England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
(Chancery Division)

		Royal Courts of Justice Strand, London, WC2A 2LL
		26 September 2008

Mr. Justice Morgan:

1. This is an application in which TDG Plc ("the Company") seeks an order under section 899 of the Companies Act 2006 sanctioning a scheme of arrangement and, in addition, an order under section 137 of the Companies Act 1985 confirming a resolution for the reduction of capital involved in the scheme. For reasons which I need not go into, but which are of a common character, the order that I am asked to make today is the order sanctioning the scheme, leaving the question of the reduction of capital to be the subject of an order made in a few days time when final details are ascertained; those details being necessary for the purpose of drawing up the final form of order.
2. However, for the purpose of sanctioning the scheme I am, of course, concerned to consider the attitude the Court will adopt when asked to make an order confirming the resolution for the reduction of capital. If I considered that there would be difficulty in relation to the reduction of capital, that would have an impact on the decision I ought to make in relation to the order sanctioning the scheme of arrangement.
3. The object of the scheme, in short, is to effect the Company's acquisition by another company (LIT Plc), which is a company incorporated for this purpose in the Isle of Man by Laxey Partners Ltd., a private equity house. The terms of the acquisition value the entire issued Ordinary share capital of the Company at some £203 million. It is currently proposed that the Ordinary shares of LIT Plc will be admitted to trading on the alternative investment market.
4. I ought to say a brief word about the issued shares in the Company. There are some 81 million Ordinary shares in issue, and some 800,000 B shares in issue. In relation to the Ordinary shares, Laxey Partners Ltd. own approaching 18 million of those, which I am told is 21.9% of the issued Ordinary share capital.
5. The B shares are not subject to the scheme. The scheme relates to the holders of Ordinary shares. The Ordinary shares have been divided into two classes. The first class, which one can immediately put on one side, are what are called the "Laxey Scheme" shares. Those are being dealt with by agreement and without the need for a court meeting and such like.
6. However, the remainder of the Ordinary shares, some 63 million of them, are regarded as the "scheme" shares. It is in relation to those shares that the statutory procedures have been followed through.
7. The scheme makes a series of offers to a shareholder of a scheme share. The basic provision (and this is the default provision) is that a holder of an Ordinary scheme share is offered cash for his share of £2.50. The offers are, however, more complicated than that. Mr. Moore QC (who appears for the Company) referred to the menu of offers as being á la carte, with a range of alternative dishes in place of some part of the £2.50. That matter was, of course, material to the way in which the scheme was drafted and the offer was made but it is not necessary, for today's purposes, to narrate the detail of those alternative offers.
8. I do not consider I need to go into any detail as regards the technical parts of the scheme. The first part of the scheme reorganises the issue of share capital of the Company and will lead to some six classes of shares reflecting the á la carte options, to which I have referred.
9. The application for the sanction of the scheme has already been before the Court, when the Court ordered a meeting of a single class, namely the holders of the scheme shares; that is some 63 million shares or so. That Court meeting took place. I have, in the usual way, the Chairman's report indicating what happened at the meeting on the 3^rd September 2008. The number of those present voting in favour of the scheme was 89.7% of those who voted. The majority in value of those present voting in favour of the scheme was some 98.7%.
10. Looking at the comparison between the numbers present and voting and the total number of scheme shareholders, the number of members voting was 21% of the members. The number of members voting represented 46% in terms of value of the holders of scheme shares.
11. At this point I need to introduce what I believe is a relatively unusual feature of applications of this kind. Mr. Moore QC appears on behalf of the Company, but the Court has also been assisted by the submissions of a shareholder, a Mr. Chalker. Mr. Chalker voted against the scheme at the Court meeting. He has appeared in person and has made submissions to me in opposition to the suggested approval of the scheme.
