Jersey Unreported Judgments

Companies - reasons for granting orders in relation to scheme of arrangement and reduction.

[2011]JRC230

Royal Court

(Samedi)

6 December 2011

Before     :

W. J. Bailhache, Q.C., Deputy Bailiff, and Jurats Le Cornu and Nicolle

 

IN THE MATTER OF POLYUS GOLD INTERNATIONAL LIMITED ("THE COMPANY")

AND IN THE MATTER OF AN APPLICATION PURSUANT TO ARTICLES 63 AND 125 OF THE COMPANIES (JERSEY) LAW 1991

Advocate M. H. Temple on behalf of the Company.

judgment

the deputy bailiff:

1.        On 5^th October, 2011, the Court sat to receive an application by the Company for orders convening a meeting of shareholders pursuant to Article 125(1) of the Law for the purposes of considering and, if thought fit, approving (with or without modification) a scheme of arrangement (the "Scheme") proposed to be made under that legislation between the Company and the holders of the Scheme Shares (as defined in the Scheme).  The Court made such an order as requested by the Company, together with a number of supplementary procedural orders. 

2.        We were also asked to order that Article 62(3) to 62(5) inclusive of the Law should not apply to the Company's application for confirmation of the reduction which comprises part of the Scheme, if and when such an application is made, and we also made that order.  We indicated that short reasons would be given in due course, and these are those reasons. 

3.        As was set out by the Court in 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 summons 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 three/fourths of 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 arrangements ..."

4.        In that case, the Court also observed that there was a fourth stage in that particular scheme namely an associated reduction of capital, upon which the scheme was conditional.  That is also the position in the case of the scheme which is currently before us. 

5.        We are concerned today with the first stage and, in part, the fourth stage. 

6.        The Company is the holding company for the Polyus Gold Group, headquartered in Moscow.  Through subsidiary undertakings, the Company operates mines, including development and exploration projects, in Russia, the Republic of Kazakhstan, Romania and Kyrgyzstan. 

7.        Nearly two thirds of the Company's issued ordinary shares are held by a custodian, which holds those shares on behalf of a depositary as a bare nominee.  For every share held by the custodian, the depositary has created and issued one level one global depositary receipt (a "GDR").  The GDRs are admitted to the official list of the UK Listing Authority and to trading on the main market of the London Stock Exchange.  In contrast, the ordinary shares are not listed or traded on any stock exchange.  Investors wishing to invest in the company by acquiring securities on the London Stock Exchange would only be able to purchase GDRs issued by the depositary.  These can also be acquired in off market transactions. 

8.        The rights of an investor who acquires a GDR are governed by the terms of a deposit agreement made between the Company and the depositary.  GDRs are broadly intended to provide the holder with economic rights that are equivalent to those attaching to the underlying ordinary share held by the custodian and represented by the GDR.  Thus if the company pays a dividend on the ordinary shares, the depositary is required under the deposit agreement to pass on to the GDR holders the US dollar equivalent of the dividend received from the custodian as registered holder of the ordinary shares, net of the fees and expenses of the depositary.  Similarly, if the Company calls a general meeting of shareholders, the deposit agreement requires the depositary to notify the GDR holders that a meeting has been convened and to seek voting instructions from them in relation to the resolutions proposed.  The depositary is only to instruct the custodian to vote for or against a particular resolution proportionately with the number of ordinary shares in respect of which it has received voting instructions.  Thus, where a GDR holder does not provide voting instructions in relation to the Scheme, the ordinary shares which are represented by those GDRs will not be voted. 

9.        The question for us today therefore is to consider what meeting or meetings are necessary to be summoned.  We must ensure that those who are affected by the compromise or arrangement which is proposed have a proper opportunity of being present in person or by proxy at the meeting or meetings at which the proposals are to be considered and voted upon. 

