Re Waste Recycling Group Plc

This is the hearing of a petition to sanction a scheme of arrangement under Section 425 of the Companies Act and to confirm the reduction of the capital of the company provided for by the scheme. The company is called Waste Recycling Group plc, and the point of the scheme is to carry through a recommended take-over of the company by another company called Cholet Acquisitions Ltd. (which I will call ‘the acquirer’).

The terms of the acquisition are that existing shareholders should receive a cash payment of the acquirer of 267.5 pence per share. That figure represents a premium of a significant amount to the middle buying price as it was on the last business day before an announcement in January by the company that it was in talks about a possible take-over.

The scheme is of a nature that is reasonably familiar whereby the scheme shares, which are in practice all the shares of the company, are cancelled. The share capital is then increased to its former amount. The number of shares cancelled are re-issued to the acquirer or its nominees, and issued fully paid by crediting the share provision account set free by the earlier cancellation, and in consideration of the cancellation of the issue of the shares to the acquirer, the acquirer makes the cash payment to the, by then, former shareholders of the company.

The scheme has two elements: the sanction of the scheme and the confirming of the reduction of the capital. In terms of the sanction of the scheme the Court requires to be satisfied that the statutory provisions have been complied with and to be satisfied that the class has been fairly represented, and that the majority shareholders were acting bona fide and not coercing the minority for the sake of interests adverse to those of the class whom they purport to represent. In terms of merits, the test is put in terms redolent of the Victorian age, taken from a well-known nineteenth century Judgment, that the scheme is one that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

The scheme is one in relation to which only one class of members was identified, and I am satisfied that that is correct. The determination of the class of members, as indeed in a different type of scheme of a class of creditors, depends primarily on considering first of all the rights of the members in question; and, secondly, the way in which the scheme proposes to deal with those members. It is possible that you have five members with all essentially the same rights, but who are to be dealt with by the scheme in different ways, in which case there will be different classes according to how they are to be dealt with.

In the present case there is really only one class of members in terms of rights, and all members are to be treated the same under the scheme by having their shares cancelled in return for the cash payment. So, I am satisfied that there is only one class. I am satisfied that the steps taken as directed by the Companies Court in respect of convening the meeting were properly carried through, and accordingly in terms of the compliance with the basic procedure, all has been done as it should have been.

Passing on, before I come to the matters of, as it were, the merits, but referring briefly to the question of the reduction of capital, it is necessary that the company shall have power in its Articles to reduce capital; it is necessary for the relevant special resolution to have been passed; it is necessary in the present case, and it is the case, that by Court order, the procedure as to an inquiry as to creditors has been dispensed with. The discretion to confirm a reduction of capital turns on whether the shareholders are being treated equitably; whether the cause of the reduction has been properly explained to shareholders; and whether the reduction is for a discernible purpose. As I say, all the shareholders have been treated the same. There is therefore no issue as to whether they are being treated equitably. The cause of the reduction has been properly explained to shareholders, and the reduction is for a discernible purpose.

The Court meeting was duly convened and that was immediately followed by a meeting at which the resolution requiring the reduction of capital was proposed. The resolution in favour of the scheme was approved by a substantial majority. I am told that approximately 74 percent of all the issue shares of the company were voted and the proportion of shareholders who actually voted was relatively small, but they include the principal shareholder which holds 45.5 percent of the shares. In terms of the figures on the vote, 555 shareholders voted in favour and 143 against. But, in terms of value, the shares which were voted in favour were 99.7 percent of all the shares voted. So, there is an overwhelming vote in terms of value in favour of the scheme, and the votes against were principally from the smaller shareholders.

The hearing has been attended not only by Mr. Davis White for the company, and those instructing him, but by Mr. James Page, who objects to the scheme. He is a shareholder, holding a small number of shares in the company, and he has written a letter to the Court and has expanded a little on what he says in that letter in submissions to me this morning. His concern is at the prospect that this company, which has acted, as its name might suggest, in the business of recycling waste - to which, of course, significant environmental issues attach - should not, as would happen under the scheme, pass from being in public ownership to being wholly privately owned. Were that now to be the case, and if the scheme becomes effective in its present terms, it will become wholly owned by the acquirer who is part of a private group and it would not longer have public shareholders, however few in number, or however small in shareholding.

