DEE VALLEY GROUP PLC
13th March 2017
In order for a scheme of arrangement under Part 26 of the Companies Act to obtain the sanction of the Court S.899 of the Companies Act 2006 requires that it must first be approved by a majority in number representing 75% in value of the creditors or class of them or members or class of them, (as the case may be) present and voting either in person or by proxy at a meeting summoned by the Court. The achievement of a majority in number is a jurisdictional hurdle which must be passed. Conversely, if the majority in number is not achieved then the court has no jurisdiction to sanction a scheme, no matter how objectively beneficial it may be.
On 8th February 2017 Sir Geoffrey Vos, the Chancellor of the High Court gave judgment in Dee Valley Group plc [2017] EWHC 184 (Ch) in which he answered one of the unanswered questions in English law and practice in this area, namely whether the deliberate manipulation of a shareholding in order to frustrate or to achieve the majority in number test was objectionable. In a Hong Kong case, Re PCCW Limited [2009] 3 HKC 292, the Court of Appeal had roundly rejected an attempt to achieve a majority in number by manipulating shareholdings. Hitherto the converse situation where share manipulation had been used to try to vote down a scheme had not been considered by any Court until the Dee Valley case. The Court decided that the share manipulation in the case was objectionable, that the Chairman had been right not to admit the votes of members who had obtained their share through share manipulation and sanctioned the scheme.
As the holding of shares through nominees or central depositaries has become more commonplace the actual number of members of a company has become more and more out of sync with the numbers of individuals with the sole beneficial or economic interest in the shares. Nevertheless, it is the member, who is a person whose has agreed to become a member and whose name is entered on the register of members (s.112 of the Companies Act 2006) whose vote must be counted. The requirement for a majority in number of members has looked increasingly open to manipulation. Some jurisdictions, namely Australia, Hong Kong and prospectively Singapore, have dealt with the potential problems by making the attainment of the majority in number in members’ schemes a matter of discretion at the sanction stage rather than a jurisdictional hurdle. In the United Kingdom a similar approach was considered at the time of the Company Law Review during the build up to the Companies Act 2006 but was not taken further because share manipulation was not then thought to be a practical problem.
In Dee Valley Group plc the problem arose in a very acute way.
The facts
In the latter part of 2016 Dee Valley Group plc (“DV”) was the subject of competing take-over proposals from Severn Trent plc and Ancala Fornia Limited (“Ancala”). By the end of November 2016 the state of play was that Ancala had made a revised offer for the voting ordinary share capital of DV at 1,706p per share (“the Ancala Offer”). Severn Trent, through a bid vehicle Severn Trent Water limited (“ST”) had made a proposal to acquire by way of a scheme of arrangement the voting ordinary shares of DV at 1,825 p per share, with a loan note alternative (the Scheme”). The ST proposal was recommended by the Board of DV. Ancala had the benefit of irrevocable undertakings given by three shareholders, between them holding of 35.16% of the voting ordinary shares, to accept the Ancala Offer but which did not require the givers of the undertaking to vote against the Scheme, although they could not vote for it.
As one of only two Welsh water companies there was considerable concern amongst employees, customers, supplies, members of the local community and local politicians at the prospect of DV losing its independence.
On 30th November 2016 the Court directed DV to hold a Court meeting of Scheme Shareholders to consider the Scheme. At that time, the number of Scheme Shareholders entitled to vote at the Court Meeting was 830. By a notice dated 2nd December 2016 the Court Meeting was convened to be held on 12th January 2017.
In mid-December a single employee, a Mr. Cashmore, acquired shares in DV at a total cost of £8,420. Share certificates were issued to him on 20th and 21st December 2016. On 3rd January 2017 Mr. Cashmore delivered 443 stock transfer forms seeking to transfer to 443 separate people a single share each transferred by him to them by way of gift. On the 3rd and 4th January 2017 those transfers were registered and the extra 443 persons became members, thereby increasing the head count of Scheme Shareholders by roughly 50%. On the 9th January 2017 proxy forms from most of the new members were lodged by another employee; all voting against the Scheme. The evidence of Mr Cashmore was that he had let it be known that he was willing to donate a single share to anyone who “wanted their say” and that there was no prior agreement as to how the new members were to vote on the scheme or as to how to deal with any proceeds should either the Scheme be sanctioned or Ancala’s offer succeed.
On 10th January 2017 DV, accompanied by ST, applied ex parte to Registrar Derrett and obtained an order permitting the Chairman of the Court meeting to refuse to admit the vote of any member who derived title from Mr Cashmore. The Chairman was directed to report to the Court on the result of the meeting on the basis of that rejection and on the basis that the votes were admitted. DV put out an RNS explaining that the purpose of the application had been to ensure that all arguments could be ventilated at the sanction hearing without the Court having been deprived of jurisdiction
At the meeting, the Chairman rejected the votes of the new members. On that basis, the scheme had been approved by 363 members holding 1,454,463 shares in favour to 32 members holding 213,513 against. If the votes had been admitted the scheme would not have been approved with only 363 members voting in favour but 466 members would have voted against.