12. I have said that Mr. Chalker is a shareholder. His shareholdings fall into these classes. In respect of 2,603 shares, he is the beneficial holder of the shares. In respect of 918 shares, he is the shareholder but he holds the shares as trustee for others. There is a third class of shares which are held by nominee shareholders. The ultimate beneficiary is Mr. Chalker's mother-in-law. In relation to those shares, Mr. Chalker has a power of attorney. That class of shares comprises 1,557 shares. I dare say that that combined shareholding is a worthwhile investment for Mr. Chalker, but it will of course not be forgotten that the number of his shares, when placed against the figures I have already stated (there are some 63 million scheme shares) is comparatively modest.
13. Mr. Chalker wrote to the Court in the last few days. The letter has been made available to the Company. Mr. Chalker makes a number of points in his letter, which I will refer to. I will not read out verbatim what Mr. Chalker has written, but I will attempt to summarise the essential points he makes in the letter. It may then be necessary to say a little bit more about what Mr. Chalker said when he made his oral submissions to me.
14. One point Mr. Chalker makes in his letter is to draw attention to the percentages represented by the votes; not only the percentages in favour registered by those present and voting, but also the comparison between the numbers who voted and the numbers who did not vote. He refers to the fact that only 36% of the 81 million Ordinary shares in issue support the scheme. (This ignores the 18 million shares, which are part of the 81 million shares, and which are owned by Laxey). He draws my attention to certain provisions in the Companies Act 2006, in particular sections 979 and 986, which contain the well-known provisions in a takeover context where an offeror for shares can acquire, on a compulsory basis, the shares of certain dissenting shareholders but, for that purpose, the statute makes it clear that the offeror, before this compulsory power is vested in it, must show it has not less than 90% in value of the shares to which the offer relates.
15. I am not attempting to summarise the provisions in any detail but, for present purposes, Mr. Chalker draws attention to the 90% which is needed before an offeror has a compulsory power of acquisition. He contrasts that with the present case, where those promoting the scheme can demonstrate only a much more modest percentage than 90% and yet, if the scheme is approved, the consequence for Mr. Chalker is the same. He is divested of his shares and he is given a sum of money – a situation which he does not voluntarily accept.
16. The second point made in Mr. Chalker's letter is to draw attention to what he says are shortcomings in the information given to shareholders. He drew my attention to what was said in the report of the independent Directors. I will not read in extenso from what is a lengthy letter of report from the independent Directors, but I will attempt to summarise the salient points.
17. In paragraph 3 of the letter, the cash offer is described as "£2.50 a share". That is described as showing a healthy premium to the closing price, computed in different ways by reference to the Stock Market up to February 2008. (Mr. Moore, on behalf of the Company, has pointed out that the Stock Market, at today's date, stands very much below what it did in February 2008).
18. In paragraph 9 of the independent Directors' letter, the letter describes in a little detail the history of bid interest being expressed by Laxey and by another bidder, leading to the offer which is now the subject of the proposed scheme.
19. The TDG Directors and their financial advisers have explored whether there is any other source of interest. They have concluded that there is not. They are not aware of any other parties currently contemplating an offer for shares in TDG. The independent Directors said that they believed that the cash offer, when considered against the expected future trading performance, offered TDG shareholders a fair price in cash and, on the basis of these and other factors which they considered relevant, and having taken advice from Rothchilds, they have concluded that the terms of the cash offer were fair and reasonable and should be recommended to TDG shareholders.
20. Mr. Chalker points out that the independent Directors did not go on to say why any particular shareholder should sell. Mr. Chalker refers to his own position, where he does not want to sell. He wants to retain his investment. It is an attractive investment. More significantly, it has produced a healthy dividend in recent years. He has expectations it will continue to do so if this scheme went away.