Mr. Page says that if it ever were the case, it is no longer true to say that the only reason for holding shares is one of financial gain. He says - and this seems to be a fair comment from observation - that particular companies with operations which have an environmental impact - whether positive or negative - often attract the attention of shareholders who buy shares more with a desire to try to hold the directors to account in respect of environmental interests than just on dividend or other financial return. He says that from an environmental perspective it is important that the operations are of a public interest nature and that they should be carried out under public ownership. That is his concern in general terms.

In particular terms, he fears that the financial interests of the company, or of its shareholders, could conflict with environmental objectives, and he would wish to see a situation in which somehow he would let the scheme go through in general; but that some voting shares should be retained by those existing shareholders who wish to retain their shares (such as himself). Now, that is clearly not consistent with the scheme as it stands. It may be compared in terms of the implications of such a situation, with other provisions of the Companies Act under which if a small body of shareholders, not exceeding 10 percent in value of the shares held, remains after an acquisition, it is in some cases the duty, or the right, of the majority shareholder to buy out the shares of those who remain.

Mr. Page suggests that the compulsory acquisition - albeit in return for £2.67.5 on his shares - would infringe his rights under Article 1 of the First Protocol of the European Convention on Human Rights. He is aware that there are decisions of the courts to the effect that the approval of the scheme under Section 425 does not infringe Article 1 of the first protocol any more than provisions equivalent to Section 429 concerned with buying out a small remaining body of shareholders with less than 10 percent of the shareholding infringe Article 1. The point that he makes to distinguish those cases is that they have been cases concerned with cases where the interests bought out are purely financial. Again, he says the interests of those who might wish to remain are not purely financial, and therefore Article 1 is engaged, but is not answered sufficiently in the same way as it might be with a company where the interests are purely financial.

Article 1 of the First Protocol is in the following terms: ‘Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No-one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest, or to secure the payment of taxes or other contributions or penalties’. We are not concerned with the second part of the Article, but we are concerned with the question of whether the expropriation of Mr. Page’s shares would amount to depriving him of his possessions otherwise than in the public interest and subject to the conditions provided for by law. Well, the conditions are obviously provided for by law. The question is whether they are provided for in terms that are appropriate and justifiable.

It fell to me to decide whether Article 1 was infringed in relation to the scheme which was proposed between Equitable Life Assurance Society and classes of its members, as creditors. In deciding to approve the scheme, I was presented with objections on the grounds of infringement of Article 1 of the First Protocol. In paragraph 86 of my Judgment, of which the neutral citation number is [2002] EWHC 140, and which is reported at [2002] 2 BCLC, 510, I referred to the submission by Mr. Moss for the company that it was wrong, based on a decision of the European Commission of Human Rights on a complaint made on 12 October, 1982 in relation to applications 8588/79 and 8589/79 reported as Bramelid and Malmstrom -v- Sweden [1982] 29 DR 64. The complaint was based on legislation somewhat similar to Section 429 of the Companies Act. I rejected the objection saying this: “The Commission said that this type of rule, essential in a liberal society, cannot in principle be considered contrary to article 1 of the First Protocol, provided that the law does not create such inequality that one person could be arbitrarily and unjustly deprived of property in favour of another”. The Commission said that “this type of rule essential in a liberal society, cannot in principle be considered contrary to Article 1 of the First Protocol provided that the law does not create such inequality that one person could be arbitrarily and unjustly deprived of property in favour of another”. I went on to say, “It seems to me plain that given the terms of Section 425 and the case law that has been established concerning its application, there is no possible argument for saying that the approval of the scheme under Section 425, so as to bind dissentients among the relevant classes, breaches the rights afforded by article 1 of the First Protocol. Mr. Pike suggested that the Scheme would amount to confiscation of rights, and others made a similar point, even if not in quite the same way, saying that the compensation was not worthy of the name. I have already quoted Brightman, J. as to what is meant by compromise and arrangement, and the essentail need for some quid pro quo. The objectors may feel that it is inadequate, and indeed some said so to me, on both sides of the GAR/Non-GAR divide, but the Scheme does both in law and in fact involve exchange of rights and thus consideration. No arrangement capable of being approved under section 425 could, in my view, amount to a confiscation such that article 1 would be infringed”.

