Jersey Unreported Judgments

Companies - application to the court to grant orders convening meetings of two separate classes of members and to approve scheme of arrangement.

[2012]JRC120

Royal Court

(Samedi)

18 June 2012

Before     :

J. A. Clyde-Smith, Commissioner, and Jurats Clapham and Olsen.

IN THE MATTER OF THE REPRESENTATION OF FRM HOLDINGS LIMITED

AND IN THE MATTER OF ARTICLE 125 OF THE COMPANIES (JERSEY) LAW 1991 (AS AMENDED).

Advocate J. D. Kelleher for the Representor.

judgment

the commissioner:

1.        On 1^st June, 2012, on the application of FRM Holdings Limited ("the Company"), the Court granted orders convening meetings of two separate classes of the members of the Company for the purpose of considering, and if thought fit, approving a scheme of arrangement and this pursuant to the provisions of Article 125 of the Companies (Jersey) Law 1991 ("the Companies Law"). 

2.        There are three stages in the process by which a scheme of arrangement under Article 125 of the Companies Law becomes binding on shareholders, which were summarised in the judgment of the Royal Court in In the matter of Computer Patent Annuities Holdings Limited [2010] JRC 011 at paragraph 6:-

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

(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 [1996] All ER 1006 at 1012 approved by the Royal Court in Re Telewest Finance (Jersey) Limited [2004] JRC 109."

3.        The Court was concerned with the first stage of the process but before setting out the reasons why two meetings were convened, it is helpful to summarise the background. 

4.        The Company was incorporated in Jersey on 2^nd August, 1996, and is the parent company of the FRM Group, a group of companies carrying on business in a number of jurisdictions as hedge fund research and investment specialists.  It has seven offices and approximately 130 professionals in Europe, North America, Asia and Australia and as at 31^st March, 2012, managed approximately US$8 billion in assets.  It has always encouraged its employee shareholders to share in the benefits and rewards of success through significant share ownership.  The board believes that in order for the group to continue to prosper in the market in which it operates, it would benefit from greater scale, broader international reach and additional platforms for future growth.  Having taken extensive advice, it is proposed that the Company be acquired by the Man Group, a world leading alternative investment management business with approximately US$59 billion of assets under management as at 31^st March, 2012. 

5.        The Company has an authorised share capital of £1,000,000, divided into a million ordinary shares of £1 each.  It has issued 592,087 ordinary shares of which 53% are held through Damor Investments Limited ("Damor") for the Tomlinson Family Trust, of which Blaine Tomlinson, the chairman of the Company, is a beneficiary.  Damor also holds one "special share" which entitles it to such number of votes as are required to pass special resolutions at general meetings of the Company.  Sumitomo Mitsui Trust Bank Limited ("SMTB") owns 4.9% of the ordinary shares and the remaining ordinary shares are held by employees and former employees of the Company and other investors. 

6.        Given the nature of the acquisition, and the fact that the Company is not listed on a Stock Exchange or governed by the City Code on Takeovers and Mergers, the scheme (in part) resembles an acquisition by way of a private contract.  However, the Man Group requires that the acquisition be implemented by way of a scheme of arrangement as it requires certainty that it will acquire all of the issued shares. 

7.        Damor will be transferring its one "special share" for £1 to the Jersey incorporated purchasing company, which is an indirect wholly owned subsidiary of Man Group Plc, namely RBH Holdings (Jersey) Limited ("the purchaser") under the terms of a separate agreement.  Although not convened, the purchaser was represented at the hearing by Mr Temple.  

8.        Due to the particular relationship between the Company's business and SMTB, which has introduced or referred a significant proportion of the Company's client investors, it is proposed that SMTB will transfer its ordinary shares on different terms and for a different consideration from the other shareholders.  The purchaser will issue to SMTB preference shares in exchange for the ordinary shares that SMTB holds in the Company, rather than SMTB receiving cash.  The preference shares will entitle SMTB to receive a cumulative preferential dividend on a yearly basis and it will enter into a new strategic relationship with the purchaser.  SMTB has agreed to be bound by the scheme subject to certain conditions.  As the sole member of its own class, it will not be asked to vote at a meeting to approve the scheme but instead it will be asked to undertake to the Court to be bound by the scheme. 

