Case Law
In re John Power & Son, Ltd.
[1934] I.R. 424 FitzGibbon J. in the Supreme Court wrote
“It seems to have been contended in the Court of first instance, and the appellants certainly adumbrated a similar contention here, that where a proposal for a reduction of capital under sect. 46, and a scheme of arrangement under sect. 120, have been approved by majorities considerably in excess of those prescribed by the Companies Act, the Court is practically bound, in the absence of bad faith, or unless there is some statement or omission likely to mislead the shareholders, to give its confirmation or sanction, as the case may be, to the proposed reduction or scheme. In my opinion the duty of the Court is not confined to these considerations. Until 1908 the power of the Court to bind a minority by the vote of a majority was limited to creditors and to cases of winding-up, but sect. 120 extended the power in the case of a compromise or scheme of arrangement, in the same words, to the”members or any class of them,” and the decisions under the earlier Acts have always been treated, and in my opinion necessarily so, as authorities to be followed in exercising the extended powers conferred by sect. 120 of the Act of 1908, in cases where no winding-up was in progress.
The rule was stated by the Court of Appeal in England in In re Alabama, New Orleans, Texas and Pacific Junction Railway Company (1), by a Court consisting of Lindley, Bowen and Fry LL.JJ., and I take the following passage from the judgment of Lindley L.J.:””What the Court has to do is to see, first of all, that the provisions of that statute [the Joint Stock Companies Arrangement Act, 1870, which corresponds, with the addition of the provisions as to ‘members,’ with sect. 120 of the Companies Act, 1908] have been complied with; and, secondly, that the majority have been acting bona fide. The Court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the Court has to look at the scheme, and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can be reasonably taken by business men. The Court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class they purport to represent; and then see whether the scheme is a reasonable one, or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it.” That decision came up for consideration two years later in the very important case of In re English, Scottish, and Australian Chartered Bank (2) when Sir Horace Davey arguendo in support of the scheme contended that the passage I have cited meant no more than that the Court should see “whether the majority are acting bona fide(3).”Vaughan Williams J.] a great authority not only on Company Law but especially on the law and practice in Bankruptcy, where similar principles in the case of creditors were of daily application corrected him, and pointed out in a luminous judgment, in which they are set forth as clearly and concisely as in any judgment I have read, the principles and considerations which should govern a Court in dealing with such a scheme, and he put his interpretation upon the words of Lindley L.J. An appeal was taken from this decision, which was affirmed in the Court of Appeal, where Lindley L.J. expressly reaffirmed all that he had said in the Alabama Case (1), and Lopes and A. L. Smith LL.JJ. agreed that the law had been most clearly stated there. The House of Lords, in British and American Trustee and Finance Corporation v. Couper (2) and in Poolev. National Bank of China, Ltd. (3), affirmed the right of a majority to bind a minority both on the question whether there should be a reduction of capital, and on the mode by which that reduction should be carried out, provided always that it was fair and equitable as between the different classes of shareholders, and in the latter case Lord Macnaghten (4) deprecated “a growing tendency to narrow and restrict the power conferred by the Act of 1867 on companies limited by shares.”
Having dealt with the principles which I think should govern the Court, I now come to the objections which have been urged in this particular case against the proposals of the Company.”
In Millstream Recycling Ltd -v- Companies Acts
[2009] IEHC 571 Laffoy J. wrote
“Section 201 of the Act of 1963 deals with a compromise between the company and its members or creditors. In relation to compromise with creditors, subs. (1) provides for the Court’s first involvement in the process and, insofar as is relevant, provides as follows:
“Where a compromise or arrangement is proposed between a company and its creditors or any class of them …, the court may, on the application of the company … order a meeting of the creditors or class of creditors, … to be summoned in such manner as the court directs.”
Sub-section (2) sets out the court’s jurisdiction under subs. (1) and provides as follows:
“Whenever such an application as is mentioned in sub-section (1) is made, the court may on such terms as seem just, stay all proceedings or restrain further proceedings against the company for such period as to the court seems fit.”
As will be clear from the factual circumstances which will be outlined later, a crucial element in the reliefs sought by the company is that existing proceedings by contamination creditors against the company be stayed and further proceedings be restrained. It is unquestionably the case that, in the absence of such a stay, the proposed scheme would simply not work. The contamination creditors who, on this application, strongly resisted the application for relief, are creditors who have proceedings pending in the Commercial Court and who have obtained dates for hearing of their claims in that Court in January and February 2010.
The final involvement in the process from the Court’s perspective is dealt with in sub-section (3) of s. 201 which provides:
“If a majority in number representing three-fourths in value of the creditors or class of creditors … present and voting either in person or by proxy at the meeting, vote in favour of a resolution agreeing to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all of the creditors or class of creditors … and also on the company ….”
There is a helpful analysis by the Court of Appeal of England and Wales of the corresponding provision in the company’s legislation in the United Kingdom (s. 425 of the Companies Act 1985) in Re Hawk Insurance Company Ltd. [2002] BCC 300. Chadwick L. J., having identified the three stages in the process by which a compromise or arrangement becomes binding on the company and all those within a class of creditors (first, the application to court for an order that a meeting or meetings be summoned, at which stage a decision – which I understand to mean, by the company – needs to be taken as to whether or not to summon more than one meeting; second, the putting of the scheme proposals to the meeting; and third, if approved at the meetings, the application to court to sanction the compromise or arrangement), stated as follows (at para. 12):
“It can be seen that each of those stages serves a distinct purpose. At the first stage the court directs how the meeting or meetings are to be summoned. It is concerned, at that stage, to ensure that those who are to be affected by the compromise or arrangement proposed have a proper opportunity of being present (in person or by proxy) at the meeting or meetings at which the proposals are to be considered and voted upon. The second stage ensures that the proposals are acceptable to at least a majority in number, representing three-fourths in value, of those who take the opportunity of being present (in person or by proxy) at the meeting or meetings. At the third stage the court is concerned (i) to ensure that the meeting or meetings have been summoned and held in accordance with its previous order, (ii) to ensure that the proposals have been approved by the requisite majority of those present at the meeting or meetings and (iii) to ensure that the views and interests of those who have not approved the proposals at the meeting or meetings (either because they were not present, or, being present, did not vote in favour of the proposals) receive impartial consideration. As it was put in [Re B.T.R. plc. [2001] 1 BCLC 740] at p. 747 g-h:
‘… the court is not bound by the decision of the meeting. A favourable resolution of the meeting represents a threshold which must be surmounted before the sanction of the court can be sought. But if the court is satisfied that the meeting is unrepresentative, or that those voting at the meeting have done so with a special interest to promote which differs from the interest of the ordinary independent and objective shareholder, then the vote in favour of the resolution is not to be given effect by the sanction of the court.’”
Later, at para. 17, Chadwick L.J. stated that, if the correct decision as to the summoning of one or more meetings is not made at the first stage, the court may find, at the third stage, that it is without jurisdiction. That was the view taken in this jurisdiction by Costello J. in Re Pye (Ireland) Ltd. (High Court, Unreported, 11th March, 1985). In that case, on an application under subs. (3) of s. 201 to sanction a scheme, Costello J. accepted a submission that there should have been a separate class of creditor comprising unsecured creditors who were also shareholders of the company and he refused to sanction the scheme on that basis. He had earlier quoted a passage from Palmer’s Company Law (23rd Edition) to the effect that the Court does not consider, at the first stage, the application to convene meetings, what classes of creditors or members should be made party to the scheme, which was a matter for the company to decide and he also quoted the admonition in Palmer that “great care must be taken in considering what for the purpose of the scheme constitutes a class”, because, if meetings of the proper classes have not been held, the Court may not sanction the scheme. Costello J. remarked that, indeed, it would seem that a failure to hold proper class meetings “will generally speaking be fatal to a s. 201(3) petition”.
In the Hawk Insurance case the Court of Appeal recommended that the long-standing practice in the United Kingdom – whereby the Court ordered meetings to be held at the first stage without considering whether those were the meetings which the scheme proposed actually required before sanction could be given by the Court – should be reconsidered. In fact, a revised practice was introduced in the United Kingdom in Practice Statement [2002] 3 All E.R. 96 following the Hawk Insurance decision under which, as is pointed out in the judgment of David Richards J. in the decision of the High Court of England and Wales in Re T. & N. (No. 3) [2007] 1 All ER 851, the applicant is required to draw the attention of the Court as soon as possible to any issues which may arise as to the constitution of the meetings, or which may otherwise affect the conduct of the meetings, and to notify any person affected by the scheme of the intention to promote the scheme and of its purpose and of the proposed composition of classes. Under the Practice Statement the Court will, if necessary, give directions for the resolution of any such issues and, in particular, will hear interested parties. The statement concludes by stating that the Court will expect any creditor who raises any such issue at the third stage to show good cause why it was not raised at an earlier stage (per David Richards J. at p. 862).
The other statutory provision which received considerable consideration at the hearing of the application was s. 62 of the Act of 1961 which provides, insofar as is relevant, as follows:
“Where a person (hereinafter referred to as the insured) who has effected a policy of insurance in respect of liability or a wrong, …if a corporate body, is wound up … moneys payable to the insured under the policy shall be applicable only to discharging in full all valid claims against the insured in respect of which those moneys are payable, and no part of those moneys shall be assets of the insured or applicable to the payment of the debts (other than those claims) of the insured … in the winding-up …, and no such claim shall be provable in the … winding-up ….”
In the Matter in Colonia Reinsurance (Ireland) Limited
EX TEMPORE JUDGMENT of Mr. Justice Kelly [2005] IEHC 115
“This is the petition of Colonia Re Insurance Ireland Limited (the company). The company is solvent. It seeks the courts approval for a solvent scheme of arrangement pursuant to s. 201 of the Companies Act, 1963, as amended.
The court is familiar with such schemes of arrangement in the case of insolvent companies but not in the case of solvent companies.
The company is proposing to enter into the scheme of arrangement for the following reasons.
It was incorporated in 1990 as part of the AXA Group. It was involved in the reinsurance of non life insurance business. The company ceased to write any new business as of 31st December, 2002. It continues to have liabilities in relation to the policies underwritten by it prior to 31st December, 2002. These are known as “run off” liabilities. These liabilities are likely to last far into the future. The scheme proposes to establish a mechanism to shorten the time involved in quantifying and paying these “run off” liabilities.
This is the first time that an Irish court has been faced with a proposed solvent scheme of arrangement in respect of an insurance company. In such circumstances it is appropriate to seek guidance and assistance from other jurisdictions. I find the judgment of Neuberger J. in Re Osiris Insurance Limited [1999] 1 B.C.L.C. 182 particularly helpful.