21. My comment on that is it is not for the independent Directors to tell, or even indicate to an individual shareholder what that individual's choice should be. The individual is being told the history of the offer and the content of the offer; is being told that the offer represents a fair price in cash when considered against future trading performance, and then it is for the individual shareholder to decide whether to accept the offer, or not.
22. In my judgment, that is not a criticism of the independent Directors' letter.
23. The other thing that is said by Mr. Chalker is that the independent Directors did not explain why this matter was being dealt with by way of a scheme of arrangement rather than by way of a takeover, where the shares would be transferred by one shareholder to a purchaser and where the squeeze-out provisions, to which I have referred, would apply, where the compulsory power of acquisition would not arise until the 90% threshold had been crossed.
24. Again, in my judgment, that matter is not something that has to be explained to a shareholder. What the shareholder is being asked to do is to say 'yes' or 'no' to the proposal. It is not for the independent Directors to explain why one particular legal route is being adopted rather than another legal route. In any case, I accept the submission of Mr. Moore (on behalf of the Company) that the scheme of arrangement in this case has become an entirely conventional, indeed much used, route. No particular opprobrium is to be attached to this scheme because the arrangements are being handled by this statutory method, rather than by another possible statutory method. I should also say that I have no material on which I could possibly find that the bid of £2.50 a share would have been different, in particular would have been higher, if the takeover route had been used.
25. Mr. Chalker, in his letter and in the course or oral argument, has addressed me on the attitude I should adopt to the fact that many shareholders expressed no view either way, for or against the scheme. There has been speculation (and it can only be speculation) as to why people do not vote. I will not attempt an exhaustive list of the reasons why people do not vote, there are some obvious explanations. One is that, although the documents are served in accordance with the legal requirements, they do not in fact come to the attention of the shareholder. Another is that the shareholder receives a very substantial bundle of documents and does not feel ready and able to deal with it, and so does not deal with it within the time that is set. Other shareholders might feel able to deal with the matter, but in the end have no very pronounced preference and so they leave the decision to large shareholders in a company who it might be thought will have a very good commercial feel as to the appropriate decision. So such a shareholder leaving it to others to form a majority is not to be equated in any sense with an opponent of the scheme.
26. Mr. Chalker also referred to another class of shareholders, which is the class of nominee shareholders, where the nominee takes the action and makes the decision, or perhaps remains passive and does not vote. Mr. Chalker would have it that in some circumstances, certainly not all, the nominee will not have truly consulted the ultimate beneficial owner of the shares. Mr. Chalker may be right. Some nominees do not fully consult. Others plainly do. Indeed, in this case some of the relevant shares, Mr. Chalker's mother-in-law's shares (where she is the beneficial owner) are held by a nominee. The nominee does appear to have explained the matter adequately, if not completely fully. Mr. Moore reminds me, and I accept his submission, that the shareholder is the nominee. If the documents go to the nominee and the nominee acts in a way the nominee chooses then nothing has gone wrong. In particular, silence from the nominee is not to be equated with opposition to the scheme.
27. Finally, before turning to the legal matters which I must consider, Mr. Chalker explained to me very cogently why he did not wish to sell, why he wished to retain the shares and derive an income and although the Stock Market, as is well-known, has fallen in recent months, Stock Markets do, we all hope, rise again. Mr. Chalker may be restored in some months time to the position he was in in February 2008, disregarding recent disturbances in the market.
28. No one criticises Mr. Chalker's decision. His decision is a matter for him, and he has explained it.
29. As to the legal requirements which must be observed before the Court is in a position to sanction a scheme of this kind, Mr. Moore has, as is conventional, drawn my attention to the treatment of this subject in Buckley on the Companies Acts Vol 1, 50^th Edition, paragraphs 425.53 and 54. As those passages are so very well-known, I will not read them into this judgment, but I will summarise the matters that require attention as involving the following four things.

