Jersey Unreported Judgments

[2010]JRC011

royal court

(Samedi Division)

25^th January 2010

IN THE MATTER OF A REPRESENTATION BY COMPUTER PATENT ANNUITIES HOLDINGS LIMITED

AND IN THE MATTER OF PART 18A OF THE COMPANIES (JERSEY) LAW 1991

Advocate M. J. Thompson for the Representor.

Advocate R. J. MacRae for the Bidder.

judgment

the commissioner:

1.        On 15^th December, 2009, the Court convened a meeting of the shareholders of Computer Patent Annuities Holdings Limited ("the company") pursuant to Article 125(1) of the Companies (Jersey) Law 1991 ("the Companies Law") for the purpose of considering and, if thought fit, approving a scheme of arrangement.

2.        The business currently carried on by the company was established in 1969 as a Jersey general partnership carrying out intellectual property renewals on behalf of UK intellectual property attorneys.  The company was incorporated on 14^th June, 2006, under the Companies Law as a private limited company with unrestricted corporate capacity.  Today the company's core business is to furnish a computerised service to patent and trade mark attorneys and/or industrial or commercial firms, corporations and other institutions or persons owning such intellectual property throughout the world. 

3.        The purpose of the scheme is to enable George Topco Limited "(the bidder") to acquire the whole of the issued share capital of the company.  The bidder is ultimately wholly owned by Intermediate Capital Group Plc. 

4.        Currently, the company has a number of classes of redeemable shares and has issued loan notes which under the scheme will be redeemed and repaid in accordance with the articles of association and their respective terms.  The scheme therefore concerns the holders of the issued ordinary shares ("the scheme shares") which are currently held by some eighteen nominees on behalf of some 305 individual beneficial owners.  The company has been structured this way to maintain its private company status. 

5.        If the scheme becomes effective, the scheme shareholders will (depending on elections by each beneficial owner made under a mix and match facility whereby each can elect to receive different proportions of the consideration elements) receive an initial cash consideration, bidder ordinary shares, bidder A preferred instruments and bidder B preferred instruments and a possible further cash consideration (subject to any claims for leakage).  All of the issued shares in the capital of the company will be cancelled by means of a reduction in capital effected by a special resolution of the holders of the ordinary shares.  The reserve arising on the reduction of capital will be applied in paying up in full new ordinary shares which will be issued to the bidder or its nominees.

6.        There are three stages in the process by which a scheme of arrangement under Article 125 of the Companies Law becomes binding:-

(i)        First there is an application under Article 125(1) for an order that a meeting of shareholders or creditors if necessary be called.  It is at this stage that the Court should consider whether or not to summon separate class meetings and if so, who should be summoned to each meeting.  The Court will not look at the merits at this stage (See Re Telewest Communications Plc [2004] EWHC 92).

(ii)       Second, the scheme proposals are put to the court-convened meeting and are approved by a majority by number representing 3/4ths of the voting rights of members present and voting in person or by proxy.  As the Company's articles of association require a resolution to approve any change of control of the company to be passed by a majority of at least 90 per cent of the votes cast at that meeting, the scheme will in this case be conditional upon attaining the approval of scheme shareholders representing at least 90 per cent of the voting rights at the court meeting.

(iii)      Third, and assuming the requisite approval at such meeting is given, the Court exercises its discretion as to whether to sanction the arrangement:  see Re National Bank Ltd [1966] 1 All ER 1006 at 1012 approved by the Royal Court in Re Telewest Finance (Jersey) Limited [2004] JRC 109.

7.        There is also in effect a fourth stage to this scheme.  As there is an associated reduction of capital, which the scheme is conditional upon, the Court will be requested to make an order sanctioning the reduction of capital - see In the matter of Real Estate Opportunities Limited [2008] JRC 025.

8.        There were three issues that were raised by Mr Thompson on behalf of the company for consideration by the Court.

Position of board members

9.        At a board meeting on 30^th November, 2009, all of the ten directors who voted (having agreed that the executive directors should not vote) voted unanimously in favour of putting the offer of the bidder to the shareholders.

10.      The ten directors then voted on whether to recommend the offer to shareholders.  Eight voted in favour and two against. 

11.      It was proposed, and the Court agreed, that the scheme shareholders should be given a fair and balanced view of the position of all the directors.  The two dissenting directors have explained in writing their reasons for not recommending the offer and their explanatory statements are contained within the board's letter, which forms part of the scheme documentation that will be issued to the scheme shareholders.  The response of the non-dissenting directors to the views of the dissenting directors is also contained within the board's letter.

