Jersey Unreported Judgments

Companies - re: Member's Scheme of Arrangement.

[2021]JRC060

Royal Court

(Samedi)

13 January 2021

Before     :

T. J. Le Cocq, Esq., Bailiff, and Jurats Ramsden and Hughes

 

IN THE MATTER OF THE REPRESENTATION OF ATLANTIC LEAF PROPERTIES LIMITED

AND

 IN THE MATTER OF ARTICLE 125 OF THE COMPANIES (JERSEY) LAW 1991

Advocate E. B. Drummond for the Representor.

Advocate J. M. Dann for the Offeror.

judgment

the bailiff:

1.        On 3^rd August 2020, this Court sanctioned a Member's Scheme of Arrangement (the "Scheme") relating to Atlantic Leaf Properties Limited (the "Company/the Representor") pursuant to Article 125 of the Companies (Jersey) Law 1991 (the "1991 Law").  At that point we indicated that we would give reasons subsequently.  These are those reasons.

Background

2.        The Company was incorporated in Mauritius on 11^th November 2013 and re-domiciled to Jersey on 1^st March 2019, by reason by which it was incorporated as a public no par value company with limited liability under the 1991 Law.  Its registered offices are in Jersey. 

3.        The Company is an income focussed UK REIT targeting commercial property in the United Kingdom.  Its purpose is to provide returns to investors through long-term investments in real estate. 

4.        There is one class of shares which are ordinary shares of no-par value.  As at 29^th May 2020, there were 50 registered shareholders of the Company's ordinary shares representing over 700 beneficial owners holding an aggregate 188,976,628 ordinary shares.  As at the time of the voting record the number of registered holders in the ordinary shares had changed to 52 representing 693 beneficial owners.  This change was as a result of normal shareholder trading.  The number of shares issued remain the same.   

5.        The Proposed Scheme was structured to give effect to the acquisition of the entire issued and to be issued share capital of the Company/Representor by South Downs Investment LP ("the Offeror").  The intention was to provide Scheme shareholders with a fair and reasonable consideration for their shares in the company and an opportunity to realise their investments at a significant premium to the price at which the company had traded over an extended period. 

The Convening Hearing

6.        On 10^th June 2020, the Bailiff, sitting alone had given directions and made orders relating to the convening of a "Court Meeting" of shareholders prior to the Scheme being placed before this Court for final sanction.  At that convening hearing the timetable was put to the Bailiff and he was directed to the appropriate authorities to determine the approach that should be taken.   

7.        Articles 125(1) and (2) of the 1991 Law provide as follows:

"(1)     Where a compromise or arrangement is proposed between a company and its creditors, or a class of them, or between the company and its members, or a class of them, the court may on the application of the company or creditor or member of it or, in the case of company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members (as the case may be), to be called in a manner as the court directs.

(2)       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."

8.        In Representation of CPA [2010] JLR Note 11, Representation of CPA [2010] JRC 011 the Court, at Paragraph 6 of the Judgment regarding setting up company meetings said this:

"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 of creditors if necessary be called.  It is at this stage that the Court should consider whether or not a summon separate class meetings and if so, who should be summoned to each meeting.  The Court will not look at the merits of this stage (see Re Telewest Communications Plc [2004] EWCH 92[4]).

(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."

9.        In the Telewest Judgment referred to therein, the Court stated at Paragraph 14:

".....it is important to keep in mind the function of the court at this stage.  This is an application by the companies for leave to convene meetings to consider the schemes.  It is emphatically not a hearing to consider the merits and fairness of the schemes.  Those aspects are among the principal matters for decision at the later hearing to sanction the schemes, if they are approved by the statutory majorities of creditors.  The matters for consideration at this stage concern the jurisdiction of the court to sanction the scheme if it proceeds.  There is no point in the court convening meetings to consider the scheme if it can be seen now that it will lack the jurisdiction to sanction it later.  This is principally a matter of composition of classes.  Under s.425, the court will have no jurisdiction to sanction the scheme if the classes have been incorrectly constituted.  It is perhaps unfortunate that this is the case and there is much to commend an approach which enables the court to sanction a scheme in an appropriate case, where the classes have been incorrectly constituted in a way which would not have affected the outcome of the meetings  But that is not the position under s.425 and the practice now is to deal so far as possible with issues of class composition at the first stage of the application for leave to convene meetings.  There might exceptionally be other issues which would go to jurisdiction and could be properly raised at this stage: see Savoy Hotel Ltd [1981] Ch 351.  What the court should not do is to consider the fairness of the scheme with a view to deciding whether at the later hearing it will or will not sanction it."