The functions of the court in considering whether to sanction a scheme are succinctly set out in a passage (which is derived from a number of decisions) in Buckley on the Companies Acts (1981 edition). At pgs. 473 – 474 it is stated as follows:-
“In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and, thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interests, might reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme.”
The words of Lindley L.J. in In Re English, Scottish and Australian Chartered Bank [1893] 3 Ch. 385 at pg. 409 are also relevant:-
“Now, it is quite obvious from the language of the Act and from the mode in which it has been interpreted, that the court does not simply register the resolution come to by the creditors or the shareholders, as the case may be. If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to be their commercial advantage than the court can be. I do not say it is conclusive, because there might be some blot in a scheme which had passed that had been unobserved and which was pointed out later.
While, therefore, I protest that we are not to register their decisions, but to see that they have been properly convened and have been properly consulted and have considered the matter from a proper point of view, that is, with a view to the interests of the class to which they belong and are empowered to bind, the court ought to be slow to differ from them. It should do so without hesitation if there is anything wrong; but it ought not to do so, in my judgment, unless something is brought to the attention of the court to show that there has been some material oversight or miscarriage.”
As Neuberger J. stated in Re Osiris, it is not the function of the court to act as a rubber stamp although the court would be slow to differ with experienced insurance industry creditors who are familiar with the subject matter of the scheme.”
In the matter of Depfa Bank plc
Note of ex tempore judgment delivered by Mr. Justice Kelly [2007] IEHC 463
“In the case of Re Colonia Insurance (Ireland) Limited [2005] 1 IR 497, I had to adjudicate for the first time on a scheme of arrangement in respect of a solvent company. In that case I considered and followed a number of English authorities, in particular the decision in Re Osiris Insurance Limited [1999] 1 B.C.L.C. 182 and Re English Scottish and Australian Chartered Bank [1893] 3 Ch. 385.
I considered that I had jurisdiction to approve a scheme of arrangement in respect of a solvent company. I set forth the conditions which have to be fulfilled in an application of that kind, namely:-
(i) the court must be satisfied that sufficient steps have been taken to identify and notify all interested parties;
(ii) the court must be satisfied that the statutory requirements and all directions of the court have been complied with;
(iii) the court must be satisfied that the classes of creditors were properly constituted;
(iv) the issue of coercion must not arise; and
(v) the scheme of arrangement must be such that an intelligent and honest man, a member of the class concerned, acting in respect of his interest might reasonablyapprove of it.
……
The third condition relates to the constitution of classes of members. In this case, the view was taken that the members comprised a single class. I believe that this is correct, subject only to considering whether the directors (who also beneficially own shares) might have been regarded as a separate class. The directors in question gave undertakings to vote in favour of the scheme.
I am satisfied that the decision to have a single meeting of a single class of members was correct. The giving of undertakings does not constitute the directors as a separate class. The reason for this is identified in Buckley on The Companies Acts (15th Edition, LexisNexis Butterworths, loose leaf issue 12, November, 2006) at para. 425.49A, where it is stated:
“A company may enter into voting agreements with some of the members of a class, whereby those members bind themselves to vote in favour of the scheme. Such agreements can save the loss of time and expenditure which would otherwise arise where members of that class have expressed support for the scheme and subsequently changed their minds. Guidance on the execution of such an agreement in connection with a scheme of arrangement was given in Re Telewest Communications plc (No. 1) [2004] EWHC 924 (Ch). Such an agreement is not open to objection if the member in question would not reasonably have voted differently in the absence of such an agreement, as, for example, where he can withdraw from the agreement in the event that reasonable grounds exist for a change of mind. The existence of such an agreement does not make the member signing it a separate class for the purpose of section 425(1) save where in consideration of entering into the agreement, a party obtains benefits not available to other members of the class. The existence of such an agreement is, however, relevant to the exercise of the discretion to sanction the scheme.”
I am satisfied that the same reasoning applies here. The only basis upon which there would be a need to call a separate meeting is where a party obtained a benefit not available to other members of the class in consideration of the undertaking. That clearly does not arise here. I am, therefore, of the view that the decision not to regard the directors as a separate class was correct. That means that, insofar as the third condition is concerned, the class has been properly constituted.”
The text in italics on this page is sourced from the DJEI and is re-published under the Licence for Re-Use of Public Sector Information made pursuant to Directive 2003/98/EC Directive 2013/37/EU of the European Parliament and of the Council on the re-use of public sector information transposed into Irish law by the European Communities (Re-Use of Public Sector Information) Regulations 2005 to 2015.
Linen Supply Ireland Ltd (formerley CWS-Boco Ireland Ltd) -v- Companies Acts
[2010] IEHC 28 (03 February 2010)
JUDGMENT of Mr. Justice Brian J. McGovern delivered on the 3rd day of February, 2010
1. This matter comes before the court, pursuant to s. 24 of the Companies (Amendment) Act 1990 (“the Act”), for the consideration by the court of the report of the Examiner under s. 18 of the Act. The court is asked by the Examiner to approve a Scheme of Arrangement. While most of the creditors of the companies support the Scheme, it is opposed by a number of landlord creditors from whom the company had leased premises. Their objections to the Scheme are twofold. In the first place, they claim that the debts due to them are not subject to impairment under the Act, and that the court has no jurisdiction to confirm a Scheme which makes provision for impairment of the sums due by way of future rent. Secondly, they claim that the proposals are unfair and inequitable and that they are unfairly prejudiced.
2. The company was incorporated on 8th October, 1997. It is the leading supplier of linen products to the hospitality and health sectors in Ireland, particularly hotels and restaurants. It provides work uniforms and other garments to companies operating in manufacturing, retail, hospitality and healthcare services. It is also the leading supplier of what are known as “clean room services”. This is the supply, decontamination, delivery and collection of a range of specialised clothing to companies working in a clean room environment such as pharmaceutical companies, hospitals and companies in the food industry. The company also supplies sterile surgical procedure packs, surgical gowns, sterile gloves and other materials used by hospitals and pharmaceutical companies. It supplies, maintains and cleans dust control mats used at entrances to buildings, and it rents or supplies washing hygiene products such as paper or cotton towel dispensers, foam dispensers, toilet roll holders and other related matters to companies throughout Ireland.
3. On 30th October, 2009, the company transferred its clean room business to a wholly owned subsidiary, Micron Clean (Ireland) Limited.
4. The downturn in the hospitality sector in the current difficult economic conditions had a negative impact on the company. The decline in hotel occupancy rates depressed the demand for the company’s linen sales and further pressure was put on the company’s business by the demands of customers in the hotel and restaurant sector for lower prices. The downturn in the economy also led to similar decreases in the company’s work wear sales and sterile and surgical supplies, floor care and washroom sales. There were also demands in all these areas for goods and services to be supplied at lower prices. All of these factors led to a sharp decrease in the company’s turnover for the first eight months of 2009, with no corresponding decrease in the company’s outlays or overheads.
5. The company incurred losses in the years ended 31st December, 2007, and 31st December, 2008, and at 30th August, 2009, the company had net estimated liabilities of €700,000 and was trading at a loss. By the time of the presentation of the petition, the company was operating with the financial support of CWS-Boco International GmbH, the company’s parent. The petition was presented by the company on 18th September, 2009, and an interim Examiner was appointed on that date. The appointment of the Examiner was confirmed at the hearing of the petition on 30th September, 2009. The Examiner has submitted a report, pursuant to s. 18 of the Act, and presented proposals for a scheme of arrangement between the company and its members and creditors. The court is asked to confirm the proposals. As I have indicated earlier in this judgment, a number of landlords, who are creditors of the company, object to the confirmation of the proposals.
Has the court power to approve the scheme?
6. The landlords argue that at the date of presentation of the petition, there were no arrears of rent due to them. In his affidavit sworn in support of the petition, the Examiner described the claims of the landlords as, “. . . a contingent liability at the date of the presentation of the petition”.
7. The company carried on business in various parts of the State, and had rented premises for this purpose. In some cases, these premises were significantly adapted to the needs of the company, and in one particular case, the premises were purpose built to the specifications set out by the company. In the course of this examinership, the company applied to have the leases repudiated and brought a motion, pursuant to s. 20 of the Act. At the same time, the Examiner brought a motion under section 9. This court held that it had no jurisdiction to make the order sought by the company and the Examiner. The Supreme Court allowed an appeal against this decision, ruling that there was a statutory basis under s. 20 of the Act, to repudiate a lease, and remitted the matter back to this court to exercise its discretion on the s. 24 application.
8. At the hearing of this application, written submissions were presented to the court by the DOC Partnership which is the landlord of premises at Rahoon, County Galway, and E.P. Mooney & Company Limited, the landlord of a property at Unit C, Concorde Industrial Estate, Naas Road, County Dublin. The other landlords supported the submissions and adopted them. In considering the submissions, I am doing so on the basis that they have been presented by all the objecting landlords and I do not propose to differentiate between them for the purpose of my decision, as it is not necessary to do so.
9. When the matter was referred back to me, I ruled on 16th December, 2009, that the company should be permitted to repudiate the leases. Section 20(5) of the Act, states:
“Where the court approves the affirmation or repudiation of a contract under this section, it may, in giving such approval, make such orders as it thinks fit for the purpose of giving full effect to its approval, including orders as to notice to, or declaring the rights of, any party affected by such affirmation or repudiation.”
The parties had agreed the sums due in respect of loss of rent and/or dilapidations that arise in the event of the court making an order, pursuant to s. 20 of the Act, permitting repudiation. These sums are as follows:-
Bluebell lease: €662,000
Fonthill lease: €502,759 (together with a payment of €200,000 to be paid in full in order to allow the break option to be exercised)
Naas Road lease : €1,089,370
Galway lease: €4,000,000
Parkwest lease: €783,000
These figures do not include loss of rent during the course of the examinership which I have already directed shall be treated as expenses properly incurred by the Examiner, pursuant to s. 29(1) of the Act. In Appendix F – Part 5 of the proposed Scheme of Arrangement, the Examiner has set out the list of landlord creditors and the sums set out are stated to be “agreed in quantum and liability”. There are some minor variations between these figures and those furnished to the court at an earlier date. For example, in the case of the Galway lease, the figure is €4,056,410.56, and the figure for the Fonthill lease is stated to be €503,000. As no point was taken in relation to these figures during the course of the s. 24 hearing, I will assume those to be the precise figures which now apply in respect of the landlord creditors. These figures represent damages arising from the post-petition repudiation of leases of premises occupied by the company. Taken as a group, the landlords represent, in value, a significant group of creditors, and one of the landlords is by far the largest unconnected creditor of the company.
