidable inference to be drawn from the information reviewed by Bidvest and from the omissions in the circular and prospectus is that –
8.2.1 financial assistance (as contemplated in section 44 of the Companies Act) has been given or is to be given by Adcock in contravention of the Companies Act;
8.2.2 material elements of the transaction have not been disclosed to shareholders;
8.2.3 in these circumstances and to feather their own nests, the directors of Adcock have authorised the steps which permit the assets and business of the company to be used by CFR to fund the acquisition of the Adcock shares.
8.2.4 the transaction, underpinned by the Bridging Loan Agreement and supported by the other agreements that form part of this indivisible series of transactions, are void and unenforceable due to the contravention of section 44 of the Companies Act.
8.3 In addition, related to and as a consequence of the above (and the facts set out below)-
8.3.1 the Board resolution to recommend the scheme to shareholders is fatally defective and falls to be set aside;
8.3.2 the notice of the meeting called for 18 December 2013 is materially defective;
8.3.3 the meeting of shareholders proposed for 18 December 2013 cannot proceed as it is improperly constituted and convened on the back of a materially defective notice, circular and prospectus;
8.3.4 any action taken at the meeting, if convened and proceeded with, would be invalid and unenforceable;
8.3.5 the transaction and scheme of arrangement (including all of the associated agreements) are void alternatively cannot be implemented.
8.4 The board of Adcock in its enthusiasm to align itself with CFR has:-
8.4.1 paid scant attention to its fiduciary duties and the interests of all shareholders;
8.4.2 participated in and permitted the breach of the provisions of section 44 of the Companies Act and a number of other provisions of the Companies Act;
8.4.3 convened the scheme meeting for 18December 2013, which is effectively a dead period in South Africa, thereby depriving dissenting shareholders of an adequate opportunity to express their dissent;
8.4.4 fixed the last date to trade in Adcock shares and the record date for participating in the scheme meeting on dates that again have the effect of disabling dissenting shareholders from voting at a scheme meeting and expressing their dissent; and
8.4.5 failed to make full disclosure of material facts and has not been frank in the notice convening the scheme meeting and accompanying circular;
8.4.6 the circular has obfuscated the heart of the transaction – the central role played by the provision of the Adcock guarantee to fund the acquisition and the effect thereof on the Adcock shareholders.
8.5 This authorisation of the financial assistance is unlawful because (as is common cause):
8.5.1 the required special resolution of the shareholders of Adcock approving the financial assistance has not been adopted (and neither Adcock nor CFR contend that it has); and/or
8.5.2 the directors of Adcock have not satisfied themselves either that the company would satisfy the solvency and liquidity test after the giving of the assistance and that the terms under which the financial assistance is proposed to be given are fair and reasonable to Adcock. In fact, there is no suggestion whatsoever that the directors have even considered these questions.
8.6 It would have made for a less complex and more transparent methodology for the proposal and implementation of the scheme of arrangement had the approval of the current shareholders been sought to the provision of financial assistance by Adcock. This would have entailed the passing of a special resolution by the current shareholders Adcock authorising the provision of the guarantee by Adcock. It appears that the board of Adcock and its advisers harboured material concerns in proceeding on this straightforward basis which would have entailed that:
8.6.1 the notice convening the meeting for the special resolution would have to identify explicitly that financial assistance was being provided by Adcock to CFR to fund the acquisition of Adcock’s own shares;
8.6.2 the notice would have had to explain and motivate the need for such assistance by Adcock and the financial effects thereof on Adcock and its shareholders; and
8.6.3 the currently constituted board of Adcock would have been required in terms of section 44(3)(b) to satisfy itself in terms of the solvency and liquidity test and that the terms of the transaction were fair and reasonable to Adcock.
8.7 Given the above factual scenario, certain aspects emerge as being of specific interest to shareholders but are not the subject of full and proper disclosure by the board in the circular:
8.7.1 that Adcock was giving financial assistance;
8.7.2 that such assistance was to be utilised for the acquisition of its own shares;
8.7.3 that the cash element of the price for the Adcock shares was effectively to be being funded by the shareholders themselves (through their company, Adcock)
8.7.4 that the Adcock shareholders would effectively share in the risk and the cost of the R6 billion loan funding the acquisition as shareholders of CFR (and thus indirect shareholders of Adcock);
8.7.5 the nature and extent of the (what appear to be material) benefits that accrue to the current directors from the transaction, given their direct involvement in the preparation of and motivation for the scheme of arrangement; and
8.7.6 the treatment of ‘A’ ordinary and ‘B’ ordinary shareholders – the BEE shareholders – who remain invested in Adcock and are not obliged to take up the scheme, as further set out below in relation to the matters dealt with in respect of section 114(3)(b) and (c).
8.8 Of particular significance in this context is the bridge loan agreement and the securities required by the foreign banks in relation thereto. The report failed to articulate how JP Morgan evaluated the material adverse effects of the guarantee, including:
8.8.1 the new additional borrowing of USD600 million as a result of the transactions;
8.8.2 the material interest burden thereon;
8.8.3 the material cash-flow effects to fund the new borrowings; and
8.8.4 the consequential effect upon the payment of dividends,
particularly in light of the fact that the Adcock shareholders are., in terms of the scheme, to receive shares in CFR ( with Adcock as its subsidiary)
8.9 The failure of the JPM report to deal with these significant elements of the transaction, which an expert is enjoined by the Companies Act to address, exposes a significant deficiency in the information provided to shareholders in order for them to make a decision at the scheme meeting. Not only does the circular (through the incomplete expert report) fail to comply with the Companies Act, but any decision taken by the proposed meeting to approve the scheme of arrangement will be materially tainted by a serious conflict of interest among board members who recommended the scheme to shareholders, by the inadequate disclosure of material information and by the failure to comply with the Companies Act.
8.10 Although Bidvest has not sought to interdict the holding of the meeting and has contented itself to the declarations set out in the relief and the interdicts in respect of the implementation of the security, the scheme of arrangement, and the transactions forming part of the pre-ordained series, it is Bidvest’s respectful submission that Adcock should abandon the meeting and that the regulator (i.e. the Takeover Regulation Panel) should compel it to do so. If the meeting does take place then the Takeover Regulation Panel should compel Adcock to inform shareholders appropriately, including by means of notices in the press, notices on SENS, and at the scheme meeting of the allegations that Bidvest has made and of the relief that Bidvest has sought.