The Court must be satisfied that the provisions of the statute have been complied with.

It must be satisfied that in relation to the class of shareholders, the subject of the court meeting, was fairly represented by those who attended the meeting, and the statutory majority are acting bona fide and not coercing the minority in order to promote interests adverse to those of the class they purport to represent.

An intelligent and honest person, a member of the class concerned and acting in respect of his own interest, might reasonably approve the scheme.

There must be no blot on the scheme.

30. It is also right to record that the court does not act as a rubber stamp simply to pass without question the view of the majority but, equally, if the four matters I have referred to are all demonstrated, the Court should show reluctance to differ from the views of the majority, and should certainly be slow to differ from the majority, on matters such as what an intelligent, honest person might reasonably think.
31. Before applying those four matters to the facts of this case, I ought to deal with what is really a distinct point being made by Mr. Chalker, relying as he does on the different statutory provisions where a 90% shareholding is needed before there can be a compulsory purchase of a minority shareholder's shares.
32. True it is that the Companies legislation has two sets of provisions: one, with which I am concerned, dealing with schemes of arrangement; and another dealing with code takeovers.
33. Mr. Chalker's point is perhaps an obvious one, but it is not a new one. Indeed, it was addressed more than forty years ago in the case of Re National Bank Ltd. [1966] 1 WLR 819, a decision of Plowman J. At pages 929 to 830 of the report, Plowman J. dealt with an objection put to him which is much the same as Mr. Chalker's point made today. The objection was rejected by that learned Judge. The Judge, in short, did not see any reason why a party should not be able to rely upon the scheme of arrangement provisions, with the safeguards and the checks and the balances contained in them, rather than a different set of statutory provisions, which were structured in a different way and were to be operated in a different way.
34. Based on that authority, I conclude that I can put on one side any consideration of how the takeover provisions and the squeeze-out provisions might have operated on the facts of this case. That seems to me to be beside the point. I will focus on the four matters I have described in my earlier remarks.
35. Focusing on those four matters, the conclusions I reach are as follows.
36. First, the provisions of the statute have been complied with.
37. I secondly consider whether the class of shareholders with 63 million shares were fairly represented by those who attended the Court meeting. I have no material on which I could hold anything else. There is no basis for saying that the representation was not fair. My attention has been drawn to the number of shareholders who voted in person or by proxy. I have, of course, referred to the percentage of the total shareholding which so voted and the views which they expressed. Continuing with this second requirement, there is no material which would enable me to say that the statutory majority were not acting bona fide, or were coercing the minority to promote adverse interests.
38. There is, of course, an element of coercion (if that is the right word) or a compulsory element when the statutory provisions themselves say that the consequence of the statutory majority being achieved is that the majority view will prevail, and the minority view will not prevail, certainly if the Court is prepared to approve the scheme. But there is nothing here which gives a minority any kind of veto just because their views run strongly contrary to the views of the majority.
39. The third matter is whether an intelligent and honest man, a member of the class concerned, acting in his own interests, might reasonably approve the scheme. Mr. Chalker does not approve the scheme. Mr. Chalker is an intelligent and honest man. He has his own strong views as to why he does not wish to approve the scheme. But none of that invalidates the opinions of the majority. There is no material on which I could say that the majority are not acting intelligently and honestly, or that they are not reasonably considering their own interests in coming to their conclusion. Indeed, nothing that they decided is remotely surprising. Indeed, it is very much as one would expect. So the third criterion is abundantly satisfied.
40. Having considered the scheme, there is no blot that can be found in it.
41. Therefore, I am in a position where all of the established principles point in favour of this scheme being approved. Everything that had to be shown has been shown. I am not a rubber stamp. I have thought about the rival arguments. I recognise that the consequence of approving the scheme is that Mr. Chalker's shares are taken from him against his will, but that is an inevitable consequence of the Court approving such a scheme. Whether I should or whether I should not is really directed by the answers I have already given to the questions I posed.
42. In those circumstances the conclusion I reach is that, in accordance with established principle and on the facts of this case, the right thing to do is to give the Court's sanction to the scheme.
43. I referred earlier to the reduction of capital. I need not rehearse the facts any further, or indeed the legal principles. The legal principles are very well established. They point to this being a proper case for the reduction of capital to be permitted to go ahead. Therefore, that does not give rise to any impediment to the approval of the scheme.
44. Accordingly, I will make the order sought today. The matter will return to the Court in a few days time when the final version of the order relating to the reduction of capital will be considered.
45. As to the form of order, there was a form in the bundle. Is that the up-to-date draft?
46. MR MOORE: My Lord, I think a draft has been handed to your Associate. If your Lordship will be kind enough to initial that, that will then achieve ------
47. MR JUSTICE MORGAN: Let me just glance at that. The undertaking appears. The Court sanctions the scheme. The only minor change is I consider we should record the fact that Mr. Chalker appeared and was heard.
48. MR MOORE: Yes.
49. MR JUSTICE MORGAN: So in between "hearing counsel" and "reading the evidence", I am going to write in ". . . and upon hearing Mr. E. R. Chalker (a shareholder)". With that addition I am able to make that order. Is there any other point I need to consider?
50. MR MOORE: I do not think so, my Lord. If your Lordship would initial that order we can then get it stamped.
51. MR JUSTICE MORGAN: Right. Mr. Chalker, I have made that decision. Thank you very much for a number of interesting and informative points. So often these matters are just dealt with shortly. It has been, if I may say so, quite an interesting exercise to look at them more thoroughly, as we have done with your assistance today. I regret from your standpoint that I have not been able to accede to your submissions.
52. MR CHALKER: Thank you, my Lord. Not an unexpected decision.

This is to certify that paragraphs 1 to 52 have been produced according to the procedure set out in the AVTS Quality System.

Signed: Linda Burton

3809/W4624