10. The Scheme of Arrangement states at clause 12.8:
“Each of the Landlord Creditors shall, within 7 days of the Effective Date, be paid in full for rent falling due during the Protection Period by the Company, and shall receive 30% of their agreed debt (together with 30% of any VAT thereon, if applicable) within 7 days of the Effective Date.”
11. The landlords complain that under the Scheme, they will only receive 30% of the figure agreed as the damages that follow the repudiation of the leases. The landlords argue that these damages are a post-petition liability. Until such time as the court made an order permitting repudiation, the leases continued in force and the only liability that the company had in relation to these leases was for unpaid rent on each gale day as it fell due. The landlords argue that the damages that flow from repudiation can only arise as a matter of law at the effective date of repudiation and not before, and can only be treated as a post-petition liability and therefore must be paid in full. They argue that s. 22(5) of the Act, makes it clear that a Scheme is only intended to apply to debts due at the date of presentation of the petition, because it refers to a creditor’s claim being impaired if he receives less under the proposals than the full amount due “at the date of presentation of the petition”. In the case of the landlords, it is argued that there were no amounts due at that time.
12. The landlords contend that post-petition liabilities (including a judgment debt against the company following its repudiation of a lease) can only be written down if there is express statutory authority to this effect. They say that none is to be found in the 1990 Act.
13. Another argument made on behalf of the landlord creditors is that a repudiation payment is not a contingent liability at the date of presentation of the petition. In an affidavit sworn by the Examiner on 15th January, 2010, he states that the company’s liability with regard to the landlords’ claims “. . .was a contingent liability at the date of the presentation of the petition.” This is challenged by the landlords who say that the approach is wrong in principle and misconceived as a matter of law.
What is the nature of the landlords’ claim for future rent?
14. Section 3 of the Act sets out a list of bodies or persons who may present a petition under section 2. Among those who can present a petition are:
“(c) A creditor, or contingent or prospective creditor (including an employee) of the company. .”
While petitions by creditors are somewhat unusual in the examinership process, it is clear that the Act had regard to different types of creditors who might make such application. Such creditors are entitled to be heard by virtue of s. 3(b) of the Act.
15. In this case, the claim by the landlords is a claim for agreed damages based on the loss of rent in the future, and taking into account dilapidations and the possibility of the landlords re-letting the properties during the currency of the term of the repudiated leases. In Re Park Air Services Services plc. [1999] 2 WLR 396, the court considered the implications of a disclaimer of a lease in a winding up under the Companies Acts. The court held that the statutory right to compensation was a right which comes into existence at the moment of the disclaimer. It is not a right to the performance of the contract disclaimed and it is not a right to the payment of future debts. It is a right to the payment of compensation coming into existence at the date of the disclaimer. While the word “creditor” does not ordinarily include a person who has a contingent or future claim against the debtor, it has to be given a certain flexibility of meaning according to the context in which it is used. It cannot be said that the claims of the landlords make them contingent creditors. In Stonegate Securities Limited v. Gregory [1980] Ch. 576, Buckley L.J. said at p. 579:
“In that context, in my opinion, the expression ‘contingent creditor’ means a creditor in respect of a debt which will only become due in an event which may or may not occur; and a ‘prospective creditor’ is a creditor in respect of a debt which will certainly become due in the future, either on some date which has already been determined, or on some date determinable by reference to future events.”
I have been referred to the 2nd Edition of ‘Applications to Wind Up Companies’ by Derek French, in which the author says, at page 461:
“It is clear, though, that there are prospective debts which are not contingent debts. For example, the liability of a lessee under an existing lease to pay rent for the remaining term of the lease was described as ‘a perfectly certain debt, a future debt, but not a contingent debt’ by Lord President Dunedin in Palace Billiard Rooms Limited and Reduced [1911] 2 S.L.T. 324 at page 326.”
16. In Oppenheimer v. British and Foreign Exchange and Investment Bank [1877] 6 Ch.D. 744, Hall V.C. said, at p. 746:
“Now, rent which will accrue under covenants which have been entered into by the company, though payable at future times, is a claim of a certain ascertained amount.”
He went on to say at p. 747:
“Rent is not payable as a debt or a claim subject to a contingency; and because there is another remedy for payment viz., by distress, its value is not made less certain.”
17. The position of the landlords at the presentation of the petition seems to me quite clear. They were prospective creditors. While the landlords argue that their claim was not a claim for unpaid rent but for damages arising on the repudiation of their leases, pursuant to s. 20 of the Act, this does not alter their status as prospective creditors. That prospective creditors are entitled to present a petition is clear (s. 3 of the Act).
18. The bankruptcy code and Companies Acts recognise the rights of creditors with debts payable in the future as well as those payable at present. In Re Cancol Limited [1996] 1 All. E.R. 37, Knox J. held that a narrow construction of “creditor” which would include only those with a present right to payment would produce anomalous results. In the that case, the issue arose as to whether a company voluntary arrangement could, as a matter of law, bind persons entitled to future contingency payable debts, or whether it could only bind persons entitled to the benefit of presently enforceable claims. The company’s landlord was listed in the Schedule of Unsecured Creditors, and applied for an order declaring that all money falling due under the lease after the creditors meeting, was payable in full, and was not affected by the voluntary arrangements. Knox J. did not accept that a liability to future rent is incapable of inclusion as a matter of law in a company voluntary arrangement. At p. 43, he stated:
“Moreover, the power of a company with the approval of a court to enter into schemes of arrangement under s. 425 of the Companies Act 1985, in my judgment, extends to schemes of arrangement which affect the rights of creditors with debts payable in the future as well as those payable at present. This was decided in relation to s. 2 of the Joint Stock Companies Arrangement Act 1870, in Re Midland Coal, Coke and Iron Company, Craig’s Claim [1895] 1 Ch. 267.”
He went on to refer to the judgment of Lindley L.J. giving the judgment of the Court of Appeal at p. 277, where he said:
“Whether the court is bound to give effect to his [that is, Mr. Craig, the original lessee] opposition is a different question, and depends on the meaning of the word ‘creditor’ in the Joint Stock Companies Arrangement Act 1870. Considering that that Act was passed in order to enlarge the powers conferred by s. 159 of the Companies Act 1862, we agree with Mr. Justice Wright in thinking that the word ‘creditor’ is used in the Act of 1870, in the widest sense, and that it includes all persons having any pecuniary claims against the company. Any other construction would render the Act practically useless.”
19. At p. 45 of the Cancol judgment, Knox J. said:
“If Mr. Schaw-Miller is right in his submission regarding the meaning of the word ‘creditor’, the directors would appear to have to exclude secured creditors on a contingency such as a debt made payable on demand, a very common case, which would be outside the scheme of the voluntary arrangement because ‘creditors’ on this hypothesis only includes those with a present right to payment and that does seem very anomalous.”
At p. 46, he stated:
“Either the word ‘creditors’ in s. 425(1) includes creditors who have claims which are not presently enforceable, such as a landlord with a right to future rent, or it does not. If it does, it goes a long way towards destroying Mr. Schaw-Miller’s thesis regarding the natural or ordinary meaning of the word ‘creditors’ because there is no relevant statutory enlargement of the term. If it does not, and the Midland Coal case, contrary to the views expressed in Buckley , is no longer good law in relation to s. 425 of the 1985 Act, Parliament has radically restricted the power of compromise with creditors in a way which would deprive it of a great deal of its usefulness. The only other possibility that I can see would be that the word ‘creditor’ would have a variable meaning according to whether or not the company in question was in liquidation, with a wider construction applicable to those that were in liquidation and a narrower for those that were not in liquidation. That is also a profoundly unsatisfactory construction, giving a single word different meanings in the same sentence in relation to different situations.”
It seems to me that the reasoning of Knox J. is equally applicable to our company law as it applies in winding up and examinerships.
20. I have been referred to the Interpretation Act 2005. Section 5 of the Act applies to the construction of ambiguous or obscure provisions. The section provides that if a provision of any Act is obscure or ambiguous or would, on literal interpretation, be absurd or fail to reflect the plain intention of the Oireachtas:
“. . . the provision shall be given a construction that reflects the plain intention of the Oireachtas . . . where that intention can be ascertained from the Act as a whole.”
The landlords rely on the decision of the Supreme Court in Albatross Feeds Limited v. Minister for Agriculture [2007] 1 IR 221, which held that the exercise of a power depriving a citizen of his property rights would require to be justified by clear legal authority. At p. 245, Fennelly J. stated:
“However, clear words are necessary where fundamental rights are at issue. I do not accept that our courts are obliged to interpret our laws so as to confer drastic powers by vague or indirect words, or, indeed, by none. In the present case, such a result cannot be achieved by any normal process of legal reasoning.”
21. Undoubtedly, the property rights of the landlords in this case are being impaired or interfered with (see Blake v. A.G. [1982] 1 I.R. 117 and In the Matter of Art. 26 of the Constitution and In the Matter of the Housing (Private Rented Dwellings) Bill 1981 [1983] 1 I.R. 181). It seems to me, however, that the plain intention of the Oireachtas, in enacting the Companies (Amendment) Act 1990, was to provide for the repudiation of certain contracts (including leases) and that the court could appoint an Examiner who may present a scheme of arrangement that impairs the rights of a creditor, including a prospective creditor. In those circumstances, I hold that the agreed debts due to the landlord creditors is subject to impairment under the Act, and the court does have jurisdiction to confirm a scheme which makes provision for such impairment. I am satisfied that the proposals are fair and equitable in relation to the landlord creditors.
Are the proposals unfair and inequitable and are the landlord creditors unfairly prejudiced?
22. Having heard the submissions of counsel and considered the evidence in this matter and the proposals for a scheme of arrangement, I cannot find evidence that the proposals are unfair or inequitable. The 30% dividend being offered to the landlord creditors under the scheme is similar to the offer made to many other creditors who are supporting the scheme. The landlords have not been treated differently to other creditors. While it is true that the sums agreed in quantum and liability amount to damages for the repudiation of the lease and take into account dilapidations, the sums also have regard to the fact that the landlords will be able to offer the premises to other tenants, although it make some time for them to conclude firm agreements.
