Chairman of scheme meeting can disallow votes in manipulative share splitting instances (Dee Valley Group plc)

Corporate analysis: In this case, the High Court considered whether the chairman of a class meeting directed by the court in the context of a scheme of arrangement was right to disallow the votes of 434 individual shareholders who voted against the scheme where there had been share splitting. This is the first case in which a share-splitting exercise was undertaken in order to defeat a scheme of arrangement between a company and its shareholders.

Original news

Dee Valley Group plc [2017] EWHC 184 (Ch)

In this case, the High Court considered whether the chairman of a class meeting directed by the court (the Chairman) in the context of a scheme of arrangement was right to disallow the votes of 434 individual shareholders (Individual Shareholders) who voted against the scheme where there had been share splitting. This is the first case in which a share-splitting exercise was undertaken in order to defeat a scheme of arrangement between a company and its shareholders.

What was the background to the case?

This case arose in the takeover of Dee Valley Group plc (the Company) by Severn Trent Water Limited (Severn Trent) by way of a scheme of arrangement.

The Company applied to the court to sanction a scheme of arrangement between the Company and its members under Part 26 of the Companies Act 2006 (CA 2006). The scheme would enable Severn Trent to acquire all the issued share capital in the Company for 1,825 pence per share. The court directed that:

  • a meeting of the members be convened to approve or object to the proposed scheme, and
  • shareholders included in the Company's register of members as at 6pm two business days before the meeting would be entitled to attend and vote at the meeting

Following this direction, Mr Cashmore, a shareholder who objected to the takeover by Severn Trent, acquired additional shares in the Company and then transferred these shares to new shareholders (who were registered as such in the Company's register of members on 3 and 4 January 2017). Mr Cashmore had transferred one share each to 443 individuals who accordingly became new shareholders in the Company entitled to vote at the court-convened shareholder meeting which was held on 12 January 2017 (Court Meeting).

The Company applied to court for, and was granted, an order on 10 January 2017 (the Order). The Order gave the Chairman 'permission to reject the votes of any member of the Company holding a share or shares who shall have derived his, her or its shareholding by way of transfer from [Mr Cashmore]'.

At the Court Meeting, 466 out of the 828 members present (in person or by proxy) voted against the resolution to approve the scheme. However, more than 75% in value of the class of voting shares did support the scheme.

The Chairman disallowed the votes of some 434 Individual Shareholders opposing the scheme because each of the shareholders had acquired one share each by way of gift from the same transferor. The result of disallowing those votes was that a majority in number of the shareholders approved the scheme at the Court Meeting. Had the opposing shareholders votes been included, then the scheme would not have been approved by a majority of the shareholders and the court therefore would not have the jurisdiction to exercise its discretion to sanction the scheme.

What were the relevant statutory provisions?

A scheme is a legally binding statutory arrangement between a company and its shareholders (or class of its shareholders) or a company and its creditors (or a class of them), made in accordance with the procedures and requirements in CA 2006, Pt 26.

A company will need to apply to the court which will have the discretion to order a meeting of the members or class of shareholders (as appropriate) to approve a scheme. Crucially, CA 2006, s 899(1) provides that the scheme will need to be approved by the members (or class of shareholders) at the court convened meeting by:

  • a majority in number of those present (in person or by proxy) and voting (this is commonly referred to as the head count test), and
  • a majority representing at least 75% in value of the shareholders attending and voting at the meeting (often known as the value test)

Consequently, there are two tests which must be satisfied before the court will have jurisdiction to exercise its discretion to sanction the scheme. The aim of the head count test is to ensure that a few shareholders with significant stakes do not impose an arrangement on the unwilling majority, whereas the purpose of the value test is to ensure that a numerical majority with a small stake cannot outvote a minority with a large stake.

What key issues did the court have to determine?

The issues for determination before the court included:

  • what test should be applied to determine if the votes of members at a members' class meeting directed by the court were valid
  • were the votes of the Individual Shareholders at the Court Meeting valid, and whether they should have been counted by the Chairman
  • whether the court had a discretion to approve the scheme and whether it should do so as a matter of discretion

What did the court decide?

In relation to the first issue, the court concluded that members voting at a class meeting directed by the court must exercise their power to vote for the purpose of benefiting the class as a whole, and not merely individual members only and that the key is that the members of the class must vote in the interests of the class as whole and not in their own specific interests if they are different from the interests of the class.

In relation to the second issue, the court found that the Chairman's knowledge of the circumstances in which the Individual Shareholders had acquired their shares gave him sufficient evidence to conclude that their votes at the Court Meeting were not being cast for the purpose of benefiting the class as a whole because the only possible explanation for their conduct was to further a share manipulation strategy to defeat the scheme by use of the majority in number jurisdictional requirement. The court found that the actions of the Individual Shareholders in accepting the gift of shares in these circumstances demonstrated that they could have given no consideration to the interests of the class of members which they had joined, and that they could only have joined the class with the 'pre-conceived notion' of voting down the scheme:

There was no other reason to acquire one single share in the Company at that crucial time after the Court Meeting had been directed. Both the Chairman and the court could and should, in my judgment, take these matters into account in considering whether the votes of the Individual Shareholders were valid. In my judgment, they were not. The Chairman was entitled to protect the integrity of the Court Meeting against manipulative practices such as share-splitting that would frustrate its statutory purpose. (Para 58)

The court also considered the court's discretion to sanction the scheme under CA 2006, s 899(1). Following established caselaw, the court formed the view that:

  • the provisions of the CA 2006 had been complied with
  • the Court Meeting was fairly represented by those who attended it (once the individual members has been discounted)
  • the statutory majority (ignoring the Individual Shareholders) were acting bona fide and were not coercing the minority in order to promote interests adverse to those of the class they purported to represent
  • an intelligent and honest person as a member of the class or ordinary shareholders in the Company, who was concerned and acting in respect of his own interest, would reasonably approve the scheme, and
  • there was no blot on the scheme

The court went on to sanction the scheme.

What are the practical implications of this case?

This was the first case in which a share-splitting exercise was undertaken with the apparent object of defeating a scheme of arrangement between a company and its members. Had the disallowed opposing votes been included, the jurisdictional pre-conditions of CA 2006, s 899(1) would not have been satisfied and there would have been no basis on which the scheme could have been considered for sanction by the court. The court noted that it is for Parliament to decide whether the head-count test pre-condition should continue to apply and that so far Parliament has decided it should not be changed.

The court noted that the reverse position had been considered by the Hong Kong Court of Appeal in the only other reported share-splitting case (see Re PCCW Limited [2009] 3 HKC 292). In PCCW, however, the share-splitting was used to support the scheme and would not, even potentially, have caused a situation in which there would have been no sanction hearing. The court in the current case considered the judgments, and in particular, agreed with Lam J that share splitting to manipulate the voting at class meetings undermined 'the underlying spirit of the dual requirements prescribed by the legislature'.

The court's findings will come as a relief to practitioners as it provides clarity over the issue of share splitting and what actions companies can take to prevent manipulative share splitting which could potentially hamper the use of schemes to facilitate takeovers. Schemes remain the deal structure of choice for implementing takeovers (in 2016, 61% of firm offers made for targets subject to the Takeover Code were structured as a scheme (see further our latest Market Tracker Trend Report—Trends in UK public M&A deals in 2016)) so practitioners will welcome the court's decision.

Case details

  • Court: Companies Court
  • Judge: Sir Geoffrey Vos
  • Date of judgment: 8 February 2017

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