Company

City code on take-overs - purchaser of less than 30% of voting rights controlling company through understanding with another shareholder - change of controlPhilip Morris Products Inc.

and Another v Rothmans International Enterprises Ltd and Another: ChD (Evans-Lombe J): 19 July 2000

The claimant and defendant groups of companies formed a partnership between two of the claimants' subsidiaries and one of the defendants' (in which the defendants had a 65% interest) for the purpose of exploiting certain tobacco products in the United Kingdom under licence from the claimants.

It was a term of the parties' licensing agreement that the claimants could terminate the licence if there was a change of control of the defendants' affiliated partner company.

In June 1999 a third company (BAT) took over the defendants' tobacco business in exchange for the defendant group's ultimate parent company receiving a 35% stake in the BAT Group.

The defendant group allotted to R, the subsidiary of the ultimate parent company which owned the immediate parent company of the defendants' affiliated partner (RIE), a special share entitling that company to wield 70.1% of the votes of RIE in general meeting but no meaningful economic interest in the business of RIE such as a right to a dividend which was more than merely theoretical, thereby reducing the voting interest of BAT in RIE below the 30% required for that company to have control under the terms of the City Panel's code on take-overs.

The claimants contended that there had nevertheless been a change of control in relation to the parent company of the affiliated partner and sought a declaration that they were entitled to terminate the licensing agreement accordingly.

Jonathan Sumption QC and David Chivers (instructed by Clifford Chance) for the claimants.

Philip Heslop QC and Richard Hill (instructed by Herbert Smith) for the defendants.

Held, granting the declaration, that under the terms of the parties' master agreement a change of control took place if any person or group of persons acting in concert not having control at the date up of this agreement (20 April 1989) acquired control of RIE or, directly or indirectly, acquired control of a person who controlled RIE; that control of a target company could be acquired by a person acquiring a shareholding of less than 30% of the voting rights if it could be demonstrated that, at the time of his acquisition, he had an understanding with another shareholder in the target company whose interest, aggregated with that of the purchaser, amounted to 30% or more of the votes available at a general meeting; that before the completion of the take-over BAT and R were not acting in concert for the purposes of controlling RIE as BAT held no shares, directly or indirectly, in RIE and any understanding as to the parties' future conduct in the event of a successful take-over contributed nothing to R's control of RIE; but that at the point of completion there came into existence a group of persons having control of RIE who did not previously as a group have such control.