23. The objecting landlords, in common with the company’s creditors (other than preferential creditors) are being asked to accept a 70% write-down of their claims. The proposals do not involve any impairment of the interest of the company’s shareholder. The issued share capital of the company is €5,503,683 ordinary shares which are held by CWS-Boco International GmbH. This is the company’s parent and the investor which will invest sufficient funds into the company to make the payments to the creditors under the scheme of arrangement and to pay for the restructuring costs associated with the business, including redundancy and relocation costs, and to discharge the costs of the examninership. It is clear, therefore, that the company’s shareholder is obliged, under the terms of the scheme of arrangement, to put up substantial sums of money which it would otherwise not be obliged to do.
Should the scheme of arrangement be amended in any way?
24. The objecting landlords claim that the proposals provide that the investor/member will provide a non-interest bearing loan of up to €17,800,000 and that, “The Loan shall be immediately repayable on demand at any time after the day upon which all payments to Creditors are to be paid pursuant to the Approved Scheme”. Thus, they argue, as soon as the creditors of the company are cleared away (at 30 cent in the Euro, save for the preferential creditors), the investor will be free to demand repayment of the loan and the company would be immediately insolvent. Alternatively, the member might resolve that the company sell all or part of its business. The member would be in the greatly enhanced position of being able to benefit from the sale of the company’s business, unencumbered by its leases and free of debt. The court was referred to the decisions in Re Wogans (Drogheda) Limited (Unreported, High Court, Costello J., 7th May, 1992), and in Re Sisti Gugan Barra Teoranta (in Examinership) [2008] 1 IEHC 251, which held that proposals for a scheme of arrangement must involve a legally binding obligation to invest sufficient monies to enable the survival of the company and its undertaking as a going concern.
25. It seems to me that this is a valid complaint. Counsel for the company seemed to acknowledge this by informing the court that the scheme could be amended so there would be no withdrawal for a year after the effective date.
26. It is useful, I think, to look at the independent accountant’s report furnished on 18th September, 2009, in support of the application for court protection. At para. 6.23, he states:
“CWS-Boco International GmbH, the company’s parent, is the largest creditor of the company since it has historically provided all of the company’s financial support through Haniel Finance B.V., a financing company of the Haniel Group. This financial support is critical to the company’s survival. CWS-Boco International GmbH has agreed that, to the extent any working capital is required by the company during the protection period to facilitate the continuance of its business, they shall provide the company with such working capital upon receipt of any reasonable request from the company. In addition, they have confirmed that they are interested in investing in the company to facilitate the terms of an appropriate scheme of arrangement formulated by the Examiner, in the event that such a scheme is approved by the court.”
In para. 6.24 of his report, the independent accountant said that, in his opinion, the company, and the whole or any part of its undertaking, would have a reasonable prospect of survival as a going concern subject to a number of conditions, among which was, “the continued provision of funding by companies within the Haniel Group to support management’s proposals for the future of the business”. (Highlighting added).
27. The actual scheme of arrangement seems to fall short of this requirement and in my view, will have to be amended. I am prepared to approve the scheme of arrangement if a provision is made for ongoing funding by the investor. I will adjourn my final decision on the matter for one week to enable the Examiner and the company to enter into discussions with the investor to ascertain whether it is willing to make this investment.
Mc Enaney Construction Ltd -v- Companies Acts
[2008] IEHC 43 (25 February 2008)
Judgment of Ms. Justice Finlay Geoghegan delivered the 25th day of February, 2008.
On 11th January, 2008, by order of the High Court, Mr. Michael McAteer was appointed Examiner of McEnaney Construction Limited (“the Company”) for the purpose of examining the state of the Company’s affairs and performing such duties in relation to the Company as are imposed by or under the Companies (Amendment) Act, 1990 (“the Act”).
The Examiner, as required by s. 18 of the Act, formulated proposals for a scheme of arrangement in relation to the Company, held the necessary meetings of members and creditors and made a report thereon to the Court on 5th February, 2008, recommending confirmation of the proposals.
The report of the Examiner, with the proposal for a scheme of arrangement, was set down for consideration by the Court pursuant to s. 24 of the Act on 12th February, 2008.
At the hearing before me on 12th February, no person appeared to object to the confirmation of the proposals for the scheme of arrangement and I was not precluded from confirming the proposals by reason of any of the matters specified in s. 24(4) of the Act.
However, there were two distinct reasons for which I was unwilling to confirm the proposals for the scheme of arrangement. Having raised the issues with counsel for the Examiner, in the course of the hearing, and considered his submissions thereon, I indicated that I could not confirm the proposals for the scheme of arrangement as proposed and adjourned the hearing to allow the Examiner, with his counsel and solicitor, to consider whether the difficulties could be overcome by modifications to the scheme of arrangement.
On 14th February, 2008, at the adjourned hearing, the Examiner presented modified proposals for a scheme of arrangement which addressed the issues raised by the Court and I confirmed the scheme of arrangement. The modified proposals did not alter the substance of the scheme.
As the difficulties presented by the original proposals for the scheme of arrangement are matters which have previously occurred and may re-occur, I indicated that I would set out in writing the reasons for which I considered I could not confirm the original proposals. This judgment is for that purpose.
The first issue was the proposed cancellation of all 100 issued ordinary shares in the Company at paragraph 3.1.2 of the scheme of arrangement and, in substance, repeated in paragraph 5.1. The Company was a single-member company. Mr. Sean McEnaney held all 100 ordinary shares of €1.26973 each credited as fully paid up. The scheme of arrangement was predicated on “the Investor” making available €67,500,000 to the Company, secured on the Company’s assets. The Examiner had entered into an agreement with the Investor, Paragraph 3.1.2 of the scheme of arrangement provided:
“The Company’s Issued Share Capital of 100 ordinary shares will be cancelled and 100 ordinary shares will be issued to the Investor (75 ordinary shares) and Sean McEnaney (25 ordinary shares) at the Effective Date.”
This provision was, in substance, repeated in Clause 5.1, though with the slight variation that the existing issued share capital of 100 ordinary shares “will be deemed to be cancelled”. I propose ignoring this variation as clearly it is not possible to “deem” shares to be cancelled.
The proposal, therefore, was that the Company would, as part of the scheme of arrangement, cancel its existing 100 issued ordinary shares. There was no indication, in the proposals, of the steps intended to be taken by the Company to effect the cancellation of its shares. Upon inquiry by the Court, counsel for the Examiner indicated that if the Court confirmed the proposals, he would seek an order from the Court pursuant to s. 24(8) of the Act that the existing 100 issued ordinary shares in the Company be cancelled.
Section 24(8) of the Act provides:
“Where the court confirms proposals under this section it may make such orders for the implementation of its decision as it deems fit.”
I formed the view that:
1. The Court should not confirm proposals which include a provision that the Company cancel issued paid-up shares unless the consequent reduction of capital is expressly authorised by the Companies Acts, 1963 – 2006; and
2. Section 24(8) of the Act does not give the Court jurisdiction to make an order that the issued shares in the capital of the Company be cancelled .
My reasons for so concluding are as follows. The effect of the cancellation of issued paid-up shares in the capital of a company limited by shares is to reduce the capital of the company. Section 72(1) of the Companies Act, 1963 (as amended by s. 231(1)(c) of the Companies Act, 1990) provides:
“Except in so far as this Act expressly permits, it shall not be lawful for a company limited by shares or a company limited by guarantee and having a share capital to reduce its share capital in any way.”
The Companies (Amendment) Act, 1990 contains no express provision enabling a company to whom an examiner is appointed under that Act to reduce its share capital as part of a scheme of arrangement.
The absence of such express provision is to be contrasted with certain other provisions of the Companies (Amendment) Act, 1990 which expressly permit a company to which an examiner is appointed to do matters which it would not otherwise be authorised to do. One such provision is s. 20, which enables a company repudiate a contract under certain conditions with the approval of the Court. Also, s. 24(7) (set out below) expressly provides for the taking effect of alterations in the memorandum and articles of association of a company specified in the proposals “notwithstanding any other provisions of the Companies Acts”. No analogous provision exists in relation to alterations in the share capital of a company proposed as part of a scheme of arrangement. .
Accordingly, if a company wishes as part of a scheme of arrangement, to reduce its share capital, then it must do so in accordance with s. 72(1) of the Act of 1963, pursuant to a provision of the Companies Act which expressly so permits. Section 72(2)(b) of the Act of 1963 is one such provision which might apply to a company in a financial situation which required the appointment of an examiner. This was not sought to be operated in the scheme of arrangement herein.
On the facts herein, the provision in the scheme of arrangement that the Company cancel its issued shares on the Effective Date, in effect, requires the Company to do something which appears to be unlawful having regard to s. 72(1) of the Act of 1963.
Section 24(5) of the Act provides that where the Court confirms proposals for a scheme of arrangement, such proposals are binding inter alia on all the members affected by the proposal and also on the company. If the Court were to confirm proposals containing a provision that the Company cancel its issued shares (and thereby reduce its share capital), it would be purporting to impose an obligation on the Company to do something which is unlawful having regard to s. 72(1). The Court cannot make an order which has such an effect. Even if the proposals for the scheme of arrangement were drafted in such a way that the obligation to cancel the shares was not expressly imposed on the Company, it does not appear to me that the Court has jurisdiction under s. 24(8) of the Act to make an order that issued shares credited as fully paid up in the capital of a company limited by shares be cancelled. If it did so, the Court would be assuming a jurisdiction to order that a step be taken, i.e. the shares be cancelled, which the Company itself has no power to do and is expressly prohibited by s. 72(1). Notwithstanding the apparently wide discretion given to the Court under s. 24(8), it does not appear to me to include the doing of an act which, if done by the Company, would be unlawful. Further, any such order of the Court would have to direct that some person or body cancel the shares. The obvious person to do this is the Company, which, again, comes back to the situation of the Court imposing on the Company an obligation to do something which is unlawful pursuant to s. 72(1) of the Act of 1963.
Happily, on the facts of this scheme of arrangement, the issued share capital was very small, i.e. €126.9738. The intention of the scheme of arrangement was that, subsequent to the Effective Date, the Investor would hold 75% of the issued share capital and Mr. McEnaney, 25%. It was possible to achieve this by modifying the scheme of arrangement so as to delete all references to cancellation of the existing 100 ordinary shares and to provide for the issue to the Investor of 300 ordinary shares at par, credited and fully paid up, in consideration of €380.92.
