Jersey Unreported Judgments

Companies - reasons for directions given in relation to a scheme of arrangement

[2019]JRC198

Royal Court

(Samedi)

7 October 2019

Before     :

Sir William Bailhache, Bailiff, and Jurats Thomas and Dulake

 

IN THE MATTER OF ARTICLES 125 OF THE COMPANIES (JERSEY) LAW 1991 AS AMENDED

Advocate J. M. Dann for the Representor.

Advocate N. A. K. Williams for the Respondent.

judgment

the bailiff:

1.        The Court sat on 20^th September to receive an application under Article 125 of the Companies (Jersey) Law 1991 as amended ("the Law").  The Representor seeks leave to convene a court meeting of scheme shareholders as defined in a draft scheme circular presented to the Court for the purposes of considering, and if thought fit approving, a scheme of arrangement proposed to be made among the Representor and the scheme shareholders, as defined in the scheme circular.  In this judgment, "the scheme" means the scheme as set out in the circular annexed to the affidavit of Mr Simon Radford sworn on 11^th September, 2019, and all the terms used as defined terms in this judgment are the same as the defined terms in that document.

2.        The scheme if implemented will enable the group of which the Respondent forms a part ("the bidder group") to acquire the balance of shares in the Representor which that group currently does not hold, actually or beneficially.  The subject of the scheme is approximately 39.9% of the issued shares in the Representor.  The shares held by the bidder group are excluded shares for the purposes of the scheme.

3.        The Representor is a Jersey company which is listed on Euronext Amsterdam and on the Vienna Stock Exchange.  If the scheme becomes effective, the Representor will be de-listed on the two exchanges.  As is apparent, this is a members' scheme and not a creditors' scheme.

4.        The Court gave a useful summary of the procedure in Re Computer Patent Annuities Holdings Limited [2010] JRC 011 when it described the stages by which a scheme of arrangement under Article 125 of the Law becomes binding on shareholders:-

"(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."

5.        The Court was presented by Advocate Dann with a draft order, and having heard argument agreed to make the order in the terms prepared.  In essence, there will be a meeting of the scheme shareholders (all shareholders in the Representor other than the bidder group) at which the offer to purchase the shares of the scheme shareholders will be considered.  It is clear that it is appropriate that there should be a meeting of the scheme shareholders to consider the offer which has been made to them, and equally importantly, given that it is a meeting of the Representor, that the class of members attending the meeting does not include the bidder group.  The former class of shareholders has an interest either in retaining their shares or disposing of them for the highest possible price, and the latter class of members has an interest in acquiring the shares at the best possible price.  Their private interests as shareholders are therefore different and there should be a different class meeting of the putative transferors, before such a transfer is imposed on them by the court.  I have not received any significant submissions on the point, and these comments should be seen in that light.

6.        In Re UDL Holdings Limited [2002] 1 HKC 172, Lord Millett NPJ gave the decision of the Court of Final Appeal in Hong Kong in relation to a creditors scheme of arrangement where there had been only one class meeting of all creditors and the scheme had particular impact on former employees who would have been preferential creditors.  At page 179, Lord Millett said this:-

"The principles upon which the creditors or members should be grouped into classes for the purpose of a scheme of arrangement under S166 or its equivalent have been considered by numerous courts in a number of different common law jurisdictions over more than a century: in England, see Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [191] 1 Ch 213 (CA); Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 (CA) at 279 - 580 (Per Lord Esher MR) and 582 - 583 (per Bowen LJ); Re United Provident Assurance Co Ltd [1910] 2 Ch 477; Re Hellenic & General Trust [1976] 1 WLR 123; Re BTR plc [2000] 1 BCLC 740 (CA) at 745 - 748 (per Chadwick LJ); RE Hawk Insurance Co Ltd [2001] EWCA Civ 241 (CA) at paras 13 - 33 (per Chadwick LJ); in Hong Kong, see Re Industrial Equity (Pacific) Ltd [1991] 2 HKLR 614 at 620 - 625 (per Nazareth J); in Australia, see Re Chevron (Sydney) Ltd [1963] VR 249; Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 - 149; Re Landmark Corp Ltd [1968] 1 NSWR 759 at 766; Nordic Bank plc v International Harvester Australia Ltd [1983] 2 VR 298 at 303; re Linter Textiles Corp Ltd [1991] 2 VR 561 at 565; Re Bond Corp Holdings Ltd (1991) 5 ACSR 304 at 313 - 317; Re NRMA Ltd (1999 - 2000) 33 ACSR 595 at 616 - 617; and in South Africa, see Rosen v Bruyns NO [1973] 1 SALR 815 at 820 - 821 and Borgelt v Millman NO [1983] 1 SALR 757 at 769.

