All that stands between Solomon Lew and a huge pot of cash is the corporate regulator.

Despite an overwhelming vote in favour of South African based Woolworths’s $2.2 billion bid to purchase the troubled department store, the Australian Securities and Investments Commission may attempt to stymie the offer when the Federal Court decides on Thursday whether to ratify it.

While ASIC has yet to declare its hand, the law around schemes of arrangement needs to be clarified given they do not explicitly outlaw collateral benefits.

Some may argue that schemes of arrangement have evolved. Others claim they now are used in a manner for which they were never designed, which the regulator, through years of inaction, has allowed to continue. More on that later.

Lew’s windfall gains

Legally, the David Jones takeover is a highly unusual case. Solomon Lew has ended up with a massive windfall gain – one that other David Jones shareholders have been denied – by forcing Woolworths to buy him out of another company at an exorbitant price in order to secure his support for the DJs purchase.

Late last year, Lew’s 11.8 per cent stake in Country Road was worth $36 million. He now will receive $213 million after forcing Woolworths into a takeover bid at the current, hugely inflated market price.

This is the culmination of a 17-year war of attrition between Lew and the South Africans, who had the temerity to outbid Lew for Country Road back in 1997.

By denying them the opportunity to move above 90 per cent of Country Road – and hence the right to move to compulsory acquisition – Lew has been a thorn in Woolworths’s side all those years.

When the South Africans announced their $4 a share offer for David Jones in May, agreed to by the DJs board, Lew promptly made his move, snapping up 9.9 per cent of the company in his own name and possibly as much as an extra 10 per cent through derivative contracts.

Facing yet another stand-off, the South Africans opted for the cheaper option; to take Lew out of Country Road and merge the operation with David Jones. The Country Road deal was conditional upon Woolworths successfully wrapping up DJs – explicitly tying the two deals.

But it wasn’t the only option open to Woolworths. It could have spent the $213 million upping its offer for David Jones which would then have been distributed to all shareholders.

It was that decision that created such angst at this morning’s meeting among smaller shareholders, some of whom were livid at the benefits flowing Lew’s way.

Schemes of arrangement

The majority of takeovers these days are conducted via schemes of arrangement, where shareholders get to vote on whether a takeover proceeds.

Originally, however, they were designed to allow smaller companies a cheaper way to merge their operations.

Under scheme rules, 50 per cent of shareholders owning 75 per cent of the stock must vote in favour for a bid to succeed.

But there’s a neat little loophole that until recently worked in favour of those making offers through this method. It all gets down to shareholder participation, or more correctly voter apathy. Shareholders who don’t vote are considered to not exist.

So if a handful of big institutions control more than 75 per cent of the target’s stock and thousands of small shareholders don’t vote, it can be relatively easy to get a takeover across the line.

Because a vote is involved, these deals must be ratified by a court which until recently merely rubber stamped the vote. Not any more.

The courts since have wised up to the potential for distortion and have begun to pay attention to voter participation.

Participation at the David Jones meeting was relatively robust. But, even then, only a little over half the issued shares were voted by proxy.

Lew wisely refrained from voting his DJs shares to avoid any notion of conflict. His tactics throughout the campaign have been brilliant. He sat on his Country Road stake for the best part of two decades. And he bought into DJs after a fully-priced bid was announced. Clearly there was no collusion.

But those arguments ring thin for David Jones investors who believe they’ve been denied the chance for a higher offer.