9.        Turning to the remaining ordinary shareholders, they constitute, on the face of it, one class.  We will refer to them as the "scheme shareholders" and the shares they hold as the "scheme shares".  The Company has rightly identified, however, a distinction between them which arises out of the fact that a considerable number of them have been lent money by the Company to assist them in acquiring their shares in the Company and in the case of two Japanese employees, to meet certain Japanese tax liabilities which arose as a result of their participation, at the request of the Company, in a capital re-organisation. 

10.      It is a term of the loans that they be repaid out of the proceeds of any sale of the shares that such scheme shareholders hold.  Some scheme shareholders will receive sufficient sums from what we will describe for the purposes of this judgment as the first tranche of the consideration to enable their loans to be repaid.  However, some 31 scheme shareholders will not receive enough to do so.  The purchaser is only willing to proceed if those loans which are still outstanding after payment of the first tranche are waived by the Company, with the cost of that waiver being borne by the other scheme shareholders or sufficient of them ("the loan waiver"). 

11.      The scheme documentation therefore defines those scheme shareholders with no loans, which includes those whose loans will be repaid out of the first tranche, as the "Non Loanholder Scheme Shareholders" and those ordinary shareholders whose loans will not be repaid out of the first tranche as the "Loanholder Scheme Shareholders". 

12.      The Non Loanholder Scheme Shareholders will be given two options by the purchaser.  Under option A, they elect to bear (proportionately between them) the cost of the loan waiver.  Under option B (which is the default option) they will receive their full pro rata share of the first tranche and will not bear the cost of the loan waiver. 

13.      Without going into the detail of the consideration payable under the scheme it suffices for the purposes of this judgement  to say that the first tranche is a certain sum based on the balance sheet of the Company at completion, but the remaining tranches are performance based, and therefore less certain.  Those Non Loanholder Scheme shareholders who select option A will in due course receive out of the subsequent tranches payable to the Loanholder Scheme Shareholders a sum equivalent to the cost of the loan waiver financed by them (a process described in the scheme documentation as "equalisation"), but there is no certainty that they will be reimbursed in full. 

14.      It can be seen from this that the scheme will only work if enough Non Loanholder Scheme Shareholders select option A, thus enabling the loan waivers to be financed.  As it transpires, the scheme has the overwhelming support of the scheme shareholders, in that 59 of them (comprising both Loanholder Scheme Shareholders and Non Loanholder Scheme Shareholders representing 557,653 scheme shares, being 99.09% of the scheme shares) have given irrevocable undertakings to vote in favour of the scheme.  The Non Loanholder Scheme Shareholders who have given undertakings have all selected option A. 

15.      It is normal practice for such undertakings to be obtained.  The Court has a discretion whether or not to convene meetings and will therefore take into account whether the proposed scheme has sufficient general support to have a prospect of success.  (See Re Savoy Hotel Limited [1981] Ch 351 at page 366).  In this case it is clear that it does. 

16.      In the representation of Vallar Plc [2011] JRC 051, the Court referred to and followed the Practice Note issued by the High Court of England, Chancery Division (Practice Statement (Companies: Schemes of Arrangement) [2002] All ER 96, [2002] 1 WLR 1345) which provides that a party seeking an order in relation to a creditor scheme should draw to the Court's attention at the earliest opportunity any issues regarding identification of classes of creditors in the context of a scheme of arrangement between a company and its creditors and obtain the Court's directions in relation to those issues.  The identification of separate classes would mean that separate meetings must be called of each class and a majority in number representing 75% by value of the creditors present and voting in person or by proxy in each class must be obtained.  In Vallar, the Court accepted that the principles in the Practice Note can be applied equally to member schemes (a view also expressed in Tolley's Company Law Service at paragraph S 1003).  It is incumbent therefore on the Company to draw to the Court's attention, as it has, any issues regarding class identification. 