A similar issue arose in December, 2007, in the matter of Euro Iompu Teoranta (in examination) [2007] 372 COS In that instance, the examiner had proposed the cancellation of redeemable preference shares. For the same reasons as expressed herein, I reached a conclusion that I could not confirm the scheme of arrangement as originally proposed. In that instance, the examiner was able to modify the proposals so as to provide for the redemption of the issued redeemable preference shares for a total consideration of €20 out of the proceeds of a fresh issue of shares. The purpose of the cancellation in the scheme of arrangement, in that instance, was to remove the holder of the redeemable preference shares as a member of the company. The redemption provided for in the modified proposals achieved this. The redemption proposed was in accordance with Part XI of the Companies Act, 1990 and the shares could have been cancelled if required, pursuant to s. 208 of the Companies Act, 1990.
The confirmation of the scheme of arrangement by the Court does not, of itself, effect any change in the shareholding of the Company. As already stated, confirmation of the scheme of arrangement makes binding, inter alia, on the members and the company. The requisite resolutions of the company and/or the board of directors still have to be passed to issue and allot the new shares to the Investor.
The second issue which arose related to the amendment of the articles of association of the Company. Paragraph 5.1 of the scheme of arrangement, insofar as relevant, originally provided:
“The Articles of Association of the company shall be deemed, with effect from the Effective Date, to be amended to the extent necessary to allow these proposals to be implemented. Without prejudice to the generality of the foregoing, the period during which the directors are empowered to allot shares contained in article 2 of the Company’s Articles of Association shall be extended to the extent necessary to enable the shares to be allotted to the Investor.”
The intention was that the articles of association of the Company would then be amended pursuant to s. 24(7) of the Act. This provides:
“Any alterations in, additions to or deletions from the memorandum and articles of the company which are specified in the proposals shall, after confirmation of the proposals by the court and notwithstanding any other provisions of the Companies Acts, take effect from a date fixed by the court.”
It is to be noted that, if s. 24(7) is to apply, such alterations must be “specified in the proposals”. The original proposals of the Examiner did not specify the intended alterations to the articles of association. The modified proposals confirmed by the Court on 14th February, 2008, expressly specified the amendments to be made in articles 1 and 2 of the articles of association.
The requirement in s. 24(7) that the proposed amendments be specified is consistent with the need for certainty at any time as to the relevant provisions of the memorandum and articles of association of a company. If the Company had amended its articles by special resolution, the resolution would have had to be filed in the Companies Registration Office. Hence, on 14th February, I made an order pursuant to s. 24(8) of the Act that the articles of association, amended as specified in the modified proposals, be filed in the Companies Registration Office within 21 days.
I wish to add one comment in relation to the order made herein which is of practical importance. In the course of the hearing for the purpose of consideration of the report of the examiner in Euro Iompu Teoranta (in examination) [2007] 372 COS in December, 2007, counsel for the examiner therein, as part of his submissions on the question as to whether the Court could confirm proposals for a scheme of arrangement which included provision for the cancellation of shares and/or make an order pursuant to s. 24(8) of the Act that issued shares in the company be cancelled, wished to refer to earlier proposals for schemes of arrangement which, he submitted, had included similar provisions and which had been confirmed by the Court.
It then transpired that the relevant proposals for schemes of arrangement confirmed by the Court had not been retained on the Court file. This was so because such proposals were an exhibit to an affidavit sworn by the examiner and, as such, would not normally be retained on the Court file. It appears desirable that proposals for a scheme of arrangement which are confirmed by the Court should form part of the Court order as a schedule thereto and should be retained on the Court file. I so directed, in the proceedings herein, in the order of 14th February, 2008. The proposals as modified are included as a schedule to the order. This was facilitated by the solicitors for the Examiner making same directly available to the Registrar in electronic format.
Allergan PLC v The Companies Act 2014
(Approved) [2020] IEHC 214 (11 May 2020)
JUDGMENT of Mr Justice David Barniville delivered on the 11th day of May 2020
Introduction
1. The applicant, Allergan plc (the “Company”), seeks orders pursuant to the Companies Act, 2014 (the “2014 Act”) for, (a) the sanctioning of a proposed scheme of arrangement between it and holders of certain shares in the Company (the “scheme”) under Part 9, Chapter 1 of the 2014 Act and (b) confirming a special resolution approving a reduction of the capital of the Company by cancelling and extinguishing certain of its shares under s. 85(1).
2. The application arises in the context of an acquisition of the Company’s share capital by a subsidiary of AbbVie Inc. (“AbbVie”), a Delaware company, in a US$63 billion transaction announced in June 2019. The purpose of the proposed scheme is to effect the acquisition of the entire issued, and to be issued, share capital of the Company by Venice Subsidiary LLC (“Venice”), a direct wholly owned subsidiary of AbbVie such that, on completion of the acquisition, the Company will be a wholly owned subsidiary of AbbVie. The Company is the parent company of a global pharmaceutical business with operations in more than 100 countries with approximately 17,000 employees. AbbVie is a global biopharmaceutical company with operations in 75 countries and approximately 30,000 employees.
3. I heard the Company’s application for the orders referred to above on 6 May 2020 and in an ex tempore ruling that day, made orders sanctioning the proposed scheme and confirming the special resolution approving the reduction in the Company’s capital as well as various ancillary orders. I was satisfied that it was appropriate to do so in light of the relevant legal tests as applied to the facts set out in the various affidavits sworn in support of the application. However, as the application raised an issue which, while present in a number of previous similar applications, has not yet been the subject of a written judgment of the Irish courts. I agreed to produce a written judgment addressing the issue and setting out my reasons for granting the Company’s application.
4. The issue arises from the fact that more than 99% of the shares the subject of the scheme are held by investors in book entry form through the Depository Trust Corporation (“DTC”) in the United States, whose nominee, Cede & Co (“Cede”) is the registered holder and legal owner of the relevant shares. Those investors are beneficial owners and not legal owners of these shares. The balance of the shares (less than 1%) are held by persons other than Cede. Those persons are the registered and legal owners of the shares. As we shall see, Cede cast votes at the scheme meeting convened by the court in favour of and against the proposed scheme, to reflect the instructions given to the DTC by the beneficial owners of the relevant shares. This raises a number of questions in terms of the test applicable to the sanctioning by the court of schemes of arrangement, which it is appropriate to address in this judgment.
Procedural Background
5. On 10 September 2019, the High Court (Haughton J.) entered the proceedings in the Commercial List and made various further orders and directions in connection with the proposed scheme. The court ordered, pursuant to s. 450 (3), that a meeting of the holders of the Scheme Shares (as defined in the scheme) be convened to consider the proposed scheme and ordered that such meeting of scheme shareholders take place on 14 October 2019. The court further ordered pursuant to s. 450 (5), that all of the holders of the scheme shares would comprise one class for the purposes of the scheme meeting. The court ordered that the scheme meeting be advertised in a number of Irish and international publications and made various other orders concerning the conduct of the scheme meeting itself. Among those orders and directions was an order that each member of the Company entitled to more than one vote was not required, if it voted, to use its all of its votes or to cast all the votes used in the same way.
6. The scheme meeting went ahead on 14 October 2019. Cede was counted as voting both for and against the scheme. The scheme was approved by an overwhelming majority. The scheme was approved by 91.36% in number of the votes cast, representing 99.64% in value of the holders of the scheme shares present and voting in person or by proxy at the scheme meeting.
7. An extraordinary general meeting (the “EGM”) was held after the scheme meeting on 14 October 2019. Among the resolutions passed at the EGM was a special resolution approving the reduction in the Company’s capital by cancelling and extinguishing all of the “cancellation shares” (as defined in the scheme) without thereby reducing the authorised share capital of the Company. The holders of shares, representing 99.79% of the shares in the company, voted in favour of that special resolution.
8. By an originating notice of motion dated 11 March 2020, the Company applied for orders sanctioning the proposed scheme and confirming the special resolution approving the reduction in the Company’s capital. The application was grounded on a very detailed affidavit sworn by a Robert D. Bailey on 5 March 2020. Mr Bailey is the Company’s Executive Vice President, Chief Legal Officer and Corporate Secretary. Affidavits were also sworn on behalf of the Company by Brenton L Saunders, the Company’s Chairman, President and Chief Executive Officer, on 2 March 2020, by Sandra Lynn Moore of Computershare Trust Company N.A., on 6 February 2020, by Michelle Gribulis of Broadridge Investor Communications, on 21 February 2020 and by Donal Breatnach of Arthur Cox on, 16 March 2020.
9. On 16 March 2020, I fixed the hearing date for the Company’s application for 6 May 2020. I gave directions in relation to the advertising of the hearing in a number of Irish and international publications. I also directed that if any interested party wished to appear at the hearing to support or oppose the making of any order, that party had to give notice of its intention to appear by 5:30pm on 1 May 2020, and had to file and serve an affidavit in support of such appearance by the same date.
10. Mr Breatnach swore a further affidavit in support of the Company’s application on 6 May 2020. In that affidavit, he confirmed that the outstanding United States anti-trust clearance required was obtained by the Company from the Federal Trade Commission on 5 May 2020. All of the required anti-trust clearances had, therefore, been obtained by the Company. Consequently, all of the conditions to the acquisition, and to the scheme, were at that stage satisfied (save for those to be dealt with by the court on the Company’s application). Mr Breatnach also provided evidence of the Company’s compliance with the directions made by the court on 16 March 2020. He further confirmed that no interested party had given notice of its intention to appear at the hearing, although he pointed out that one potentially interested party had made enquiries about the hearing. That party did not, however, seek to appear to oppose or support the orders being sought. Finally, as the proceedings are “takeover proceedings” within the meaning of order 75 rule 18 of the Rules of the Superior Courts (as amended). Mr Breatnach explained that the Irish Takeover Panel (the “Panel”) was on notice of the Company’s application and had been kept updated in relation to the hearing of the application. The Panel confirmed that it did not intend to appear at the hearing.
Sanction of the Scheme of Arrangement
11. The test to be applied by the court in deciding whether to sanction a scheme of arrangement is well established and has been considered and applied in a number of recent judgments of the Irish courts. In Re Colonia Insurance (Ireland) Ltd [2005] 1 IR 497 (“Colonia”), the High Court (Kelly J.) set out the test to be applied in the case of a scheme of arrangement in relation to a solvent company. The test was subsequently applied to takeover or acquisition schemes, such as the scheme at issue in the present case: In Re Depfa Bank plc [2007] IEHC 463 (“Depfa”) (Kelly J.) and In Re SCISYS Group plc [2019] IEHC 904 (“SCISYS”) (Barniville J.). The test has also been applied to schemes of arrangement providing for corporate restructuring in other situations (In Re UBS EFTs public limited company [2019] IEHC 860 (“UBS”) (Barniville J.) and to schemes of arrangement concerning insolvent companies (In Re Ballantyne plc [2019] IEHC 407 (Barniville J.)). I am satisfied that the test set out in Colonia and referred to, and applied, in those other cases is the appropriate test to be applied in considering the Company’s application for court sanction in respect of the proposed scheme and I apply it here.
