Israel’s NewMed Energy has said its proposed merger with Edinburgh-based Capricorn is now “significantly” less likely to go ahead following a mass exodus of board members at the Scottish company.

Five board members at Capricorn including chief executive Simon Thomson resigned with immediate effect yesterday, and two more will follow in the coming days. Capricorn said it will also postpone the vote on its controversial merger with NewMed.

"The probability for the closing of the transaction has significantly decreased," NewMed said yesterday, adding that it "did not give any consent to the decisions reported by Capricorn".

The move came after weeks of mounting shareholder pressure led by activist investor Palliser Capital, one of Capricorn's biggest stakeholders. In a statement issued last evening, the hedge fund welcomed the decision to "enable a better path forward for Capricorn".

The battle over the company's future was set to come to a head on February 1 when shareholders were due to vote both on the merger and on proposals from Palliser to remove seven of Capricorn's nine directors and replace them with Palliser's own nominees.

READ MORE: NewMed merger cynics question 'intransigence' of Capricorn directors

The vote on the merger – which would have taken place in the morning, followed by the vote on the board of directors in the afternoon – has now been postponed to February 22. The meeting called by Palliser will go ahead on February 1.

Mr Thomson, chairman Nicoletta Giadrossi and non-executives Peter Kallos, Alison Wood and Luis Araujo have all stepped down with immediate effect. Non-executive Keith Lough and chief financial officer James Smith will remain in the short-term, though both will step down before the requisitioned meeting on February 1.

“We welcome the board’s decision to step aside and enable a better path forward for Capricorn,” a representative from Palliser said. “We are confident that today’s announcement marks the first step towards governance reform and a new leadership team focused on optimising value and delivering real growth in Egypt.”

Another dissident shareholder, 2.8 per cent stakeholder Irenic Capital, said an immediate return of cash to investors was now "the best path forward".

“Since last fall, Irenic has opposed Capricorn’s proposed merger with NewMed and has encouraged the company’s board to terminate the transaction in favor of initiating an objective and speedy review of value-maximizing alternatives," Irenic said.

HeraldScotland: NewMed has a 45% stake in Israel's giant Leviathan gas fieldNewMed has a 45% stake in Israel's giant Leviathan gas field (Image: NewMed)

"Today, we encourage Capricorn’s reconstituted board to act in the fiduciary duty of its owners by focusing on an immediate return of excess capital and near-term contingent consideration receipts to shareholders, an immediate reduction in the firm’s excessive overhead and speculative exploration spending, as well as the maximization of value from the company’s Egypt assets (including its working capital balance)."

Earlier this month Capricorn issued and lengthy rebuttal defending the deal with NewMed, saying the combination would provide at least $120 million more in short-term returns than on a standalone basis. Chris Wheaton, an analyst with Stifel, said yesterday's decision to cave in indicates the company would have lost the shareholder vote on February 1.

"Capricorn has today accepted that Palliser's proposals have won the argument with shareholders and are making the changes," he said in a note to investors.

READ MORE: Another blow for Capricorn-NewMed merger plans

Formerly known as Cairn Energy, Capricorn agreed the deal with NewMed at the end of September, scrapping a proposed merger with Tullow Oil in the process. Under the terms of that agreement, Capricorn shareholders would have received a $620m special dividend which together with an exchange of shares valued Capricorn at that time at 271p per share.

Campaigners against the merger said this under-valued Capricorn. Several also cited "long-term" concerns about governance issues at Capricorn, with accusations of "intransigence" and "brazen disregard" as the dispute intensified.

NewMed has a 45% stake in Israel's giant offshore Leviathan gas field. Shares in Capricorn closed yesterday's trading in London 0.4p higher at 244.8p.