There is a notable degree of consistency in this line of authority.  The principle upon which the classes of creditors or members are to be constituted is that they should depend upon the similarity or dissimilarity of their private interests arising from matters extraneous to such rights."

7.        At page 181, Lord Millett added this:-

"Thus creditors with different and potentially conflicting interests arising from circumstances unconnected with their interests as members of the class are not precluded from attending and voting at a meeting of the class.  But while their presence does not invalidate the result of the meeting, it may lead the court to decline to sanction the scheme."

8.        Lord Millett explains in particular Re Hellenec and General Trust Limited, which was relied upon by the applicants in Re UDL Holdings Limited as showing that separate meetings should have been held because the shareholders had conflicting interests rather than different rights.  Lord Millett said this at page 182:-

"That this was not because M and the other shareholders had conflicting interests, nor because they had different rights to start with.  M's legal rights at the outset were the same as those of the other shareholders.  What put M into a different category from the other shareholders was the different treatment it was to receive under the scheme.  The other shareholders were being bought out. In commercial terms M was transferring its shares to its own parent company and obtaining for its parent company the right to acquire the remainder of the shares from the other shareholders.  The rights proposed to be conferred by the scheme on M and the other shareholders were commercially so dissimilar as to make it impossible for M and the other shareholders to consult together with a view to their common interest, for they had none."

9.        That is just the point here.  The bidder group and the minority have different interests in this scheme.

10.      But in case it should have been regarded as controversial, we add that the Court, as a Convention compliant body under the Human Rights (Jersey) Law 2000, is required to give effect to the rights of property contained in Article 1 of Protocol 1.  For the Court to sanction a scheme upon the basis that the company had resolved to approve the scheme in general meeting when over 50% of those voting were those standing to gain the benefit of the forced sale of shares upon the minority would not in our judgment be Convention compliant.  It would not be enough to say that the presence of the bidder group would not invalidate the result of the meeting although it might lead the Court to decline to sanction the scheme.  It is far more fundamental than that.

11.      So in our judgment, none of this is particularly controversial and no judgment, so it seems to us, would normally be necessary in relation to this first directions application.  However, three points have arisen in respect of which we think it would be helpful to make some observations.

12.      The first observation is that under the Articles of Association it appears that only 14 days' notice of the Court meeting to consider the scheme circular is necessary.  As the court meeting is intended to take place on 25^th October in Jersey, the convening notice could therefore be sent out as late as 14 clear days before that date.  However the Representor has indicated that it is hoping to send out the convening notice on or about 27^th September.  This will give an extra two weeks' notice or so of the court meeting.  We have not incorporated this as part of our directions order, but we certainly do take the view that as much notice to shareholders as is reasonably possible needs to be given.  There are two reasons for this.  The first is that it appears that the price offered to the scheme shareholders may be contentious.  The Representor agreed with the bidder group that in order to ensure that the best possible price of for shareholders was obtained, there should be a "seven week go shop period" commencing on 23^rd July and expiring on 10^th September.  The rationale for the go shop period was to assist in providing the independent committee of directors with the comfort and assurance that they had properly discharged their duties in obtaining the best value for the scheme shares.  Nonetheless we have noted that the go shop period included a substantial part of what is frequently described as a summer break, and it may be that during that period there was potentially less interest in the respective investment advisers doing sufficient preparatory work to reach a conclusion as to whether they would be interested in going to the next due diligence phase. 