12. In summary the test requires the court to be satisfied that the following five requirements have been fulfilled, namely, that:
1. Sufficient steps have been taken to identify and notify all interested parties;
2. The statutory requirements and all directions of the court have been complied with;
3. The class of members (in the case of a scheme of arrangement between the company and its members) has been properly constituted;
4. There is no improper coercion of any of the members concerned; and
5. The scheme is such that an intelligent and honest person, being a member of the class concerned, acting in his or her interest, might reasonably approve of it.
13. In addition to those five requirements, the court must also be satisfied that the scheme is not ultra vires the company the subject of the application. That might be the case where the scheme at issue involved the sale of the entirety of a company’s undertaking, in circumstances where there was no power in the company’s constitution permitting such a radical alteration in its position (for example: In Re Oceanic Steam Navigation Co. Ltd [1939] CH 41). There is no question of that arising in the present case. The purpose of the scheme here is to give effect to the proposed acquisition which will alter the identity of the Company’s members, but not its activities. There is, therefore, no question of the proposed scheme being ultra vires the Company.
14. An additional factor which arises in the present case is that, as the Company is a “relevant company” and the transaction the subject of the proposed scheme is a “takeover”, as those terms are defined in the Irish Takeover Panel Act, 1997 (the “1997 Act”), the transaction must be conducted in accordance with the provisions of that Act and the Takeover Rules, subject to the supervision of the Panel. A similar position applied in the case of the scheme of arrangement which was considered in In Re Readymix plc [2012] IEHC 194, where Kelly J. noted that the transactions envisaged by the scheme at issue in that case were required to be conducted in accordance with the provisions of the 1997 Act and the Takeover Rules. He was satisfied on the evidence that there had been close liaison between the company at issue and the Panel which had, by direction of the court, been served with the application and did not appear before the court. Kelly J. was satisfied on the evidence that the scheme and the procedures relating to it were proposed and conducted in compliance with the Takeover Rules.
15. Similarly, in the present case, the evidence establishes that the Company and its advisers have liaised with the Panel throughout the entire process. The Panel commented on the draft scheme circular sent by the Company and subsequently confirmed to the Company that it had no further comments. The Panel was served with the papers in respect of the application (and the earlier application to convene the meeting of scheme shareholders). The Company kept the Panel updated in relation to developments in the application. The Panel decided that it did not need to appear at the hearing. I am satisfied on the evidence that the provisions of the 1997 Act and the Takeover Rules have been fully complied with and that no issue arises in relation to those provisions.
16. I will now deal with each of the five requirements derived from Colonia and considered and applied in the other cases referred to earlier.
(1) Steps to identify and notify interested parties
17. One of the unusual features of this case concerns the shareholding structure of the company. As noted earlier, and as explained in detail in Mr Bailey’s affidavit, similar to other companies that have effected a corporate migration to Ireland, the Company has a shareholding structure which is normal for US listed companies (the Company’s shares are traded on the New York Stock Exchange), but is unusual in Ireland. More than 99% of the Company’s issued and outstanding shares are held by investors who are the beneficial owners of the shares but are not the legal owners. The investors are not, therefore, “members“ of the Company for the purpose of s. 168 of the 2014 Act. The investors hold their shares/securities in book-entry form through the DTC. Cede is the nominee of the DTC and is the registered holder and legal owner of the shares. A tiny percentage (less than 1%) of the total shares in issue are held by persons other than Cede. Those persons are the registered holders and legal owners of those shares. Mr Bailey explained that the DTC was established in 1973 to address the issues created by rising volumes of securities trading transactions in the US securities industries in the late 1960s. Prior to that, stockbrokers physically exchanged share certificates and relied on manuscript records to evidence title shares. That system was inefficient and expensive. The DTC was created to reduce costs and to provide clearing and settlement efficiencies by making book entry changes to the ownership of the securities. Securities are deposited into the DTC by participants who are typically banks and brokers (the “DTC Participants”). Cede becomes the legal owner of the securities deposited with the DTC and is registered in the register of members of the Company for the purposes of s. 168 of the 2014 Act. The DTC maintains records of how much of each security is held by each DTC Participant. Securities are eligible for transfer among DTC Participants by book entry delivery within the DTC. This occurs by way of electronic instruction issued through the DTC, transferring the rights to a particular number of deposited securities from one DTC Participant to another. However, Cede remains the registered holder and legal owner of the securities throughout the process. The number of securities held on behalf of each DTC Participant, and the terms on which the DTC holds them as depository for such participant are set out in the records of ownership and the rules of the DTC respectively. As noted earlier, DTC Participants are typically banks and brokers. In many, if not most cases, such DTC Participants will have invested in securities through the DTC on behalf of clients. Those clients may be retail investors or other financial institutions or investment firms (who may, in turn, hold them for other institutions or for retail investors). The DTC Participants usually have contractual or trust-based relationships with the clients for whom they hold the beneficial interest in the Company’s shares (described by Mr Bailey as the “underlying interest – holders”). The Company’s experience is that there are numerous layers of contractual, or trust-based relationships involved between Cede and the ultimate beneficial owners of Cede’s shareholding in the Company. These relationships may take many forms and can be governed by the laws of several different jurisdictions.
18. Almost all trading in the Company’s shares takes place through the DTC. The register of members of the Company refers to Cede holding 99.8% of the Company’s issued, and outstanding, share capital as at 2 March 2020. As at the same date, there were 2,962 other registered members. Cede is the sole registered owner of the Company’s securities deposited with the DTC. While the Company can request from the DTC a “securities position listing” as of a specified date which will identify the DTC Participants having a position in the Company’s securities and the number of securities held by each DTC Participant on that date, this will not disclose the identity of the persons (if any) on whose behalf the DTC Participants are holding the securities. When the Company receives such a securities position listing, DTC Participants can be asked to identify the underlying interest – holders who are their immediate clients and those persons can in turn be asked to identify the underlying interest – holders (if any) on whose behalf they have invested and so on. As a consequence, and due to the number of layers of interests involved in the differing legal relationships governing each layer of underlying interest – holders, it is impossible for the Company to be completely certain at any time of the identity of all of its underlying interest – holders. Mr Bailey explained that underlying interest – holders in the Company have been informed that they are not the legal owners of the shares and that that is apparent from shareholder communications issued by the Company since it was incorporated in Ireland. As required by US securities laws, the Company takes steps to ensure that the registered holders of the shares and underlying interest – holders are aware of and able to vote on resolutions proposed at the Company’s shareholder meetings. The evidence discloses that the Company undertook a number of procedures to seek to ensure that all of those interested parties received shareholder materials in relation to the scheme meeting. I accept that evidence.
19. The procedures adopted by the Company, in that regard, were described in the affidavit sworn on behalf of the Company by Matthew E. Walsh and filed on 3 September 2019, and are referred to in the order of the High Court of 10 September 2019. At paragraph 3 of that order, the court directed that notice of the scheme meeting be sent to the members of the Company (determined by reference to the register of members of the Company at a specified time and date) commencing on or about 16 September 2019, by means of a notice and that such notice was to be sent to the DTC Participants and the underlying interest – holders in the manner described by Mr Walsh. The affidavit evidence of Mr Bailey, Ms Moore and Ms Gribulis, demonstrates to my satisfaction that, in compliance with the order of 10 September 2019, the relevant documents, including the notice and proxy statement, were sent to the registered shareholders and to the underlying – interest holders by post or electronically not less than 21 clear days before the scheme meeting. Extensive steps were taken by the Company with a view to ensuring that the underlying interest – holders received those documents. The Company used the services of Computershare, its registrar and transfer agent, and Broadridge, an investor communications company, to assist in those steps. The Company did so in order to ensure that the DTC Participants and the underlying interest – holders had sufficient notice of the scheme meeting, as well as the registered shareholders of the company. The precise steps taken by, and on behalf of, the Company were set out at paragraphs 77 to 87 of Mr Bailey’s affidavit, and in the affidavits sworn by Ms Moore and Ms Gribulis.
20. I am satisfied that this very extensive affidavit evidence demonstrates clearly that the Company has fulfilled the first requirement which must be met in order for the court to sanction the scheme. While there is no previous reported decision of the Irish courts which considered the sanctioning of a scheme of arrangement where the company at issue had a shareholding structure similar to that of the Company subject of the present application, Mr Bailey explained on affidavit that the Company’s solicitors, Arthur Cox, advised the Company that the High Court previously sanctioned a number of schemes of arrangement involving companies which had migrated to Ireland and which had the vast majority of their issued share capital held by Cede through the DTC system. Those approved schemes included schemes in respect of Cooper Industries plc, Warner Chilcott plc, and Covidien plc. Mr Bailey exclaimed that Arthur Cox had advised that materially identical procedures were undertaken in respect of those schemes and sanctioned by the court to ensure that shareholders and underlying interest holders were aware of, and able to cast votes on the resolutions proposed at the relevant scheme meetings. While that information is of interest, and does provide some comfort to the court in considering the procedures followed in the present case, I am in any event satisfied that on the basis of the extensive evidence provided by the Company, sufficient steps were taken by, and on behalf of, the Company to identify and notify interested parties of the scheme meeting.
(2) Compliance with statutory requirements and court directions
21. The statutory requirements which have to be fulfilled before a scheme of arrangement can become binding on the members of the company concerned (in the case of a scheme between a company and its members) are set out in s. 453 of the 2014 Act. Section 453 (1) provides that a scheme will become binding on the members of the company concerned if certain conditions are satisfied. Those conditions are set out in s. 453 (2). In summary the conditions are as follows:
(a) There must be a “special majority” of those voting at the scheme meeting in favour of a resolution agreeing to the scheme. A “special majority” is a majority in number representing at least three fourths in value of the members;
(b) Notice of the passing of the resolution at the scheme meeting, and that an application will be made to the court in relation to the scheme of arrangement, must be advertised in at least 2 daily newspapers circulating in the district where the registered office or principal place of business of the company is situated; and
(c) The scheme must be sanctioned by the court.