10.      At Paragraphs 19 -20 the Court said:

"19.  The approach to be adopted to the composition of classes for the purposes of s.425 has been the subject of a number of recent cases.  Two issues in particular have been considered.  First, the distinction between rights and interests has been underlined and it has been clearly reaffirmed that it is differences in rights, not interests, which are relevant to the composition of classes.  Secondly, the authorities have given important guidance as to the identification of relevant rights and the extent to which differences in rights requires different classes.  The leading English authority on this issue is the decision of the Court of Appeal in Re Hawk Insurance Co Ltd, on which both Mr Dicker QC for the companies and Mr Moore QC for the opposing bondholders have placed great reliance.  Both counsel also drew attention to the decision of the Final Court of Appeal of Hong Kong in Re UDL Holding Ltd [2002] 1 HKC 172.  The reasoned judgment in that case was given by Lord Millett sitting as a non-permanent judge of the court.  He analysed the relevant authorities in a number of jurisdictions, including in particular those dealing with the two issues which I have mentioned.  At pp. 184 - 185 he sets out a number of principles to be derived from the authorities, including the following:

"(2)  Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings.  Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.

(3)       The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights.  The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.

(4)       The question is whether the rights which are to be released or varied under the scheme or the new rights which the scheme gives in their place are so different that the scheme must be treated as a compromise or arrangement with more than one class."

20.   The test based on the similarity or dissimilarity of rights goes back to the judgment of Bowen LJ in Sovereign Life Assurance Co v Dodd.  He said ([1982] 2 QB 573), a little later in the passage which I have already cited:

"The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called.  It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest."

The significance of this passage is two-fold.  First, it makes clear that it is rights, not interests, which are the governing factor in the composition of classes.  Secondly, and it is this aspect that is central to the present case, it is the extent to which the relevant rights are dissimilar which will determine the composition of classes in any particular case." (Emphasis added)

11.      At the Convening Hearing the Court considered class composition, notice to shareholders, the conduct of the Court Meeting, how the majority in number (the headcount test) will be determined and the gap between the Effective Date and Completion Date during which trading of the company shares would continue.

12.      A particular issue had arisen by reason of the fact that there were restrictions on the ability for a physical shareholder meeting to take place as a result of the COVID-19 pandemic.  In Castle Trust Direct Plc [2020 EWHC 969 (Ch) the English High Court dealt with the practicalities of holding a Court Meeting in such circumstances and stated, at Paragraph 38 of the Judgment:

"...  It seems to me that the word "meeting" has to be construed in the context of the purpose for which it is used.  The purpose is the mechanism by which creditors or shareholders are able to come together and consult with each other, should they choose to do so, in order to make a collective decision on the rearrangement or compromise of their rights against the company.  It follows that the question is whether what is proposed enables that to happen by a process which has the essential characteristics of a meeting.  In my judgment those essential characteristics are a coming together sufficient to enable a consultation to take place."

13.      As to how "coming together" could be achieved by technology the Court, at Paragraph 42, said this:

"In my view, what is important for the purposes of a meeting to be held under Part 26 is that there can be said to be something sufficient to amount to a 'coming together' with the ability to consult.  A coming together for consultation is something that  is capable of being achieved by telephonic communication where those who are participating are able to hear and ask questions and express opinions, in circumstances in which everybody else who is present at the meeting is also able to hear, ask questions and express opinions.  Those seem to me to be the essential requirements of a meeting for the purposes of Part 26.  Can it be said at the end of the day that what is achieved under the terms of the meeting that is proposed constitutes a collective coming together for the purpose of consultation and during the course of which consultation is both achievable and (to the extent desired by creditors) actually achieved?" (Emphasis added)."