Capital reduction

12.      Mr Thompson contended that it was not necessary for there to be any requirement for notification to be made to and/or consent sought from the company's creditors in relation to the scheme and the incorporated reduction in capital.  This was because pursuant to Article 62(2) of the Companies Law there would be no diminution of liability in respect of any amount unpaid on any share nor any payment to any shareholder of any paid up capital, on the basis that the total amount of the reserve arising from the proposed reduction of capital will be utilised in paying up the new ordinary shares of a like amount that would be issued to the bidder.  The bidder will also be providing funds to the company to enable the loan note holders and the holders of the redeemable shares to be paid in full without affecting the company's balance sheet.  As a result it was contended that the company's creditors would not suffer any net prejudice as a result of the scheme or reduction in capital.

13.      The only material creditors for the purpose of the scheme are annuitants (effectively pensioners) to whom the company is obliged to pay certain annuities (pensions), the value of the company's liability in this respect having been actuarially valued at £9,327,000. 

14.      One of the concerns raised by a dissenting director was that the offer (in his view) converts a conservative and stable financial structure into a highly geared entity with lending banks taking security over the assets of the business.  This arguably could lead to the annuitants being exposed to a greater risk of default on the part of the company in the future.

15.      The Court accepted that the capital reduction did not involve either a diminution of liability in respect of any amount unpaid on a share or the payment to the shareholders of any paid up capital but was concerned that, taking a wider view of the scheme as a whole, the interests of the annuitants, as creditors, might potentially be affected.  The Court therefore directed that the annuitants should be informed of the scheme and be given the right to be heard when the Court sits to sanction the scheme.

Voting

16.      The scheme shareholders are eighteen nominee companies holding for 305 beneficial owners.  The company was concerned to ensure that the registrar of the company counted the votes at the meeting in a specific way so as to give effect to the wishes of the beneficial owners in a manner consistent with legislative provisions. 

17.      In Re Equitable Life Assurance Society [2002] BCC 319 Lloyd J held that a member acting as nominee could vote some of the shares held in favour of the scheme and some against the scheme.  At page 217 of the judgment the Judge explains that such a member can be counted as having voted both for and against the scheme and it therefore makes no difference to the calculation of the majority in number.  However, the exact amount of the shares voted for and against the Scheme can be taken into account in determining whether a 75% majority in value is achieved (or in terms of the amended Article 125 of the Companies Law, the majority in voting rights).

18.      The company proposed two alternative solutions:-

(i)        For the purpose of determining whether the majority in number of members present and voting has approved the scheme, any scheme shareholder voting unanimously either for or against the scheme shall be allotted one vote, and any scheme shareholder voting both for and against the scheme shall be allotted one vote for and one vote against the scheme.  If a majority in number of the above votes are cast in favour of the scheme, a majority in number will be deemed to be constituted.

(ii)       Alternatively, for the purposes of determining whether the majority in number of members present and voting has approved the scheme, each scheme shareholder shall be allotted one vote, which vote will be subdivided into fractions of a vote in accordance with the number of that scheme shareholder's underlying beneficiaries.  If the scheme shareholder votes entirely in favour of or against the scheme, one vote shall be counted.  If the scheme shareholder is instructed to vote and does vote partially in favour and partially against the scheme, the fraction of a vote representing the number of underlying beneficiaries who instructed the scheme shareholder to vote in a particular way will be counted for and against the scheme.  If a majority in number of the above votes are cast in favour of the scheme, a majority in number will be deemed to be constituted.

(iii)      For the purpose of determining whether that majority in number represented 3/4ths or more of the voting rights of the scheme shareholders present and voting at the court meeting, the total number of scheme shares voted by all scheme shareholders shall be counted.

19.      The first alternative could lead to absurd results: if for each scheme shareholder a majority of beneficial owners vote in favour, with one voting against, the 90% threshold could be exceeded without a majority in number.  There is also a risk of deadlock in the event that all of the nominees split their votes, even if the underlying beneficial owners are overwhelmingly in favour of the proposal.

20.      The Court therefore agreed with Mr Thompson that the second alternative was to be preferred in that it effectively looks through the nominee companies to treat each beneficial owner as if he or she were a shareholder and thus will properly reflect their respective wishes in respect of the scheme.

Authorities

Companies (Jersey) Law 1991.

Re Telewest Communications Plc [2004] EWHC 92.

Re National Bank Ltd [1966] 1 All ER 1006.

Re Telewest Finance (Jersey) Limited [2004] JRC 109.

In the matter of Real Estate Opportunities Limited [2008] JRC 025.

Re Equitable Life Assurance Society [2002] BCC 319.