13.      The second reason is that we are informed that the nature of the shareholdings in the Representor is such that the overwhelming majority of shares are held by Nederlands Centraal Instituut voor Giraal Effectenverkeer BV (Euroclear); and the particular terms upon which Euroclear hold the shares are that there are in some cases layers of different trustees or custodians between Euroclear and the ultimate beneficial owner.  Theoretically under the Articles of Association, notice of the court meeting needs only to be given to shareholders, but if in practice the Court should focus on ensuring that notice is effectively given to the ultimate beneficial owners through a succession of custodians, trustees or nominees, then it is apparent that there is every risk of those beneficial owners having a relatively short time to consider their position if the Articles were to be strictly complied with.  We therefore encourage the Representor to give the maximum notice of the court meeting as is practically achievable.  At the sanctions hearing, this may be a material consideration - and we put it no higher than that - when considering the extent of the voting on the scheme circular.  Of course the Articles say what they say, but nonetheless we consider the unusual way in which Euroclear hold a number of the shares in question, a matter to which we will return shortly may be relevant. 

14.      The second observation which we wish to make concerns the timetabling for de-listing the shares in the Representor in the light of the proposed mechanism for payment of the purchase price.

15.      The bidder group has proposed a price of EUR3.75 per share if the scheme is approved and sanctioned.  That price will be paid by the declaration of a special dividend and the balance of EUR3.15 in cash.  If for any reason the special dividend cannot be paid, then the offer is a cash payment of EUR3.75 per share.  It is currently thought that the special dividend will be paid at some point in November, and that the de-listing will take place on or about 2^nd January.  There is therefore a probability of six or seven weeks between the payment of the special dividend and the de-listing.  Theoretically and perhaps probably there will be trading in the shares in the Representor between those two dates.  The issue which arises is that payment of the overall price of EUR3.75 is therefore staggered over a period when shares may change hands and if that happens, the purchasers of those shares will not necessarily have had notice that as a result of the payment of the special dividend, there is a binding obligation which will result in the transfer of those shares at a later date effectively at a price of EUR3.15. 

16.      We are told that in practice there will be information publically available over the internet which will ensure that the market is well aware of the terms of the bid and that it is anticipated that once the special dividend has been paid, then in effect the market price will drop immediately from whatever its then current value is to EUR3.15 per share.  We would not be at all surprised if that indeed does turn out to be the case, but we make the comment that we think it would be desirable if the court at the sanctions hearing, if it gets that far, gives consideration to what undertakings have been given by the scheme shareholders, or what other protections should be put in place, if any, to ensure that bona fide purchasers of the shares after the payment of the special dividend do not suddenly find themselves making a substantial loss on their purchase.  Normally one would just leave those transacting on the different stock exchanges of the world to make their own enquiries and they take the risk of any investments they make: the only difference in this case is that the court will be party to the arrangements by sanctioning the scheme, if it does, which creates the opportunity for such losses to take place.  That is not an entirely comfortable position for a court to be in, and we think that the matter will need to be addressed at the time of the sanction hearing, assuming that takes place.

The headcount test

17.      The third issue which took some time at the directions hearing concerned what is set out in paragraph 11 of our order, which is in these terms:-

"That unless all of those votes received by any scheme shareholder (acting as a nominee on behalf of others) from underlying beneficial owners are either unanimously in favour or unanimously against the scheme, at the scheme court meeting, any nominee shareholder present and voting in person or by proxy shall be counted as having one vote for the scheme and one vote against the scheme for the purposes of the "majority and number" test prescribed under Article 125(2) of the Companies Law."

18.      The Representor perceived the need for this particular order because of the structure of the existing shareholding in the Representor which is as set out below:-

(i)        Aztec Financial Services (Jersey) Limited - 1 share.  Euroclear - 378,077,861 shares.  Simon Radford (an independent director) - 44, 174 shares.

(ii)       Various bidder group family members and associates - 10,000 shares.