22. As to the first of those statutory requirements, evidence has been provided in the form of Mr Bailey’s affidavit and in the affidavit of Mr Saunders, that the requisite “special majority” requirement was satisfied. 91.36% of the members by number representing 99.64% of the votes cast in value voted in favour of the scheme at the scheme meeting. Mr Bailey explained that Cede, which holds almost all of the Company’s issued and outstanding share capital, was counted as voting both for and against the scheme to reflect the instructions given by certain of the beneficial owners of those shares to the DTC. Some of those beneficial owners instructed the DTC to vote against the scheme. Two points arise out of that. The first is that it should be noted that, the order of 10 September 2019 expressly provided (at paragraph 9) that members of the Company entitled to vote were not required to cast all their votes in the same way. Second, s. 190 of the 2014 Act expressly entitles a member of a company, entitled to more than one vote, not to cast all of its votes in the same way in a poll taken at a meeting of the members of the company. There was, therefore, no problem with Cede voting some of its shares in favour of and some against the scheme.
23. As regards the second of the statutory requirements, Mr Breatnach’s affidavit of 16 March 2020 establishes that the relevant notices were published in the Irish Times and in the Irish Independent on 11 March 2020. The requirements of s. 453 (2)(b) have, therefore, been fulfilled in this case.
24. As regards the directions made by the court in its order of 10 September 2019, Mr Bailey’s affidavit demonstrates clearly that the directions given by the court in that order were all complied with. He explained, in some detail, the circumstances in which the relevant notices and other documents (including the proxy statement and circular) were sent to the members and other interested persons (further evidence of this is contained in the affidavits of Ms Moore and Ms Gribulis). In addition, Mr Bailey explained how the various other directions made in that order were complied with. Mr Saunders also explained in his affidavit how the scheme meeting was conducted. Mr Bailey also referred to, and exhibited, the advertisements published in respect of the scheme meeting directed by the court. I am satisfied that the evidence establishes that the directions made by the court on 10 September 2019 were fully complied with by the Company.
25. As regards the directions made by the court on 16 March 2020, Mr Breatnach’s second affidavit (sworn on 6 May 2020) demonstrated that the relevant advertisements were published on 21 April 2020 in respect of the court sanction hearing and that announcements were published by the Company and filed with the SEC, in compliance with those directions on 21 April 2020. Mr Breatnach also explained that no interested party had given notice of its intention to appear to oppose or support the company’s application and exhibited correspondence exchanged between one potentially interested party which ultimately decided not to appear.
26. I am satisfied that all of the directions made by the court in its orders of 10 September 2019 and 16 March 2020 were complied with.
(3) Class of members properly constituted
27. The next requirement which has to be fulfilled by the Company is to persuade the court that the class of members which voted at the scheme meeting on 14 October 2019 was properly constituted. As noted earlier, in his order of 10 September 2019, Haughton J. ordered pursuant to s. 450 (5) of the 2014 Act, that all holders of the scheme shares would comprise one class for the purposes of the scheme meeting. The meeting was convened and took place on that basis. The court had evidence before it that it was appropriate to so order. The evidence was given by Mr Walsh in his affidavit filed on 3 September 2019. In that affidavit, Mr Walsh explained that the Company had considered different groups of members who could potentially be considered as forming separate classes. However, it was explained that the Company had formed the view, on legal advice, that those groups did not properly constitute separate classes and that a single class of members was appropriate. The court agreed and so ordered on 10 September 2020, on an ex parte basis.
28. No objection has been taken by any person to the fact that the scheme meeting was conducted on the basis of a single class of members. While Haughton J. made the order that the meeting would take place on the basis of a single class, on an ex parte basis, the court should be slow to reach a different view on this application to that reached by Haughton J. when convening the meeting. That is a view I have previously expressed and is an approach supported by the authorities (see for example: UBS and SCISYS). I agree with the view expressed by Chadwick LJ. in Re Hawk Insurance Co. Ltd [2001] EWCA Civ 241, that an applicant would be “entitled to feel aggrieved” if the court, in the absence of any opposition and of its own motion, were to reach a different view of the appropriateness of the class composition to that reached at the earlier stage of the process. However, as the court is not a rubber stamp, it is necessary for me to reconsider the position on this application.
29. The Company has provided further detailed evidence on this application to demonstrate the appropriateness of the scheme meeting proceeding on the basis of a single class of members. The different groups which could potentially constitute separate classes for the purposes of the meeting were identified by Mr Bailey at paragraph 74 of his affidavit. Those groups included the directors and executive officers of the Company, who had the right to vote in respect of certain shares and who had indicated that they intended voting in favour of the scheme, the Chief Executive Officer of the Company, who had entered into an employment agreement with the Company at the time he commenced in that role which provided for certain termination provisions and payment entitlements and releases, other executive officers of the Company who participate in certain executive severance plans, holders of equity awards, participants in the Company’s annual incentive programme, employees who might receive retention bonuses as a result of the acquisition, executive officers of the Company who might receive “parachute payments” as a result of the acquisition, directors who have interests in AbbVie shares and options and so on. Mr Bailey explained that, notwithstanding particular arrangements in respect of various groupings of directors, officers and employees, to the extent that they hold shares, they are treated under the scheme in the same way as all other shareholders. On that basis, it was explained that it was appropriate for the court to have convened a single meeting of all of the holders of the scheme shares to consider and vote on the scheme and that the meeting properly proceeded on that basis.
30. As discussed by me in UBS and in SCISYS, the leading statement on the question of the class composition of meetings is that made by Bowen’s LJ. in the English Court of Appeal in Sovereign Life Assurance Company v Dodd [1892] 1 QB 405, where he stated:
“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.” (page 583)
31. The test has been considered and applied in numerous subsequent cases. The relevant principles were very helpfully summarised by Lord Millett in the Court of Final Appeal of Hong Kong in Re UDL Argos Engineering Ltd [2001] HKCFA 54, by the English Court of Appeal in Re BTR plc [2000] 1 BCLC 740 and Hawk Insurance and by Lloyd J. in the English High Court in Re Equitable Life Assurance Society [2002] EWHC 140. In that case the court noted that it was necessary to balance the power of the majority and that of the minority and stated that:
“… whereas unnecessary subdivision of a class may thwart a proper scheme altogether because of a veto thereby afforded to a small minority, on the other hand if it is said that there has been a unfairness or oppression on the part of the majority in a larger undivided class, the control mechanism is the court’s scrutiny at the sanction stage: see Re Hawk insurance Co Ltd… and Nordic Bank plc v International Harvester Australia Ltd…” (para. 46)
32. The test was approved in this jurisdiction by Laffoy J. in the High Court in In Re Millstream Recycling Ltd [2009] IEHC 571. It was also approved and applied by me in UBS and SCISYS. The proper focus is on the legal rights possessed by the members of the company. If those rights are not so dissimilar as to make it impossible for the members to consult together with a view to their common interest, then it is appropriate to treat the members as a single class. There is no suggestion in the present case there has been any unfairness or oppression on the part of the majority in the single class of members.
33. Kelly J. in Depfa had to consider whether directors who also beneficially owned shares, and who had given an undertaking to vote in favour of the relevant scheme, had to be treated as a separate class. He held that the giving of undertakings did not constitute the directors as a separate class and that the only basis on which it might be necessary to treat those directors as a separate class was where they obtained a benefit which was not available to other members of the wider class in consideration of the undertaking. That did not arise on the facts of that case and does not arise here.
34. As regards the groups referred to in Mr Bailey’s affidavit which might be regarded as requiring separate classes of members to consider the scheme, I am satisfied that the Company is correct in its contention that separate classes were not required. Each of those groups is treated in the same way as other members or interest holders under the scheme and will receive precisely the same consideration. Members of the Company are, therefore, being treated in the same way by the scheme. There is not merely a similarity, but an identity of rights involved. In my view, that indicates clearly that all of the members (and those whose interests are represented by the members) can consult together with a view to their common interest. There was, therefore, no need to call meetings of separate classes of members. To do so would unnecessarily have created a multiplicity of classes. I am satisfied that it was entirely proper for the Company to have proceeded with the scheme meeting on the basis that all members constituted a single class. There was, in my view, no necessity to convene separate meetings for the purpose of considering and voting on the scheme.
35. It is unnecessary for me to express any view in this judgment as to whether a failure to convene separate meetings where that was required might only be fatal to an application to sanction a scheme of arrangement, where the failure in effect tipped the balance of whether the requisite majorities were reached. There is a suggestion in the judgment of the High Court (Costello J.) in Re Pye (Ireland) Ltd (No. 2) [1985] 3 JIC 1101 (at page 4), that unless that was the consequence of the failure to convene separate meetings, it would not be fatal to the application to sanction the scheme. The judgment of the High Court in that case was overturned on appeal by the Supreme Court on other grounds (and there appears to be no record of the Supreme Court decision: see Irish Company Law Reports 1963 – 1993, page 328). The issue does not arise on the facts of this case since I have concluded that the meeting was convened and proceeded properly on the basis of a single class of members. I would prefer to leave to a case in which the issue actually presents itself to express a view as to whether the suggestion made by Costello J. at page 4 of his judgment in Pye is correct.
36. I conclude therefore that the third requirement of the test to be met has been fulfilled by the Company.
(4) Coercion
37. The court must also be satisfied that there has been no coercion of the members in respect of the approval of the scheme. As has been pointed out in a number of the cases mentioned (including Ballantyne, UBS and SCISYS), every scheme in a sense involves an element of coercion where a dissenting member may be bound by the scheme, notwithstanding its opposition to it. However, what this requirement is focused on is improper coercion or pressure by one group or section of members on another, similar perhaps to the oppression of a minority interest in a company. In any event there is no question of coercion in the present case and so this requirement has clearly also been fulfilled by the Company.
