An attempt to defeat a scheme of arrangement by splitting shares fails

The High Court has held that the Chairman of a court class meeting was right to exclude the votes cast in respect of split shares as they were not being cast for the benefit of the class as a whole. This was because the only possible explanation for the conduct of the relevant shareholders was to use a share manipulation strategy to defeat the scheme.

This appears to be the first case in which a share-splitting exercise has been used with the aim of defeating a scheme of arrangement.

Facts

This was an application by Dee Valley Group plc (the Company) for the court’s sanction of the scheme of arrangement (Scheme) between the Company and its members under Part 26 of the Companies Act 2006. The purpose of the Scheme was to enable Severn Trent Water Limited to acquire the entire issued voting ordinary share capital of the Company at a price of 1,825 pence per share (Dee Valley Group Plc, Re Companies Act 2006 [2017] EWCH 184 (Ch)).

Section 899(1) of the Companies Act 2006 provides that “[i]f a majority in number representing 75% in value of the … class of members … present and voting … agree a compromise or arrangement, the court may, on an application under this section, sanction the compromise or arrangement”. There are therefore two pre-conditions to the court sanctioning a scheme of arrangement. First a majority in number of the class of members present and voting must agree to it, and secondly, 75% in value of the class of members present and voting must agree to it.

The question that the court had to decide was whether the chairman of the class meeting directed by the court (Chairman) was right to disallow the votes of some 434 individual shareholders opposing the Scheme (Individual Shareholders). He had disallowed the votes because each of the Individual Shareholders had acquired one share by way of gift from the same shareholder (Mr Cashmore) in “share-splitting” circumstances. The result of disallowing these votes was that a majority in number of the shareholders in the class in question did approve the scheme of arrangement. Had the Chairman allowed these votes, the Scheme would have failed, because it would not have been approved by a majority in number of the class of members present and voting at the class meeting.

Before the court class meeting, the Company had obtained an order from the Companies Court which 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]”.

Decision

The Court held 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
• the Chairman was right to exclude the votes cast in respect of the split shares as they were not being cast for the benefit of the class as a whole. This was because the only possible explanation for the conduct of the relevant shareholders was to use a share manipulation strategy to defeat the Scheme. This would defeat the statutory purpose of the Court meeting, and
• it was appropriate for the Court to exercise its discretion to sanction the Scheme.

The judge also noted that had the conclusion been that the Chairman was wrong to exclude the relevant votes the Court would not have had on overriding discretion to approve the Scheme because the statutory test for approval by shareholders would not have been satisfied.

The opposing shareholders were given leave to appeal the ruling but have since confirmed to Dee Valley that no appeal will be made. It is expected that the Scheme will become effective this week.