Essentially Mr. Page invites me to reconsider that on the basis that that is all very well where, as was certainly the case in Equitable Life, the interests are purely financial. But, the interests of shareholders are not necessarily purely financial, and, as he says, there are shareholders who acquire their shares for the purpose, at least in part, of being able to attend annual general meetings and being able to hold companies to account in a public manner.

The question really is whether that separate interest which is undoubtedly one of the incidents of ownership of shares in public companies is a distinct interest, such that Article 1 is engaged differently as compared with the way in which it is engaged by a purely financial interest. It seems to me that the terms of Article 1 are general. They provide that no person is to be deprived of his possessions except in accordance with the provisions set out in the Article - that is to say, in the public interest and subject to the conditions laid down. I entirely accept that Mr. Page would be being deprived of his possessions if the scheme goes through and becomes effective in accordance with its terms. The question therefore is whether that deprivation of possession is one that is validated, or is capable of being validated, in the public interest by the provisions of legislation such as Section 425.

It seems to me that the answer to that is ‘Yes’ for the reasons recognised by the Commission in the Swedish case, and acted on by myself in the Equitable Life case as regards Section 425 because the legislation of this kind is not concerned to distinguish - and cannot distinguish - in relation to the treatment of shareholders according to how one shareholder or another perceives his, or her, or his interest in the company. If there were to be a differential treatment proposed of those shareholders who wished, despite being in a small minority, to be allowed to retain their shares in order to be able to carry on voting, there would be certainly a substantial risk that one would be generating two different classes of shareholders according not to their rights in relation to the shares, but in relation to how they regarded those rights. That is something which was rejected in relation to Section 425 in the case of Re. BTR plc [1999] 2 BCLC, 675 and on appeal [2001] BCLC, 740. The authorities show clearly that what one is concerned with is what rights the shareholders have, and not how they see their rights, or in what way they are interested in their rights, or how they wish to exercise their rights. I quite understand Mr. Page’s concern, and I see that he regards himself as having a different interest from the purely financial interest of, for example, the largest single shareholder. But, in terms of the application of Article 1, it seems to me that it is not possible, or necessary, for the procedures under Section 425 to distinguish in the way that Mr. Page proposes between those who look on their shares as a way of being able to call the board to account on a matter of public concern, and those who look on them as a way of receiving what they hope will be a reasonable dividend and a potential for realising cash on a sale.

It does not seem to me that Article 1 is capable of differentiating in that way, and it does seem to me on the other hand that legislation such as Section 425 is consistent with Article 1, even though it does not distinguish between the interests of the members in the sense ... (inaudible) ... according to how they look on their interest which is to be taken away from them.

For those reasons, while, as I say, I hope understanding Mr. Page’s concern, I am not persuaded that the nature of the scheme is such as to engage his rights under Article 1 of the First Protocol. Therefore, I am satisfied that notwithstanding his objection, and notwithstanding the absence of any provision in the scheme for him to be allowed to retain any of his shares, on that score at any rate the scheme is one which it would be appropriate to sanction.

Going back to the tests on the merits subsequent to the matter, I am satisfied that the statutory majority which, as I say, was very large indeed in terms of value, was acting in its own best interests, but not coercing the minority, that the class was fairly represented, and that the scheme was one which an intelligent man, and a member of the class concerned acting in respect of his interest might reasonable be approved. Equally, I am satisfied that it would be appropriate that the matter of the Court’s discretion to confirm the reduction in capital, and I therefore propose to make the order, subject to being taken to the details of the Court order.