A legal duty to explain
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Lucian Pollington says BT shareholders have little choice on the MCI acquisition. Lucian Pollington is a lawyer at Simmons & Simmons.
At the trial of a dentist for negligence, the presiding judge remarked that "there can be no doubt that... he was a disgrace to his profession. Conduct of this kind seriously undermines the confidence that patients are entitled to be able to place in their dentists." What was it that so alarmed the court?
The duty of a dentist is to explain to the patient what he intends to do, the implications of the action and why he recommends it. The Americans call this principle informed consent.
None of the dentist's former patients were given any information on which to base suitably informed consent. None were told why he was recommending massive restorative treatment, often on perfect teeth. The court found the dentist liable for negligence and awarded damages.
Like the dentist, companies listed on the London Stock Exchange need to obtain the consent of interested parties before undertaking certain actions. Shareholders must consent to a significant disposal or acquisition of businesses or assets and are sent a circular setting out what the company intends to do, the implications of the action and why the directors are recommending that shareholders should vote in favour.
The requirement to seek shareholder consent is set out in the Listing Rules drawn up and policed by the Stock Exchange.
For almost a year, British Telecom has been seeking to acquire the US telecoms operator MCI. Last March BT shareholders received a detailed circular from the company explaining the benefits of its paying about £17bn for MCI. At an EGM held in April, BT shareholders gave their consent.
The mechanics of shareholder consent are important in this instance. Consent is granted by the passing of a resolution, the precise wording of which is crucial. BT shareholders were presented with a resolution approving the acquisition of MCI "as described in the circular or on such other terms and subject to other conditions as may be approved by the directors [of BT]". A sort of royal prerogative, and by no means uncommon.
The trouble with resolutions of this kind is that shareholders either have to reject a perfectly good deal, or approve the resolution and leave themselves open to the whims of directors.
Recently there have been difficulties with the MCI acquisition. Instead of continuing along the lines set out in the circular, MCI's local telecoms business has been placed on the critical list and its long-distance business has begun to look distinctly peaky.
Losses are estimated to be £800m and mounting. In addition, US investors claiming to have been misled by MCI are threatening litigation.The deal previously described to BT shareholders is no more.
The question facing BT's directors over the past few weeks has been how far their royal prerogative can and should be stretched. The company has announced that it will be seeking renewed shareholder consent to the acquisition of MCI.
This is the only reasonable course of action and satisfies one of the Listing Rules' guiding principles, that "[shareholders] should be given adequate opportunity to consider in advance and vote upon major changes in the company's business operations".
In the coming weeks BT will be dispatching a revised circular, setting out the recent developments in MCI's business and the amended terms of the acquisition. Two particular aspects of the revised deal give cause for concern.
First, BT is reported as having agreed to pay MCI $750m in damages should BT shareholders fail to give their consent. In effect, this means that BT directors have agreed to its shareholders paying a $750m fine in the event that shareholders do not approve the acquisition. Is it fair to BT shareholders to put a $750m price on a "no" vote?
Second, and most unusually, BT appears to have surrendered the right to withdraw if there is "a material adverse change" to the MCI's business.
Recent developments in its business suggest that the odds seem very much in favour of material adverse changes.
The Stock Exchange would do well to ensure that BT directors are not permitted to adopt the dentist's somewhat novel approach to informed consent.