Jersey Unreported Judgments

[2007]JRC022

royal court

(Samedi Division)

1^st February 2007 

In the matter of MV Leveraged Finance Limited.

And in the matter of the Companies (Jersey) Law, 1991.

Advocate M.J. Thompson for the Company.

judgment

the deputy bailiff:

1.        This is an application to reduce the share capital of MV Leverage Finance Limited.  The Company was incorporated on 10^th April, 2006.  It holds a permit under the Collective Investment Funds (Jersey) Law 1988 and invests in mezzanine and second lien loans. 

2.        On 2^nd October 2006, the then sole shareholder passed a special resolution reducing the capital by €40 million.  This resolution was conditional upon the subsequent allotment of shares with an aggregate subscription price of €89,447,980.  Mr Thompson has helpfully referred us to the case of Re Tip-Europe Limited [1987] 3 BCC 647 which held that a conditional resolution of this type is permissible under the law in relation to the reduction of share capital and we agree with and adopt the reasoning of that case. 

3.        Since the passing of the special resolution for the reduction, investors have subscribed for shares.  This has been done by way of a private placement but it was procured on the basis of a pathfinder prospectus and a 'subscription and shareholders' agreement.  As a result of these subscriptions, the company now has a stated capital of €89,675,000. 

4.        The purpose of the reduction is three-fold, and this was stated in the resolution.  First, the company wishes to pay an additional dividend for the period to 31^st December 2006, at an annualised rate of 10% of the subscription price.  There are insufficient distributable profits to pay this at present.  Thereafter it wishes to pay semi-annual dividends and the resolution is intended to ensure that there is a distributable reserve from which such dividends can be paid regardless of any fluctuations in income.  Secondly, the company wishes to purchase its own shares from time to time and wishes to have a reserve from which that can be done.  Thirdly, the company wishes the reserve created by the resolution to be applied in paying the preliminary expenses and the expenses of the share offer.  In the absence of such a reserve and of any share premium - and of course there is no share premium in this case because the shares are no par-value shares - there would be difficulty in paying dividends until all the preliminary and offer expenses were paid.

5.        In the recent case of Representation of Henderson Far East Income Limited [2007] JRC 015, the Court reviewed its role on such applications.  The Court must consider the position of both the shareholders and the creditors. 

6.        As to the shareholders the Court must satisfy itself about three matters.  First, that the shareholders, particularly if there are different classes, have been treated equitably, secondly that the proposal for reduction has been properly explained to the shareholders and thirdly, that the reduction has a discernible purpose.

7.        We are quite satisfied, in this case, as to the first and third of these matters.  As to whether the matter was properly explained, the information in the pathfinder prospectus was sparse.  At page 31 of the prospectus it says merely:

"The Company has passed a special resolution to reduce its stated capital account to take effect following Admission.  In accordance with the Companies Law, the Directors intend to apply to the Court in Jersey for an order confirming such reduction of the stated capital account following Admission.  Subject to the Court's order and to any undertaking to be given to the Court, the reserve created on such cancellation will be available as distributable reserve to be used for all purposes permitted by the Companies Law, including the purchase of shares and the payment of dividends".

That was, of course, written at the time of a proposed public offering but it was still stated to be the case for the private subscribers.  Although there is another passage further on to which we have been referred, it does not really add to it, and we have to say that, in our judgment, that passage was inadequate to explain the position fully to potential investors.  In particular there is no indication of the size of the reduction, what capital would be left thereafter, nor is there any explanation in simple lay terms as to why the reduction is being made.  Had the matter rested there we would not have agreed to the reduction on the grounds that the matter had not been properly explained to those shareholders who came in after the resolution was passed, but who would be affected by the reduction.

8.        However, the position was rectified by a letter which was sent out to all intending investors attaching a copy of the text of the resolution.  The resolution itself does set out clearly the amount of the proposed reduction, the condition precedent for the reduction to take effect and the three purposes behind the reduction to which we have referred.

9.        In the circumstances we are therefore satisfied that the matter has been properly explained to the shareholders.  But we would remind professional advisers to companies of what we said in the Henderson case which was as follows:

"The references in the prospectus to the issue are fairly dry and technical, are not very prominent and in addition have certain internal inconsistencies.  In particular there is no statement of what the capital of the Company will be following the reduction. 

We think that on future occasions any applicant company will be well advised to explain the arrangement more prominently and in more detail in any prospectus and in particular should explain in simple lay terms why the reduction is thought to be a good idea for shareholders.  The unusual feature of cases such as this is that the resolution is passed by the founder shareholders and will only take effect when the investors have become shareholders.  We accept that the resolution in most cases is likely to be for the benefit of the investors, but nevertheless they need to be fully informed in the prospectus as this is the only document which explains matters to them.  They rely on the prospectus when deciding to invest."

10.      We would perhaps, on reflection, add that the amount of reduction should also be stated.  Whether it will always be possible to say what the capital will be following reduction depends on whether the total amount of stated of capital is known at that stage.  At the end of the day the matter has to be judged on the facts of a particular case, but the prospectus or the offer document must explain the position fully and properly to investors, so that they know exactly what the position will be so far as possible. 

11.      That deals the position of shareholders.  Secondly, we must consider the position of creditors.  In this case we have received a consolidated balance sheet of the company and its subsidiaries.  This shows total assets to the nearest million of €611 million with total liabilities of €509 million.  There is, therefore a net asset value including goodwill of €102 million, and excluding goodwill €67 million. 

12.      Unfortunately no breakdown was given of the creditors of this particular company and of the subsidiary.  This was an omission.  Details of the creditors of the company whose capital is being being reduced should always be given.  But the evidence does satisfy us that all the creditors of this company have consented in writing to the reduction.  Furthermore, the fact remains that the Company will have a stated capital of, in round terms, €49.6 million after the reduction and it will also have considerable cash reserves.  We are satisfied therefore that there is no need to convene the creditors and we agree that paragraphs 3 to 5 of Article 62 should not apply. 

13.      In the circumstances we confirm the reduction.  We make an order in the terms of your draft.

Authorities

Collective Investment Funds (Jersey) Law 1988.

Re Tip-Europe Limited (1987) 3 BCC 647.

Representation of Henderson Far East Income Limited [2007] JRC015