19.      Aztec, we are told, will have a continuing relationship with the Representor, regardless of owners, and will not be voting.  There are four bidder related shareholders who, as Gazit Connected Holders, will not be voting as they have irrevocably undertaken to abstain from voting and otherwise to be bound by the scheme.  That leaves two shareholders able to attend and vote - Euroclear and Mr Radford.  Euroclear arithmetically is the registered holder of 99.96% of the scheme shares.  It also holds shares for the bidder group but these are excluded shares and will not be voted.  It appears that in accordance with the Dutch Securities Book - Entry Transfer Act and Dutch practice, underlying beneficial owners of shares in the Representor held through Euroclear hold their interests in such shares via custodians or via intermediaries who in turn hold such interests via custodians.  There are as indicated earlier multiple layers of custodian accounts and intermediaries behind Euroclear as the registered owner of the scheme shares.  It is said that it would be practically impossible to identify with any certainty the number of underlying beneficial owners of the shares in the Representor registered in the name of Euroclear. 

20.      That takes us to Article 125(2) of the Law which is in these terms:-

"If a majority in number representing -

(a)     3/4ths in value of the creditors or class of creditors; or

(b)     3/4ths of the voting rights of the members or class of members,

as the case may be, present and voting either in person or by proxy at the meeting, agree to a compromise or arrangement, the compromise or arrangement, if sanctioned by the court, is binding on -

(i)      all creditors or the class of creditors; or

(ii)      all the members or class of members,

as the case may be and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company."

21.      We are informed that this Article is either similar to or identical with the terms of Section 425 of the Companies Act 1991.  We are also told that both in England and in Jersey, the paragraph has been construed as setting a two part test - leaving aside the creditors question, there must in a case like the present, be three-quarters of the class of members voting on the scheme agreeing to the compromise or arrangement in order for the Court to be able to sanction it, and secondly, that three-quarters or more majority must be matched by a majority of shareholders voting at the court meeting.  That causes an obvious problem where there will be only two voters at the court meeting - Euroclear and Mr Radford.

22.      We go on to explain below why we have included paragraph 11 in our directions order but we should like to make it clear that this paragraph, like the rest of the order, is subject to paragraph 18 of that order which gives liberty to apply.  It is important to make that clear because we have made our best assessment as to how Article 125(2) can work practicably in the circumstances of the present case, but we recognise that this has been an order obtained effectively on an ex parte basis, and we have certainly not heard from individual shareholders who might wish to assert that the wrong test has been applied.  Such individual shareholders might of course be either Mr Radford, which is unlikely given that he supports the scheme, or any of the beneficial owners of the shares beneath Euroclear who change the structure in which the shares are held between now and the date of the court meeting.  It will therefore be open to the Court at the sanctions hearing to re-visit the determination which we have made now, which is at best only a provisional determination.  The alternative would have been to make no order at present and simply leave it to the sanctions court, but as we have received some argument, it seemed helpful to make at least some preliminary comments.

23.      We have not received any detailed submissions in relation to the issue as to whether Article 125(2) does genuinely require two tests - the headcount test and the voting rights test - other than to be told that it is received wisdom that it does.  That received wisdom is said to be the consequence of the language in paragraph (2) of "a majority in number".  We can see that that is certainly a possible construction of the paragraph, but as this case demonstrates, it is capable of operating in a very inconvenient way given the commercial realities of how shareholdings may be structured in the 21^st century, and it is far from obvious that this construction is necessary to give appropriate protection.  If the headcount test does indeed form a requirement of Article 125(2), then it means that the Court has no power to sanction a compromise or arrangement if the headcount test is not satisfied.  But where is the logic in such a provision?  If one contemplates a simple company structure of ten shareholders where two of them hold 90% of the shares and the remaining eight hold the balance of 10%, why should a possible six or more of those shareholders have the ability to remove the Court's jurisdiction to sanction an arrangement which the majority of the shareholders in the equity of the company consider to be to its and their benefit?  Indeed, the minority shareholder provisions in the Law contain their own structure for ensuring that there is no damage done to minority interests, or alternatively that a mechanism is found to deal with minority interests where that is the right way to take the matter forward.  A court is well able to reach an equitable conclusion on the facts of any particular case.  Of course, if the language of the statute bears no other construction, one has to live with it, and if that were to be the position, then it seems to us that the sooner this provision is given some attention by the legislature, the better.  We are told that some jurisdictions have removed the headcount test from their equivalent of Article 125(2) and in our view that would be very desirable, assuming it to be necessary.