At the time of the meeting the Chairman did not have any information as to the motivation of the new members. DV had sent out notices to each of the new members under section 793 of the Companies Act 2006. Over 300 responded by saying that they wished to vote against the Scheme because they to save their jobs, a family member’s job or were concerned about the impact on customers, suppliers or the local community.
The sanction hearing took place over the course of three days starting on 25th January 2017.
The argument
DV (represented by Andrew Thornton of Erskine Chambers) took no active role in the argument as to whether the new member should have been allowed to vote. DV had in fact, in consideration for the opposing shareholders agreeing not to seek a costs order against DV, agreed to hold the opposing shareholders harmless on costs.
ST (represented by Martin Moore QC and Stephen Horan of Erskine Chambers) and a supporting shareholder, James Sharp (Rulegate Nominees) Limited, who represented 324 underlying beneficial shareholders with substantial economic interests in DV, (represented by David Chivers QC of Erskine Chambers) argued that the Chairman had been right to reject the votes of the new members. They did so on the basis that:
-A court meeting convened by order of the Court to consider a scheme was not subject to the same procedural or substantive rules as a general meeting of a company which is governed by the Articles of Association. No member had a pre-existing right to attend a Scheme meeting but had only such rights as were given by the Court order
-Such a meeting was a class meeting at which votes had to be exercised for the purpose of benefitting the class as a whole, and not for any extraneous reason. Reliance was placed on British American Nickel Corporation v O’Brien [1927] AC 369 and Re Holders Investment Trust Ltd [1971] 1 WLR 583.
-Share manipulation was inherently objectionable because it undermined the statutory process and that there was a difference between legitimate vote lobbying and an arrangement designed to create more votes to be cast in a pre-determined manner without regard to the substantive merits of the proposal. Reliance was placed on Re PCCW Ltd (supra), and especially dicta of Lam J.
-The application to Registrar Derrett was appropriate but not necessary in that the Chairman had an inherent power to exclude votes whether because it undermined the statutory process or because the Chairman reasonably believed that the member would be voting against the interests of the class.
-The subsequent revelation of the motives of some of the new members, via the responses to the S.793 notices, showed that they were not considering the interests of the class but wished to vote as employee, family member, customer, supplier or concerned member of the local community.
Mr Cashmore and 6 other shareholders (“the opposing shareholders”) (represented by James Potts QC of Erskine Chambers) supported by Ancala (represented by Edward Davies QC of Erskine Chambers) argued that the chairman had been wrong to exclude the votes of the new members. They did so on the basis that:
-The Chairman had no discretion to exclude the votes and had gone beyond the legitimate scope of a chairman’s authority which was to hold a meeting of members at which as many as possible might participate. The application to Registrar Derrett should never have been made, especially as it was not on notice and interfered with shareholders’ property rights. The Registrar should have adjourned the meeting, fixed an earlier record date or had the votes counted and argue the point at the sanction hearing.
-A shareholder had a property right to vote at a scheme meeting and on the principles of North-West Transportation v Beatty (1187) 12 App Cas 589 could vote as they liked. Pender v Lushington (1877) 6 Ch.D 70 showed both that a right to vote was determined by the Articles and that vote splitting was not objectionable since in that case vote splitting had succeeded, albeit not on a scheme.
-The opposing shareholders argued (but Ancala did not) that there was some restriction on the members’ right to vote because it involved a majority binding a minority and that the proper test was that set out in Re Charterhouse Capital Ltd [2015] EWCA Civ 536. In that case the Court of Appeal decided that it was for the shareholders to decide whether the exercise of voting power was in the interests of the relevant class and the court would only interfere if no reasonable person could consider that the exercise of the power was in the interests of the class. Further, the burden was on the person seeking to impugn the vote to show that the Court should intervene on that basis.
-The articulated reasons for voting were perfectly acceptable reasons for wishing to vote down a scheme. It was not simply a question of money. The consideration of the interests of the class was capable of including matters relating to employees, customers, suppliers and the impact on the local community.
The findings of fact
Although the case turned mainly on the correct legal principles to apply the judge made three important factual findings as follows:
-The evidence of the 7 shareholders as to their motivations could not be assumed to be representative of the 434 shareholders who voted against the scheme.
-The only material before the Chairman at the meeting date was that there had been a roughly 50% increase in the share register by a flood of holders of a single share for which they had paid nothing and in respect of which they had uniformly voted against the scheme.