(5) Approval by intelligent and honest person
38. The final requirement which must be fulfilled is that the court must be satisfied that the scheme is such that an intelligent and honest person, being a member of the class concerned, acting in respect of his or her own interests, might reasonably approve of it. This requirement has been widely considered and discussed in several Irish, and other, cases, a number of which were discussed by me in Ballantyne. It is unnecessary to consider the cases in any detail in this judgment. The test was most succinctly put by Kelly J. in Depfa in the terms just summarised. In considering whether the test is satisfied, it is important to bear in mind, as stated by Kelly J. in Colonia and in Depfa, and by me in Ballantyne, UBS and SCISYS, that the court does not act as a rubber stamp in considering whether to sanction a scheme which has been approved by the members. That said, however, the court will be slow to reach a different view in respect of the scheme to that reached by experienced persons involved in the relevant market or industry, relevant to the company who voted in favour of it. As noted by Parker J. in Re Ocean Rig UDW Inc. (18 September 2017, Grand Court of the Cayman Islands, Parker J), in the case of a creditor scheme:
“The court should be slow to differ from the vote, recognising that it is the creditors who are clearly the best judges of what is in their commercial interest. However, the court is not a rubber stamp in this regard even where the scheme has the support of an overwhelming majority of the creditors who are to be subject to it. The court can differ from the vote, but only if it is satisfied that an honest, intelligent and reasonable member of the class could not have voted for the scheme, and in that regard the court’s own view as to whether the scheme is reasonable or even the best scheme is not relevant.” (para. 89)
39. I adopted and endorsed those views in my judgment in Ballantyne and I do so again here.
40. The Company understandably places much reliance on the overwhelming level of support given to the scheme by the members who voted at the scheme meeting. The Company further relies on various other facts. It relies on the unanimous determination of the Board of the Company at its meeting on 23 June 2019, that the various transactions referable to the acquisition, including the scheme, were in the best interests of the Company and its shareholders and that the terms of the scheme were fair and reasonable. The Board unanimously recommended that the Company’s shareholders vote in favour of the scheme. Before doing so, the Board had consulted with management as well as the Company’s internal and outside legal counsel and its financial adviser, JP Morgan, and considered various factors in weighing up the perceived benefits and potential risks of the transaction. The Board concluded that the uncertainties, risks and potentially negative factors were outweighed by the potential benefits that it expected that the Company and its shareholders would receive. In its written opinion for the benefit of the Company’s Board, JP Morgan advised that the consideration to be paid to holders of the Company’s ordinary shares in the proposed transaction was fair, from a financial point of view, to those shareholders. The opinion formed part of the material furnished to the shareholders and underlying interest holders in compliance with the order of the court of 10 September 2019.
41. It is extremely rare for a court to refuse to sanction a scheme where it has been approved by an overwhelming majority of members and where the class, or classes, of members have been correctly constituted. It is clear from the affidavit evidence before the court that the overwhelming majority of members (and underlying interest holders) have supported the scheme. I am satisfied that the scheme was carefully considered by the Board of the Company, which recommended it to the members. The evidence also establishes that there are good, sound and practical reasons for the objectives being sought by the scheme and that the scheme is fair and equitable. In those circumstances, I have no hesitation in concluding that the scheme is one which an intelligent and honest person, being a member of the class voting at the meeting, acting in his or her own interest, might reasonably approve.
42. I am satisfied, therefore, that all of the five requirements summarised by Kelly J. in Colonia and applied and considered in the other cases discussed above, have been fulfilled by the Company. In those circumstances, I will sanction the proposed scheme under s. 453(2) of the 2014 Act and make the consequential orders sought in respect of the scheme.
Capital Reduction
43. The Company also seeks an order under s. 85(1) of the 2014 Act confirming the special resolution, approving the reduction of the capital of the Company by the reduction of the issued capital of the Company, by cancelling and extinguishing all of the “cancellation shares” but without thereby reducing the authorised share capital of the Company. It is common in schemes such as this one, that a reduction of capital is also sought in addition to the sanctioning of the scheme (see for example: Readymix and SCISYS). The relevant special resolution was passed by the members at the EGM on 14 October 2019.
44. Mr Bailey explained at paragraph 64 of his affidavit, that on the reduction of capital taking effect (if confirmed by the court), the issued share capital of the Company will be increased to its former amount by the allotment and issue to Venice, or its nominee, of new shares, equal to the number of cancellation shares with the same rights as those shares and that the reserve arising in the books of account of the Company as a result of the reduction of capital, will be capitalised and applied in paying up in full at par the new shares to be allotted. Therefore, the scheme and the reduction of capital will not affect the Company’s issued share capital and other non-distributable reserves. Neither the scheme, nor the reduction of capital is, therefore, in any way prejudicial to the rights or interests of the Company’s creditors. The Company has put up to date financial information before the court from which it is clear that the reduction of capital will not adversely affect the Company’s financial position in any way. Nor does it conflict with, or breach, any term of any indebtedness incurred by the Company or any of its subsidiaries or involve the diminution of liability in respect of unpaid company capital or the repayment to any shareholder of any paid-up company capital. The capital reduction will not affect the share premium of US$457.9 million. The company capital of the Company is, and will be, in excess of the authorised minimum (as defined by s. 1000 of the 2014 Act) and the reduction will not infringe s. 1084 of that Act.
45. The approach to be taken by the court in considering an application by a company for an order confirming a capital reduction resolution has been addressed by the High Court and by the Court of Appeal in a number of recent cases. The cases were very recently considered by me in Re Hibernia Reit plc [2020] IEHC 144. The approach to be adopted was helpfully set out by Barrett J. in the High Court in Re Permanent TSB Group Holdings plc [2015] IEHC 500. Having referred, with approval, to a number of English cases, Barrett J. set out six matters or factors with which the court would have to be satisfied before it could confirm a capital reduction (at paragraph 42). They may be summarised as follows:
(1) In a case to which the Companies Act, 1963 applies, the company must be authorised by its articles of association to resolve to reduce its capital;
(2) The company must have duly resolved by special resolution to reduce its share capital;
(3) The reduction proposals must have been properly explained to the shareholders so that they could exercise an informed judgment;
(4) The reduction of capital must be for a discernible purpose;
(5) All shareholders must be treated equitably; and
(6) The creditors of the company must be safeguarded.
46. Those factors were cited with approval in the judgment I delivered in SCISYS and in Hibernia Reit and have been recently approved by the Court of Appeal in Re Permanent TSB Group Holdings plc [2020] IECA 1. In his judgment for the Court of Appeal in that case, Collins J. stressed that evidence was required that the reduction had a discernible and for a bona fide purpose. None of that is in dispute in the present case.
47. These are the principles which I must apply in deciding whether to confirm the proposed capital reduction in the present case. I will deal with them in turn.
48. As regards (1), the Companies Act, 1963 does not apply in the present case. The 2014 Act applies. Under s. 84 of that Act, a company may reduce its company capital save to the extent that its constitution otherwise provides. There is nothing in the constitution of the Company which precludes the Company from reducing its company capital. On the contrary, article 48 of the Articles of Association of the Company provides that it may do so by special resolution.
49. As regards (2), the Company resolved by special resolution to reduce its share capital by the resolution (resolution 2) passed at the EGM on 14 October 2019.
50. As regards (3), I am satisfied that the notice set out in the proxy statement issued by the Company dated 16 September 2019, and the circular explaining the effect of the scheme sent with the notice, fully set out and properly explained to the shareholders the scheme and the proposed capital reduction in such a way that they could exercise an informed judgment.
51. As regards (4), the reduction of capital which forms an integral part of the scheme is clearly for a discernible and bona fide purpose, namely, to give effect to and implement the acquisition of the Company by means of the scheme.
52. As regards (5), the evidence establishes that all of the scheme shareholders have been treated equally and equitably in terms of the proposed capital reduction and under the scheme, each shareholder will receive the same consideration for his or her shares under the scheme. The shareholders are therefore being treated equitably.
53. As regards (6), since the Company will be immediately recapitalised in the manner indicated upon the cancellation and extinguishment of the cancellation shares, there will be no impact on the creditors of the Company.
54. In addition to satisfactorily addressing these factors, the Company must also establish that the requirements of s. 85 (2) (as amended) have been complied with. Under that provision, a company which proposes to apply to the court for an order confirming the resolution reducing its capital, must cause notice of the passing of the resolution to be advertised once, at least, in one daily newspaper circulating in the district where the registered office or principal place of business of the company is situated and notice must be given by electronic means to all creditors of the company who are resident, or have their principal place of business, outside the state and must provide certain details in relation to the hearing.
55. The Company provided evidence demonstrating compliance with those requirements in Mr. Breatnach’s affidavit of 16 March 2020 (paragraphs 4 and 5). The required notices were published in the Irish Times and in the Irish Independent on 11 March 2020. The Company sent notices to non-resident creditors by email on 13 March 2020. In addition, as the Company is party to a number of proceedings in the United States, and as claimants of those proceedings might be considered to be contingent creditors of the Company having regard to s. 85(2) of the 2014 Act, the Company sent notices to the counsel acting for the claimants in those proceedings and requested that the notices be brought to the claimants’ attention. The company is guarantor for a limited proportion of the long-term debt issued by entities within the Allergan group. The holders of such notes could also potentially be considered to be contingent creditors of the Company having regard to s. 85(2). However, the Company does not have information in relation to the holders of such notes and did not send notices to them. It appears, however, that such holders would have access to, and would generally be aware of, the Company’s publicly available SEC filings. Consequently, in addition to placing notices in various Irish and international newspapers, the Company also published an announcement in relation to the date of the hearing which it filed with the SEC on 21 April 2020. In my view, the evidence clearly establishes compliance by the Company with the requirements of s. 85(2) (as amended).
56. I am also satisfied on the evidence that the proposed reduction of capital does not involve either, the diminution of liability in respect of unpaid company capital or the payment to any shareholder of any paid-up company capital (for the purposes of s. 85(4) of the 2014 Act). As in SCISYS, the reduction of capital in respect of which confirmation is sought is momentary. As noted earlier, contingently upon the share cancellation resolution taking effect, the issued capital will be brought back to its former amount by the issue of an equivalent number of new shares from the reserve arising on the cancellation. The evidence clearly establishes, therefore, that the capital reduction is one which does not in any way impact on the affairs of the Company’s creditors. The Company will immediately be recapitalised following the cancellation. I am satisfied, therefore, that there is no need to direct the settlement of a list of creditors under s. 85 (4) of the 2014 Act.
57. For these reasons, I am satisfied that it is appropriate to confirm the special resolution approving the reduction of capital sought by the Company and to make the other orders sought, consequential upon that confirmation.
Conclusions
58. In conclusion, for the reasons set out in this judgment, I am satisfied that it was appropriate for me to (a) sanction the scheme of arrangement between the Company and the relevant shareholders pursuant to s. 453(2) of the 2014 Act, having found that the requirements for such sanction been fulfilled by the Company and that the scheme is fair and equitable, (b) confirm the special resolution approving the reduction of capital passed at the extraordinary general meeting of the Company on 14 October 2019, (c) order that the provisions of s. 85(4) of the 2014 Act shall not apply and (d) make the further orders and directions set out in the draft order provided by the Company. I will also give liberty to apply to the Company.
Result: This involved an application to sanction a scheme of arrangement and a reduction of capital. Both of which were granted.