14.      An issue also arose in the convening applications to how the headcount test was to be determined.

15.      Article 125(1) of the 1991 Law requires a "majority in number" of members present and voting to agree on the Scheme.  Although some critique as to whether or not such a test exists it is to be found in the case of Atrium European Real Estate Limited v NB (2019) BV [2019] JRC 198 in the circumstances the Representor did not pursue that argument and proceeded on the basis that the test was apparent from the statute and must be met for the Scheme to be sanctioned.  A common critique of the 'headcount test' (as it is commonly described), and indeed a point which  was noted in Atrium European Real Estate Limited v NB (2019) BV [2019] JRC 198, is that such a requirement is no longer apposite for the modern world - particularly in the case of listed companies - owing to the widespread use of share trading accounts, brokers and nominee arrangements.  In the instant case most of the company shares are legally held via central securities deposit by participants, brokers or nominees on behalf of a number of beneficial holders. 

16.      The English case of Equitable Life Assurance Society [2002] BBC 319 states the principle that a member acting as a nominee can vote some of the shares it holds in favour of the Scheme and some against the Scheme and for the purposes of the headcount test such nominee would be treated as having voted one vote in favour of the Scheme and one vote against the Scheme.  That approach was scrutinised in the Representation of CPA [2010] JLR Note 11 Representation of CPA [2010] JRC 011 where there were eighteen nominees holding shares on behalf of 305 (identifiable) beneficial holders.  The Court was given two options concerning how the head count test should be applied.  Firstly, the Equitable Life option which meant that any Scheme shareholder voting unanimously either for or against the Scheme would be allotted one vote and any Scheme shareholder voting both for and against the Scheme be allotted one vote for and one vote against the Scheme.  If the majority in the number of the above votes were cast in favour of the Scheme the majority in number requirement would be satisfied.  Alternatively, it was put before the Court on that occasion that each Scheme shareholder could be allotted one vote which vote will be sub divided into fractions of a vote in accordance with the number of underlying beneficiaries on behalf of which the nominee Scheme shareholder held shares.  If the Scheme shareholder votes entirely in favour of or against the Scheme one vote should 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 shareholders are to vote in a particular way, will be counted for and against the Scheme.  If a majority in the number of the above votes are in favour of the Scheme, the majority in number requirement would be satisfied.   

17.      In CPA the Court adopted the latter approach and looked through the nominee shareholders to the beneficial owners. 

18.      In the instant case the Company sought an order in terms of the Equitable Life approach.  It was argued that it would have been administratively impossible to seek to adopt the CPA approach for the following reasons:

(i)        other than in circumstances where the ordinary shares are held by individual shareholders in their own name the proxy forms would be received from the relevant broker/nominee or depositary.  Although those broker/nominee or depositaries can be asked to give a breakdown as to how many beneficial owners are represented by the instructions given on the proxy form might represent that information is not typically apparent and therefore it may prove difficult to obtain information concerning such a breakdown let alone confirm the integrity of such information.  The Court was informed that that was not the market practice in South Africa for example, where most of the registered shareholders and beneficial owners are based in the instant case.  In short, the CSDP broker or nominee may not be willing to provide a breakdown, their systems may not be set up to provide the information, they may not provide the breakdown in time, the results they provide cannot be guaranteed as to accuracy and if only some respond and not others the information collated would be piecemeal in nature;

(ii)       In addition, whilst the CSDP broker or nominee may have details of the first level of beneficial owners in some cases there are likely to be complex beneficial shareholder instructions that sit beneath that level and it will not necessarily be possible to know how much further down the chain one must travel to identify the true underlying beneficial owner of the relevant shares;

(iii)      The Chairman of the Court Meeting would need clarity and certainty in order to determine at the Court Meeting, whether the headcount has been met.

19.      It was for those reasons that the Company asked the Bailiff to approve the use of the Equitable Life approach and the Bailiff did so.

20.      During the Convening Application the Court asked Counsel to ensure that a helpline would be available to those seeking to participate in the meeting by remote means.

