Exception to the prohibition on cancellation schemes (Re Home Retail Group plc)

22 Nov 2016

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In this case the High Court considered

whether Home Retail Group plc could rely on an exception from the Companies Act 2006 (CA 2006) prohibition on the use of cancellation schemes in connection with a takeover. The court considered whether the Ramsay principle of the interpretation of tax legislation affected the availability of the statutory exception that permitted a cancellation scheme involving the insertion of a new holding company into a group structure.

Original news

Re Home Retail Group plc [2016] EWHC 2072 (Ch)

In this case the High Court considered whether Home Retail Group plc (the Company) could rely on an exception against the CA 2006 prohibition on the use of cancellation schemes in connection with a takeover. The court considered whether the Ramsay principle of the interpretation of tax legislation affected the availability of the statutory exception that permitted a cancellation scheme involving the insertion of a new holding company into a group structure.

What was the background to the case?

On 18 January 2016, the Company announced that it had agreed to sell its Homebase business and that it would make a capital return to its shareholders of the net cash proceeds of the sale, amounting to some £200 million. Shortly afterwards, and before the Homebase sale had been completed, the Company reached agreement in principle on a takeover by Sainsbury. The consideration that Sainsbury was to pay took into account the fact that the Company would be returning the £200m to shareholders. This meant both that Sainsbury did not have to raise additional funds simply to acquire cash that the Company had already said that it would return to shareholders and that the takeover would not be large enough to constitute a Class 1 transaction.

The transactions would be effected in stages:

a 'Newco' would become the Company’s holding company, with the Company’s existing shareholders obtaining corresponding holdings in Newco
a reduction of capital would be undertaken to effect the previously announced return to shareholders
the shares in Newco would be compulsorily transferred to Sainsbury in accordance with provisions in Newco’s articles of association

What are the legal restrictions on cancellation schemes?

The proposed scheme involved a cancellation and re-issue of shares. Cancellation schemes were previously popular on UK takeovers as they had the advantage that no stamp duty would be payable on the transaction because the offeror acquired the offeree shares through a new share issue rather than via a share transfer. However, following the government's 2014 Autumn Statement new regulations were introduced which amended CA 2006 to prevent a company from reducing its share capital as part of a scheme of arrangement to facilitate its own takeover.

CA 2006, s 641(2A) now prohibits a company from reducing its share capital as part of a scheme where the purpose is that one or more persons will acquire all the shares in the company. However, CA 2006, s 641(2B) provides that the prohibition does not apply to a scheme under which:

the company is to have a new parent undertaking
all or substantially all of the members of the company become members of the parent undertaking
the members of the company are to hold proportions of the equity share capital in the parent undertaking in the same or substantially the same proportions as they hold the equity share capital of the company

What was the Company's concern?

The Company argued that the exception in CA 2006, s 641(2B) applied in the present case. The proposed scheme involved the Company having a new parent undertaking (ie Newco), all or substantially all of the members of the Company would become members of Newco and their holdings in Newco would correspond to those they currently had in the Company.

The Company wanted the court to confirm that this interpretation was correct and that the proposed scheme was not barred by CA 2006, s 641(2A).

The Ramsay principle

The Ramsay principle refers to an approach to statutory interpretation that has been developed by the courts in cases involving tax avoidance. It began with the landmark decision by the House of Lords decision in WT Ramsay [1981] STC 174. The Ramsay principle can, with a large amount of generalisation, be summarised as:

look at the law—what did Parliament intend when it chose those words?
look at the facts—should an individual transaction be considered as part of a wider context?
in light of the first two steps, how does the law apply to these facts?

The shortest statement of the Ramsay principle is in Ribeiro PJ's judgment in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46:

'The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.'

What did the court decide?

The court agreed that if CA 2006, s 641(2B) was interpreted literally, the proposed transaction would clearly fall within the exception to the prohibition on cancellation schemes.

The court acknowledged that a number of arguments could be made to support the proposition that the Ramsay principle should not be applied to section 641(2B) at all:

the expression 'ultimate parent undertaking' was frequently used in other legislation, and Parliament might be expected to have used such terminology had it intended the 'new parent undertaking' referred to in subsection (2B) to be such an undertaking
there was no need to invoke a purposive interpretation to defeat what might be thought to be abusive transactions both because the court always had a discretion as to whether to confirm reductions of capital and because in practice the circumstances in which an abusive structure could be put in place were very few
subsection (2B) used technical language in respect of which there was no real scope for application of the Ramsay principle

Ultimately the High Court did not decide whether the Ramsay principle could apply to the interpretation of CA 2006, s 641(2)(B). Instead the court commented that if the Ramsay principle were capable of applying to the section, it would not 'bite' on a cancellation scheme such as the present one which was part of a real world transaction having a clear commercial and business purpose. It must therefore be the case that the proposed scheme had the benefit of the exception to subsection (2A) for which subsection (2B) applied.

The court gave permission for the Company to convene a shareholders meeting for the purpose of considering the scheme of arrangement.

By Darius Lewington

Filed Under: Corporate Law , News Analysis