-The only possible inferences to draw from the conduct of the new members was that
1. The furtherance of a share manipulation strategy to defeat the scheme using the majority in number jurisdictional requirement;
2. No consideration could have been given to the interests of the class they joined;-
3. They had a pre-conceived notion to vote down the scheme;
4. There was no other reason to acquire a single share after the court meeting had been convened.
The decision
Broadly, the Court decided the case on an abuse of statutory process ground.
The Court accepted the submissions that a court meeting was not to be equated to a general meeting and that the Court had an interest in ensuring that the integrity of the court meeting was protected against manipulative practices such as share-splitting that would frustrate its statutory purpose. It accepted that the practice of share-splitting was objectionable irrespective of the sincerity of those who had embarked on it.
The Court accepted that the proper test was that of voting in the interests of the class rather than the more property based approach exemplified by North-West Transportation v Beatty (supra). It did not in terms reject the Re Charterhouse Capital test but it was probably inherent in the finding that none of the new members could have considered the interests of the class.
The Court did, however, accept that the interest of a class can be complex and will not be purely financial or short-term. The thought processes of members of a class are complex and intertwined when assessing the interests of the class and unless it could be shown that members were motivated by their own interests in a quite different capacity it would be hard to reject votes by looking into the members’ minds. He eschewed the notion that in every case there would be an opportunity to examine motives because ordinarily there would be no evidence to allow such a process. It would not generally be appropriate to interrogate members as to why they are voting in a particular way and in the author’s view such members would be entitled to decline to answer any questions and the court would not on that ground alone draw an adverse inference.
Finally, he held that the Chairman had discretion to reject the votes and had not needed a protective order of the Court but that the approach to Registrar Derrett had been legitimate and appropriate. The lack of notice was not objectionable since the process was not akin to ordinary litigation.
Appeal
The opposing shareholders were given leave to appeal not because the Court felt there were reasonable prospects of success, which were described by the Court as low if not negligible (which was a little harsh, in the author’s view) but on the “other compelling reason” ground bearing in mind the importance of the decision to the scheme jurisdiction. For example, the issues would be equally pertinent to a creditors’ scheme involving traded debt.
The opposing shareholders also applied for advance funding from DV of £75,000 to pursue an appeal and a protective costs order against any adverse orders in the Court of Appeal. In the latter case on the grounds that without such protection an appeal would be stifled.
The Court made the protective costs order but declined the advanced funding. The court indicated that the opposing shareholders should be required to have some financial commitment in the process if an appeal was to be prosecuted.
In the event, the opposing shareholders decided not to appeal.
There would undoubtedly have been some interesting questions to be raised by both sides on appeal. Such as:
-The importance of timing. If it is acceptable for a long-standing small shareholder to consider non-financial considerations why should it make a difference that the small shareholders had only recently become a member?
-The relevant test. Is the test an objective one as suggested in Charterhouse Capital (supra) or is the test subjective as suggested by the British American Nickel (supra)?
-The relevant considerations Even if a shareholder in the position of a member of DV is entitled to have regard to a broader range of considerations than the purely short-term does the test require the shareholder to have at least considered the short-term financial impact?
-The chairman’s decision. Could the Chairman have acted without the protection of the Court’s order?
-Evidence before the Chairman. If, having regard to the evidence then available to the Chairman, he had been right to exclude votes but it later seems he could, or even should, have admitted the votes, does that go to jurisdiction or should it be a discretion issue?
-The relevance of the Chairman’s ruling. Could the Court decide whether the majority in numbers test had been satisfied irrespective of the Chairman’s ruling- in effect, can the Court overrule its own Chairman?
Ramifications
The decision should not be taken as a green light to chairmen of court of meetings to disallow votes of small shareholders or those without economic exposure to the company. Equally, it does not permit a chairman to enquire of motives of shareholders in voting but it does permit the chairman to have regard to existing, objective evidence and to draw inferences from it. What it does show is that the court has the weapons to prevent the statutory process of a scheme meeting under its direction from being subverted.
The facts in the case were very stark. In the author’s view the most significant facts were:
-The numbers involved – increasing the share register by 50% in one go
-The timing- occurring just before the meeting
-The gratuitous element- none of the new members had any significant economic interest
Whether a case with other facts would be decided the same way is difficult to say. In practice, in the author’s view, the situation where a caucus or pressure group attempts to defeat the majority in number without similar facts would be rare simply because the investment required to have a chance of working is likely to be beyond the inclinations of those with no previous connection with the company.
Nevertheless, the potential for abuse has been highlighted and, in the author’s view, the law should be changed so as to make the majority in number a discretionary factor. It has long outlived its usefulness as a jurisdictional requirement.
Mr Martin Moore QC and Mr Stephen Horan appeared for Severn Trent Water Limited
Mr James Potts QC appeared for the opposing individual shareholders
Mr Andrew Thornton appeared for Dee Valley Group plc
Mr Edward Davies QC appeared for Ancala Fornia Limited
Mr David Chivers QC appeared for James Sharp (Rulegate Nominees) Limited
