Companies - application to the court to approve scheme of arrangement pursuant to Article 125 of the Companies (Jersey) Law 1991.
[2012]JRC121
Before : |
J. A. Clyde-Smith, Esq., Commissioner, and Jurats Clapham and Olsen. |
IN THE MATTER OF A REPRESENTATION OF INVESTKREDIT FUNDING LIMITED
AND IN THE MATTER OF ARTICLE 125 OF THE COMPANIES (JERSEY) LAW 1991.
Advocate M. H. Temple for the Representor.
judgment
the commissioner:
1. On 22nd May, 2012, the Court convened a meeting of bondholders of the Company to consider and if thought fit to approve whether with or without modification a scheme of arrangement pursuant to Article 125 of the Companies (Jersey) Law 1991 ("the Companies Law").
2. The Company is indirectly wholly owned by Investkredit Bank AG ("Investkredit"), a joint stock company organised under the laws of the Republic of Austria. We were informed that companies incorporated in Jersey are commonly used by Austrian financial institutions to assist in raising funds on international capital markets. The corporate purpose of the Company was to issue bonds and carry out activities related to the bonds.
3. On 20th November, 2002, the Company issued 50,000,000 Euros of subordinated non-cumulative limited recourse notes ("the bonds") supported by an undertaking from Investkredit.
4. The bonds were issued in the form of a single global note held by Clearstream Banking AG ("Clearstream") which is a central securities depository and clearing system whose role is to facilitate international trading in securities.
5. Clearstream has direct participants (generally major financial institutions) in the bonds, but they in turn may either hold their interests beneficially or for third parties. Indeed, there may be a number of intermediaries before reaching the person with an ultimate beneficial interest in the bonds. We will refer to them as "the Bondholders" and it is they, as ultimate beneficial owners, rather than Clearstream, that the Company wishes to vote on the scheme.
6. This was the approach taken in the case of Re Castle Holdco 4 Limited, an unreported judgment of Hart J dated 23rd March (2009) in the Chancery Division of the High Court of England and Wales, in which the Court considered a scheme of arrangement in relation to the restructuring of the debt of the Countrywide Plc group of companies, which included global loan notes held by a nominee for a common depository. The global notes were held through two electronic book entry systems operated by Euroclear and Clearstream for their ultimate owners. The ultimate owners might themselves have been the beneficial owners or may have held for clients directly or through intermediaries such as banks and brokerage houses. The Court in that case accepted that the ultimate beneficial owners were properly to be regarded as contingent creditors of the company in that case and that it was the votes of the ultimate beneficial owners not the vote of the common depository or nominee which counted (page 9 of the judgment).
7. We agreed with this approach namely that it is the Bondholders as ultimate beneficial owners of the bonds whose votes count. The Company has no means of knowing the identity of the Bondholders or of communicating directly with them and must proceed therefore by way of advertisement pursuant to Article 126(3) of the Companies Law.
8. It is proposed that the terms and conditions governing the bonds will be amended as part of a review by Investkredit of its capital requirements in the context and in consequence of:-
(i) A proposed merger between Investkredit and österreichische Volksbanken-AG ("OVAG") (which is due to take place in the second half of 2012) the result of which will be that OVAG will be the sole surviving legal entity under Austrian law and the obligations of Investkredit in relation to the bonds pursuant to the support undertaking will become obligations of OVAG;
(ii) Changes to the capital requirements of banks that are expected to be introduced by the new EU capital requirements directive (and consequent regulations) in early 2013; and
(iii) Support received from the Republic of Austria by way of a subscription for shares in OVAG and the grant of a surety to protect certain assets of OVAG from impairment.
9. In very broad terms the amendments will remove the requirements to make interest payments and will include provisions for the holding of Bondholder meetings; amendments which the Company considers in the interests of the Company, the future merged entity, its stakeholders and the Bondholders. Bondholders are being offered the opportunity to exit their investment in the bonds at a premium to current market prices through a "put option".
10. There are three stages in the process by which a scheme of arrangement under Article 125 of the Companies Law becomes binding. These stages have been summarised in the case of In the Representation of Computer Patent Annuities Holdings Limited [2010] JRC 011:-
"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 ...
(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."
11. Under the Practice Note issued by the High Court of England and Wales, Chancery Division, (Practice Statement (Companies: Schemes of Arrangement) [2002] 3 All ER 96, [2002] 1 WLR 1345), a party seeking an order under s. 425 of the Companies Act 1985 in relation to a creditors' scheme should draw to the Court's attention at the earliest opportunity any issues regarding identification of classes of creditors, and obtain the Court's directions in relation to those issues. The identification of separate classes requires that separate meetings must be called of each class, and a majority in number representing 75% by value of the creditors present and voting in person or by proxy in each class must be obtained. The Practice Note has been cited with authority before this Court in the context of members' schemes (see In the matter of the Representation of Vallar Plc [2011] JRC051).