24.      Whether it is necessary depends upon the construction of the Article.  It may be possible to construe that paragraph as being clumsily drafted but in fact requiring only the stipulated majority in terms of value or voting rights.  As we have not been addressed on that, and on the application of Pepper v Hart [1993] AC 593 other material might be relevant, which has not been produced to us, we take it no further at the present time.

25.      Advocate Dann submitted that the terms of paragraph 11 of the draft order as set out above are consistent with the approach which has been taken in this Court and elsewhere.  Dealing first with the position in England, the only authority put to us in this connection was Re Equitable Life Assurance Society [2002] BCC 319, a decision of Lloyd J in the Companies Court.  In fact the issue of the headcount arises only tangentially.  It followed upon a passage where Lloyd J first considered whether a particular shareholder who represented different individuals, beneficially entitled, might cast different votes in relation to the scheme.  At page 326D, he said this:-

"I am asked to direct that a particular scheme policy-holder may, if so desired, vote either all of the voting value or only part of the voting value of a particular policy, i.e. may abstain in respect of part of the voting value, or may vote different parts of the voting value in different ways.  This is a point that has, as I understand it, arisen in practice on schemes under S.425 and has never been commented on adversely, but, equally, has never been the subject of a decision of a court that this sort of procedure can be applied ..."

26.      Having noted that a shareholder can cast votes in respect of such shares as it holds and vote different shares in different ways, and that where that is not possible for nominees or trustees, they might be able to resolve the problem by transferring particular interests into the names of different nominees, the judge rightly noted also that this would not necessarily always be possible and even if it were, it would add an undesirable and purely technical formality which would involve expense and might involve unforeseen difficulties.  He therefore continued:-

"[Mr Moss] urges me to conclude that the general terms of S.425 permit the Court to direct that in calculating the majority by value, the proportion represented by the value of the claims of the creditors voting in favour, the Court can direct that a particular creditor may vote both for and against, or may vote in part one way and abstain as regards the balance of the debt and that the same could apply logically to members, if the scheme were promoted in respect of members.

It seems to me that Mr Moss' submission is justified. The wording of the subs. (2) is general. It is certainly true that if one were reading it at a first reading, it might not occur to one that, of the however many numbers of creditors there might be in the particular class according to a headcount, you could find one of those, or any given number of those, voting different ways in respect of different parts of his claim.

... It seems to me it would be inappropriate to construe these general words as not permitting a particular member or creditor to cast different parts of the value of his claim or his membership rights in different ways."

27.      It was from this point which the judge had been asked to address that he then made the statement which gives rise to paragraph 11 of the order which we have made:-

"That does, in a sense, produce an oddity, because if you had, let us say, in an extremely simple case, ten members, one of whom wished to cast a split vote, you would really have to count that person on the headcount both for and against. So you would have on the face of it eleven members voting.  But since that person would be on both sides of the headcount, both in the 'yes' and the 'no' lobbies, that makes no different to the calculation of the majority in number, whereas it permits an appropriate way to achieve and calculate the true majority in value."

28.      It is clear therefore that Lloyd J assumes that the headcount test is a second part of the test under S.425, and that it would be appropriate where one shareholder casts a vote both for and against the scheme to treat for headcount purposes that shareholder as appearing in both lobbies.

29.      It may be possible to argue that that, on the face of it, means that if a shareholder can be treated as two shareholders given the different way he votes his shares, the split voting shareholder ought to be treated as however many persons for the purposes of his vote as nominee interests he represents.  Ultimately that leads to a conclusion that there is no difference between the headcount test and the value or voting rights test, because one looks in reality at where the equitable interests lie - and we have to say that seems to us to be much the more sensible way of looking at it.