17.      The Court in Vallar observed that the classic test for identification of classes is that of Bowen LJ in Sovereign Life Assurance Co-v-Dodd [1892] 2 QB 573, 583, a case concerning a creditors' scheme:-

"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 meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and 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."

Bowen LJ's test makes it clear that it is significant differences in the rights of members which determine that they constitute separate classes.  Furthermore, it is also clear that a careful balancing act must be performed in determining whether or not certain members require the protection of a separate Court meeting, in order to prevent any "confiscation and injustice", which would result if artificial distinctions are taken.  

18.      There is a distinction between the rights of shareholders (be they the rights which are to be released or varied under the scheme and/or any new rights which the scheme gives) and differences in their interests.  This important distinction has been consistently supported in the relevant case law.  In UDL Argos Engineering & Heavy Industries Co Ltd & Others-v-Li Oi Lin & others [2003] 3 HK LRD, a decision of the Hong Kong Court of Final Appeal, Lord Millett NPJ held (at paragraph 17) after extensive case law citations that when determining the composition of separate classes:-

"There is a notable degree of consistency in this line of authority.  The principle upon which classes of creditors or members to be are to be constituted is that they should depend upon the similarity or dissimilarity of their rights against the company and the way in which those rights are affected by the Scheme, and not of their private interests arising from matters extraneous to such rights."

19.      A question arises as to whether divergent interests, as opposed to rights, may in principle affect class composition where such divergence arises due to some private interests of some of the members of a class not being shared by other members of the class.  As Lord Millett NPJ further observed (at paragraphs 25 and 26):-

"Normally the Court acts on the principle enunciated by Lindley LJ in Re English Scottish and Australia Chartered Bank [1993] 3 Ch 385 at 409 and regards businessmen as much better judges of what is to their commercial advantage than the Court could be.  But this assumes they are voting in what they honestly believe to be the interests of the class of which they are members.  But this may not be the case if they have some private interest of their own which is not shared by other members of the class.  As Adam J explained in Re Chevron Sydney Ltd [1963] VR 249 at p.255:-

'The true position appears to be that where the members of a class have divergent interests because some have and others have not interests in a company other than as members of the class the Court may treat the result of the voting at the meeting of the class as not necessarily representing the views of the class as such, and thus should apply with more reserve in such a case the proposition that the members of the class are better judges of what is to their commercial advantage than the Court can be.  In so far as members of a class have in fact voted for a scheme not because it benefits them as members of the class but because it gives them benefits in some other capacity, their votes would of course, in a sense, not reflect the view of the class as such although they are counted for the purposes of determining whether the statutory majority has been obtained at the meeting of the class.'

Why, it may be asked, should persons with divergent interests be allowed to vote as members of the same class for the purposes of ascertaining whether the Scheme has been approved by the necessary 75% majority, if their votes are only to be discounted or disregarded by the Court when considering whether to sanction it?  There seem to be three reasons.  The first is the impracticality in many cases of constituting classes based on similarity of interest as distinct from similarity of rights.  Re Alabama, New Orleans, Texas & Pacific Junction Railway Co [1891] 1 Ch 213 (CA) is an example of this; Re BTR Plc (leave to appeal [2000] 1 BCLC 740 (CA) is another.  A second is that the risk of empowering the majority to oppress the minority to which Bowen LJ referred in Sovereign Life Assurance Co (in liquidation)-v-Dodd [1892] 2 QB 573 (CA), is not the only danger.  It must be balanced against the opposite risk of enabling a small minority to thwart the wishes of the majority.  Fragmenting creditors into different classes gives each class the power to veto the Scheme and would deprive a beneficent procedure of much of its value.  The former danger is averted by requiring those whose rights are so dissimilar that they cannot consult together with a view to their common interest to have their own separate meetings; the latter by requiring those whose rights are sufficiently similar that they can properly consult together to do so.  The third reason is that this is mandated by the rationale which underlies the calling of separate meetings.  A company can be regarded as entering into separate but linked arrangements with groups whose members have different rights or who are to receive different treatment.  It cannot sensibly be regarded as entering into a separate arrangement with every person or group of persons with his or their own private motives or extraneous interests to consider."