10.      In relation to the Company, there is only one class of shareholder, and a single meeting of shareholders is therefore adequate to ensure that the shareholder interest is represented.  The question is whether any separate step needs to be taken in respect of the GDR holders.  In our view it is clear that no such separate step is needed because the GDR holders will have the opportunity of expressing their views on the proposed scheme by giving instructions to the depositary which will, as an associated company of the custodian, ensure that the custodian votes shares in accordance with the GDRs holders' wishes.  We are informed by Advocate Temple that neither the Company nor the depository will necessarily know the identity of all the GDR holders.  It is therefore impossible for the Company to give notice of the proposals to the GDR holders itself.  However, the depositary will become aware of the proposal by service of the relevant notices on the custodian, which is its nominee as well as an associated company, and the depositary will then be obliged under the deposit agreement to take steps to identify and give notice to the GDR holders of the scheme.  Our understanding is that postal copies of the circular will be sent by the depositary to each of the GDR holders that have been identified by it and that an affidavit will be produced at the next court hearing confirming that this was done prior to the Court meeting.  We have indicated that we think this is important because the Court will want to be satisfied that the GDR holders have had notice of the scheme in order that they can have the opportunity of instructing the depositary as to how the shares which correspond to their GDR holding should be voted at the Court meeting. 

11.      The second matter which arose concerned the possibility that the scheme might infringe some Kazakhstan legislation.  In that event, the Kazakh authorities could challenge the issue of Polyus Gold shares to New Polyus Gold and the issue of New Polyus Gold shares to Polyus Gold shareholders; assert their right to the Polyus Gold groups Kazakh assets and terminate the existing agreements for sub-sole use in Kyrgyzstan.  Clearly the Court makes no findings as to whether this is or is not a risk.  Our sole concern is as to whether the existence of the risk is brought to the attention of shareholders and, on examination of the circular, we are satisfied that appropriate notice to shareholders is given within it. 

12.      The third question which arose is that one particular shareholder, Jenington International Inc, incorporated in the British Virgin Islands, also holds some GDRs and thus could give instructions to the depositary in respect of that holding.  It is a fully owned subsidiary of the company and by virtue of Article 26 of the Companies Law, it cannot vote its shares on this scheme.  It has also given notice of its intention not to vote its GDRs and this is contained in the circular. 

13.      The substance of this scheme is an arrangement involving the substitution of a holding company registered elsewhere for the holding company registered in Jersey, as with the scheme considered by the Court in Representation of Vallar Plc [2011] JRC 051.  The broad purpose of the present scheme is to enable the shares of the holding company of the company's group to be included in the FTSE 100 Share Index.  Under the FTSE ground rules for the management of the different share indices, it is required in relation to a company registered outside of the UK that not less than 50% of its shares must have a "free float" that is be held in public hands.  Less than 50% of the shares in the company are so held.  The free float requirement does not apply in the same way to a company registered in the United Kingdom and the directors of the company consider that the advantages which would accrue from having the shares in the holding company included in one or other of the FTSE indices make it desirable to alter the group structure in the manner proposed. 

14.      We turn next to the order that Articles 62(3) to (5) should not apply in relation to the reduction in company's capital. 

15.      This Court has accepted on a number of occasions that there are three conditions which are to be satisfied for a reduction of capital to be approved, namely that:-

(i)        the reduction is for a discernable purpose and has been properly explained to shareholders;

(ii)       the shareholders are treated equitably; and

(iii)      any creditors are not prejudiced. 

16.      In this case the purpose of the reduction of capital is to give effect to the scheme.  This is fully set out in the circular, which means that all shareholders have been given the opportunity of considering the merits of the proposal and accordingly are treated equitably.  They will be asked to pass a special resolution approving the reduction of capital.  They will be asked to approve the scheme and its implementation.  The Court will not provide sanction to the scheme and confirm the reduction of capital unless the resolutions are duly passed by the necessary majorities.  We are satisfied therefore that the shareholders are being treated equitably. 

17.      The last question is whether there will be any prejudice to creditors of the company.  It is clear that no monies representing capital will actually be paid out of the company.  We note the company's undertaking to the Court that no capital will be paid out between the reduction of capital taking effect and the recapitalisation of the company by the issue of new ordinary shares to New Polyus.  The reduction of capital is therefore purely technical in nature and in the circumstances the interests of creditors of the company will not be affected.  The company's scheme envisages that shareholders in the company will at the end of the day have exchanged their shares for shares in New Polyus on a one for one basis.  The overall financial status of the company's group is unaffected by the scheme - there is no reduction in the assets of the company, no payment of capital to a shareholder, no diminution of unpaid liability on a share and in our view therefore no reason why we should not direct that Article 62(2) to 62(5) of the Law should not apply to the reduction of capital which is involved in the scheme, and we make that order accordingly. 

18.      For all these reasons we have made the orders sought. 

Authorities

Companies (Jersey) Law 1991.

Representation of Computer Patent Annuities Holdings Limited [2010] JRC 011.

Representation of Vallar Plc [2011] JRC 051.