30.      The issue arose in Jersey in Re Computer Patent Annuities Holdings Limited [supra] where, having referred to Re Equitable Life at paragraph 17 of the Court's judgment, Commissioner Clyde-Smith then noted the alternative solutions as follows:-

"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)."

31.      That case also concerned a scheme by which the bidder would acquire the whole of the issued share capital of the company.  The scheme shareholders were 18 nominee companies holding for 305 beneficial owners, and the question considered by the Court was how the votes of the meeting should be counted by the registrar of the company so as to give effect to the wishes of the beneficial owners in a manner consistent with the legislative provisions under the Law.  The Court referred to Re Equitable Life Assurance Society and noted that it had two options proposed to it:-

(i)        Allotting each scheme shareholder one vote in circumstances where any scheme shareholder voting both for and against the scheme would also be allotted one vote for and one vote against for the purposes of the headcount test; or

(ii)       Allotting each scheme shareholder one vote, divided into fractions of a vote in accordance with the number of that scheme shareholder's underlying beneficiaries.

32.      It is clear that the Court noted that for the purposes of determining whether the majority number represented three-quarters or more of the voting rights of the scheme shareholders, the total number of scheme shares voted by all the scheme shareholders should be counted.  The Court considered that the first option could lead to absurd results.  If for any scheme shareholder a majority of beneficial owners voted in favour with one voting against, the 90% threshold could be exceeded without a majority in number.  There was also risk of deadlock in the event that all of the nominees split their votes even if the underlying beneficial owners were overwhelmingly in favour of the proposal.  For this reason the Court accepted the company's proposition that the second option was to be preferred, in effect looking through the nominee companies to treat each beneficial owner as if he or she were a shareholder. 

33.      The second option of course is not possible in the present case because the company is unable to identify the beneficial owners by virtue of the structure by which Euroclear holds the shares.  The Court notes in passing but with interest that in the current international debates as to how countries can ensure that there is a public register of beneficial owners, no one seems to have paid much attention to the practical consequences of an arrangement by which Euroclear holds shares in a particular company, and the impact of Dutch law in that connection. Indeed, reconciling this mechanism with the existing regulations intended to operate as a defence against money laundering might be thought to be problematic because no one, other than the beneficial owners and the immediate nominee or trustee above them in the chain necessarily knows who the beneficial owners are.  The rationality of a scheme for a register of public beneficial ownership, and indeed its proportionality having regard to Article 8 Convention Rights may well give rise to interesting litigation in the future.  All that is by the by, and the fact remains that the option pursued in CPA Holdings Limited is not available to us today.

34.      Leaving aside the possible construction of Article 125(2) that all that is required is just over 50% of the number of shareholders voting, and 75% of voting rights of the members, one is left with relatively few options in a case such as the present.  We have had the advantage of reading the opinion of Mr Martin Moore QC who recommends this solution as being the approach which the English courts would take to a similar problem under Section 425 of the Companies Act, and given that we are apparently driven to both a headcount test and a percentage of voting rights test, there would seem to be no other way in which we can make sense of the company's position having regard to the statute. That all goes to emphasise that unless an alternative and imaginative argument is adduced as to the construction of Article 125 as it now stands, it would seem that perhaps the legislature should give further consideration to this Article in early course.

35.      The decision of the company at the court meeting of course does not mean that the sanction of the Court must be given at the sanctions hearing.  The way in which the voting actually works in the court meeting will no doubt be a material factor for the Court to take into account at the sanctions hearing.

36.      For these reasons we have made the directions which we have.

Authorities

Companies (Jersey) Law 1991. 

Re Computer Patent Annuities Holdings Limited [2010] JRC 011. 

Re UDL Holdings Limited [2002] 1 HKC 172. 

Human Rights (Jersey) Law 2000. 

Pepper v Hart [1993] AC 593. 

Re Equitable Life Assurance Society [2002] BCC 319.