20.      In Re Hawk Insurance Company Limited [2001] BCLC 480, a case which also concerned a creditors' scheme and which was also applied in Vallar and UDL Argos, Chadwick LJ held (at paragraph 26) that the question is whether the scheme proposed constitutes a single arrangement between all members, or a number of linked arrangements:-

"The answer, therefore, which Bowen LJ may be taken to give to the question 'Are the rights of those who are to be affected by the scheme proposed such that the scheme can be seen as a single arrangement; or ought it to be regarded, on a true analysis, as a number of linked arrangements?' is clear enough.  The scheme proposed may be regarded as a single arrangement with those creditors whom it is intended to bind if, but only if, the rights of those creditors are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.  If the rights of those creditors whom the scheme is intended to bind are such as to make it impossible for them to consult together with a view to their common interest, then the scheme must be regarded as a number of linked arrangements.  In the latter case it will be necessary to have a separate meeting of each class of creditors; a class being identified by the test that the rights of those creditors within it are not so dissimilar as to make it impossible for them to consult together with a view to their common interest."

21.      Chadwick LJ also noted (at paragraph 30) that the test set out in Sovereign Life Assurance Co must be applied in the context of the question 'With whom is the compromise or the arrangement made?'.  He stated that the answer to that question:-

"will depend upon analysis (i) of the rights which are to be released or varied under the scheme and (ii) of the new rights (if any) which the scheme gives, by way of a compromise or arrangement, to those whose rights are to be released or varied."

22.      Chadwick LJ further observed (at paragraph 33):-

"When applying Bowen LJ's test to the question 'Are the rights of those who are to be affected by the scheme proposed such that the scheme can be seen as a single arrangement; or ought it to be regarded, on a true analysis, as a number of linked arrangements?'  it is necessary to ensure not only that those whose rights really are so dissimilar that they cannot consult together with a view to a common interest should be treated as parties to distinct arrangements - so that they should have their own separate meetings - but also that those whose rights are sufficiently similar to the rights of others that they can properly consult together should be required to do so; lest by ordering separate meetings the court gives a veto to a minority group.  The safeguard against majority oppression, as I sought to point out in the BTR case ([2000] 12 BCLC 740 at 747) is that the court is not bound by the decision of the meeting.  It is important Bowen LJ's test should not be applied in such a way that it becomes an instrument of oppression by a minority."

23.      In Anglo American Insurance Company Ltd [ 2001] 1 BCLC 740, which also concerned a creditors' scheme, Neuberger J, having considered the test set out by Bowen LJ in Sovereign Life Assurance Co., noted at page 5 that:-

"To my mind, whether or not a particular group constitutes a separate class must depend on the particular facts of the particular case and on the nature of the differences said to exist between the two alleged classes and the relevant terms of the particular scheme."

24.      Mr Kelleher submitted that the scheme consists not of a single composite arrangement but a series of separate and independent arrangements with different classes of scheme shareholders.  Loanholder Scheme Shareholders are receiving a benefit that does not directly form part of the consideration i.e. the loan waiver.  The cost of this is, effectively, borne by the Non Loanholder Scheme Shareholders who have selected option A.  This benefit (i.e. the loan waivers) is not available to Non Loanholder Scheme Shareholders.  Moreover, the rights of the Loanholder Scheme Shareholders under the process of equalisation are the opposite of the Non Loanholder Scheme Shareholders, in that the former forego their entitlement to further consideration that may become payable in favour of the Non Loanholder Scheme Shareholders who have selected option A up to the point where equalisation is reached.  In addition, Non Loanholder Scheme Shareholders who have selected option B do not bear any cost in relation to the loan waivers.  Taken together, their rights under the scheme are sufficiently different from the Loanholder Scheme Shareholders that they cannot be considered as members of the same class.  