12. In this case, there is only one direct creditor, namely Clearstream, but looking through Clearstream to the Bondholders, Mr Temple submitted, and we accepted, that they have the same economic interest in the scheme. Therefore no issues arose regarding the identification of classes of creditors. Accordingly, one meeting should be convened but steps should be taken to ensure that the Bondholders were given the opportunity to vote at that meeting.
13. The Court did inquire as to whether there were any creditors of the company other than the Bondholders who might be affected by the scheme and for whom a separate meeting might be necessary. Mr Temple informed us that as this was a special purpose vehicle formed for the purpose of issuing the bonds, there were no other material creditors of the Company. However, to the extent that there are other creditors, their consent to the scheme would be obtained for the purposes of the final hearing, when, if the scheme has been approved by the requisite majority of the Bondholders, the Court will be asked to sanction the scheme.
14. In terms of notifying the Bondholders, the following is proposed:-
(i) Notice of the meeting will be given to Clearstream, which will in turn communicate the same to the direct participants. Clearstream itself, of course, has no means of communicating directly with the Bondholders.
(ii) The notice will be published in the Amtsblatt zur Wiener Zeitung (a newspaper with general circulation in Austria), the Börsen-Zeitung (a newspaper with general circulation in Germany) and the Financial Times (European edition).
(iii) Investkredit will announce the proposed scheme through the communication procedures of the Vienna Stock Exchange and the Frankfurt Stock Exchange, where the bonds are listed.
15. The notices and announcements of the proposed scheme will inform Bondholders of where they may obtain copies of the explanatory statement in relation to the scheme. Such copies will be physically available from Citigroup Global Markets Deutschland AG, which will be acting as the Company's information agent and from the website of Investkredit.
16. Mr Dean Godwin is a director of the Company and filed an affidavit dated 17th May, 2012, in support of the application. At paragraph 40 of that affidavit Mr Godwin explained that where notices are given of matters such as this, because of their importance to those with a beneficial interest in the securities, Clearstream will ensure that they are effectively brought to the attention of the direct participants who will in turn ensure that they are brought to the attention of the underlying beneficial owners or intermediaries. The method by which the direct participants will pass on the information to intermediaries or beneficial owners or by which intermediaries will themselves in turn pass on the information will vary considerably and include email, postal alerts and facsimile notifications.
17. In order to vote, the Bondholders will need to instruct the direct participant, (through any intermediary if relevant) using a form attached to the explanatory statement:-
(i) To send a letter to the information agent identifying the Bondholder and indicating the manner in which it will vote;
(ii) Instructing Clearstream to transfer the bonds to a temporary International Securities Identification Number (ISIN code) at Clearstream from the voting instruction deadline to and including a date on which the scheme becomes effective. Once transferred to the temporary ISIN code, the bonds may not be traded or transferred until they are released from the temporary ISIN code.
18. At the meeting, the information agent will reconcile the votes of Bondholders recorded in the direct participant letters against the temporary ISIN codes that will be provided to it by Clearstream. These procedures (which are explained in more detail in the explanatory statement) have been adopted to ensure that only actual Bondholders can vote at the meeting and in respect of the correct amount of bonds. In paragraph 44 of his affidavit, Mr Godwin informed us that these procedures generally follow those that have been adopted in a large number of schemes of arrangement which have been sanctioned by the courts of England and Wales and represent the most effective and feasible method of communicating with Bondholders, given the way in which the bonds are held.
19. The Court at the final hearing will wish to be satisfied as to the process by which notice of the meeting has been communicated to the Bondholders, as well as to the conduct and results of the meeting itself and the number of Bondholders who participated. Mr Temple informed us that an affidavit will be produced to that effect.
20. The Court noted that the notice of the meeting that will be sent via the information agent to Clearstream for onward transmission to the direct participants, whilst making it clear how the explanatory statement could be obtained, did not give a short summary of the main features of the scheme. We were told that it would be unusual to do so and although changes to the notice could be made, they would have to be approved by some twelve sets of advisers which would be difficult to achieve in the time-frame. It seemed to us on reflection that the complexity of some schemes would make short summaries difficult to achieve and potentially misleading, hence perhaps the practice not to do so. We were content not to pursue the point.
21. Accordingly we gave directions for the convening of one meeting of the Bondholders.
Authorities
Companies (Jersey) Law 1991.
Re Castle Holdco 4 Limited unreported judgment 23rd March (2009).
In the Representation of Computer Patent Annuities Holdings Limited [2010] JRC 011.
Practice Statement (Companies: Schemes of Arrangement) [2002] 3 All ER 96, [2002] 1 WLR 1345.
Companies Act 1985.
In the matter of the Representation of Vallar Plc [2011] JRC051.