Vol 14 (2017) - Issue 4

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Schemes of Arrangement: The End of the Numerosity Test?

The High Court has held that a Chairperson of a shareholder scheme meeting may reject votes cast against a scheme of arrangement where the shares were acquired through an artificial share-splitting exercise designed to frustrate the scheme. Re Dee Valley Group plc is the first English case to consider the issue and while it arose in the context of a shareholder scheme, the impact is significant for debt restructurings implemented by way of a creditor scheme of arrangement.

Background
Severn Trent’s takeover offer for Dee Valley was to be effected by a Court approved scheme of arrangement. A scheme is a statutory mechanism under the Companies Act 2006 which, under the supervision of the English Court, is often used to achieve a takeover as an alternative to a traditional tender offer (a shareholder scheme) or to restructure a company’s debt (a creditor scheme). A scheme is an arrangement between the company and its shareholders or creditors that, if approved by the requisite majority and sanctioned by the Court, binds all shareholders or creditors.
The statutory test for a scheme of arrangement is two-fold and requires that a majority:
(i) in number; and
(ii) representing 75% in value

of shareholders or creditors present and voting in person or by proxy approve the scheme at a meeting of shareholders or creditors, which the Court permits the company to convene. If these majorities are achieved, a further Court hearing (the sanction hearing) is necessary at which the Court decides whether to sanction the scheme. If the statutory test is not satisfied, the Court does not have jurisdiction to sanction the scheme and it cannot become effective.

Facts
After Dee Valley convened the shareholder scheme meeting, approximately 430 transfers of small holdings in its shares took place. These transfers had the potential to distort the outcome of the shareholder vote to approve or reject the scheme (a practice known in shareholder schemes as share-splitting and in creditor schemes as vote-splitting). Based on the total number of Dee Valley shareholders, if all 430 ‘new’ shareholders voted against the scheme, the majority in number test would not be met, although more than 75% by value of the shareholders were expected to vote in favour.
Dee Valley applied to Court for directions allowing the Chairperson of the meeting to disregard the 'new' shareholders’ votes so the scheme could proceed to the sanction hearing, where the issues raised by the sharesplitting could be considered fully.
At the scheme meeting, the resolution approving the scheme was passed only because the Chairperson disregarded the 'new' shareholders’ votes. Had he accepted their votes, the resolution would have failed the majority in number test.