25.      The class of Non Loanholder Scheme Shareholders includes those scheme shareholders who have loans but whose loans will be discharged out of the first tranche, and who will not therefore benefit from the loan waivers.  These shareholders, should they select option A, will be subject to the same terms as to equalisation as other Non Loanholder Scheme Shareholders who have selected option A.  Should such persons select option B then, like any other Non Loanholder Scheme Shareholder who selects option B, they will not bear the cost of any loan waiver.  Mr Kelleher submitted that their interests and rights under the scheme are much more closely aligned with the other Non Loanholder Scheme Shareholders than with the Loanholder Scheme Shareholders and that therefore the definition of Non Loanholder Scheme Shareholders in the scheme is correct in this respect.  

26.      The Non Loanholder Scheme Shareholders will have, as stated above, two options as to consideration.  These options are designed to allow Non Loanholder Scheme Shareholders to fairly consider the scheme together as a class.  Given the purchaser's requirement that the loans are (i) waived by the Company to the extent that they are not repaid out of the first tranche and (ii) the cost of the loan waiver is not borne by the purchaser or the Company, option A and option B allow the Non Loanholder Scheme Shareholders the opportunity to choose a form of consideration which meets the requirements of the purchaser but does not force Non Loanholder Scheme Shareholders to bear the cost of the loan waiver if they do not wish to do so.  Option A makes the scheme a commercially viable proposal, as sufficient Non Loanholder Shareholders must select option A in order to allow the purchaser to be able to offer option B. 

27.      The scheme shareholders hold varying sizes of loans depending on their personal circumstances.  While the amounts of the loans vary from £78,695 to £4,830,962, with an average value of the loans being £451,141.89, it was submitted by Mr Kelleher that the interests and rights under the scheme of the Loanholder Scheme Shareholders are sufficiently similar for them all to form the same class. 

28.      Taking all of this into account, Mr Kelleher submitted and we agreed that the rights of the Non Loanholder Scheme Shareholders and the Loanholder Scheme Shareholders "are so dissimilar that they cannot consult with a view to a common interest" and therefore that they "should be treated as parties to two distinct arrangements" and have their own separate meetings.  We therefore made orders convening a meeting of the Loanholder Scheme Shareholders to be followed by a separate meeting of the Non Loanholder Scheme Shareholders.  

29.      For completeness we should record that our attention was drawn to proposals in relation to transaction completion bonuses, retention arrangements, new service agreements and a consultancy to the purchaser group of Blaine Tomlinson which will come into effect on or as a result of completion.  It was submitted, and we accepted, that despite the different nature of the interests of the beneficiaries of these arrangements (to the extent that they are scheme shareholders) in the scheme their rights under the scheme are sufficiently similar that they should count as members of the appropriate class, notwithstanding these arrangements. 

Authorities

Companies (Jersey) Law 1991.

In the matter of Computer Patent Annuities Holdings Limited [2010] JRC 011.

Re Savoy Hotel Limited [1981] Ch 351.

Vallar Plc [2011] JRC 051.

Practice Statement (Companies: Schemes of Arrangement) [2002] All ER 96, [2002] 1 WLR 1345.

Tolley's Company Law Service.

Sovereign Life Assurance Co-v-Dodd [1892] 2 QB 573, 583.

UDL Argos Engineering & Heavy Industries Co Ltd & Others-v-Li Oi Lin & others [2003] 3 HK LRD.

Re Hawk Insurance Company Limited [2001] BCLC 480.

Anglo American Insurance Company Ltd [ 2001] 1 BCLC 740.