21.      The Court made the Order set out in the Act of Court of 10^th June 2020.

The Sanction Hearing

22.      In the Application before us, the Sanction Hearing, the Court exercises its discretion in accordance with well-established principles.  An example may be found in the Representation of Shire PLC [2019] JRC 010 where at Paragraph 8 the Court listed the principles as:

(i)         Whether the provisions of the 1991 Law have been complied with;

(ii)        Whether the class of shareholders to be affected by the proposed scheme was fairly represented by those who attended the meeting and whether the statutory majority acted bona fide and without coercing the minority in order to promote the interests adverse to those of the class to whom they may purport to represent; and

(iii)       Whether the arrangement is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interests, might reasonably approve.  As part of this the Court may consider whether there is a so called "blot on the Scheme".

23.      As set out above, the Court at the Convening Hearing had considered different elements.  In the application before us, submissions were made as to how those elements had been dealt with as follows:

(1)       Class composition.  It was pointed out that the Court was, at the Convening Hearing, content to convene a meeting of only one class of shareholders on the basis that the non-voting shareholders as therein defined would not vote at the Court Meeting but will be bound by the result;

(2)       Notice to shareholders.  The Court had been content that shareholders be given notice in accordance with the proposal set out in the representation and would receive notice in enough time to enable them to exercise their rights to vote at the Court Meeting;

(3)       How the Court Meeting will be conducted.  In the light of the Covid-19 pandemic, the Court had agreed that the Court Meeting be convened by electronic means and that as suggested by the Bailiff a helpline had indeed been established;

(4)       How the majority in number (headcount) test would be determined.  It was confirmed that the Court had ordered the application of the Equitable Life test as set out above.

(5)       The gap between the Effective Date and Completion Date.  The Court had been content that this issue could be dealt with by way of disclosure.

(6)       The Court, at the Convening Hearing, had nonetheless indicated that any of the issues on which the Court had made findings to enable the Court Meeting to take place could be raised afresh at the time of the Sanction Hearing.

24.      The evidence before us was to the effect that the provisions of the 1991 Law had been complied with.  We were notified that applying the Equitable Life approach, 82.14% by headcount voted in favour of the Scheme at the Court Meeting held on 16^th July 2020, and 99.69% of the votes were cast in favour of the Scheme in each case more than the required statutory threshold.  There was no suggestion in our view that the views of the majority voting did not fairly represent the interests of the shareholders affected by the Scheme.  There is no evidence to suggest that the majority did not act bona fide or that they coerced the minority.  No party has appeared before us or given notice of any concern in connection with the Scheme in general or the Court Meeting in particular. 

25.      We observed that the turnout for the Meeting was relatively small at approximately 53.85% by number of registered shareholders.  We were directed to a statement of Bailhache, Commissioner in Representation of Vallar PLC [2011] JRC 125 where the Court, at Paragraph 6, said:

"it is true the number of shareholders attended the Court Meeting constituted only some 25% of those entitled to attend and vote but shareholder apathy is not uncommon.   None of those absent shareholders have expressed any reservations about the proposed Scheme of Arrangement and we are accordingly entitled to assume there are none.  The Scheme will affect all shareholders equally.  In any event it is not for the Court to strain to find reasons why a Scheme of Arrangement should not be sanctioned."

26.      In this case the Offeror for the shares was represented and confirmed and undertook to the Court that the Offeror would comply with the terms of the Scheme and that all of the conditions precedent were satisfied to the Offeror's satisfaction. 

27.      On the evidence we found that the necessary thresholds had been passed, and the Scheme was one that we could properly approve, and we accordingly did so. 

Authorities

Companies (Jersey) Law 1991.

Representation of Computer Patent Annuities Holdings Limited [2010] JLR Note 11

Representation of CPA [2010] JRC 011

Castle Trust Direct Plc [2020] EWHC 969 (Ch)

Atrium European Real Estate Limited v NB (2019) BV [2019] JRC 198

Equitable Life Assurance Society [2002] BBC 319. 

Representation of Shire PLC [2019] JRC 010. 

Representation of Vallar PLC [2011] JRC 125