Dee Valley Group Plc, Re Companies Act 2006

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

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

Accordingly, if it were to be determined that the Chairman was right to disallow the votes in the way that he did, the court will have to consider whether the Scheme should be sanctioned as a matter of discretion under section 899(1) of the 2006 Act (“section 899(1)”). It is well-established that the court will, in exercising its discretion to sanction a scheme of arrangement, consider whether it is satisfied that (i) the provisions of the 2006 Act have been complied with, (ii) the class of shareholders, the subject of the court meeting, was fairly represented by those who attended the meeting, and that the statutory majority are acting bona fide and not coercing the minority in order to promote interests adverse to those of the class they purport to represent, (iii) an intelligent and honest person, a member of the class concerned and acting in respect of his own interest, might reasonably approve the scheme, and (iv) there is no blot on the scheme (see page 829 of Plowman J in Re National Bank plc [1966] 1 WLR 819, and Morgan J in Re TDG plc [2009] 1 BCLC 445).

It appears that this is the first case in which a share-splitting exercise has been undertaken with the apparent object of defeating a scheme of arrangement between a company and its members. Those supporting the Scheme say that any manipulation of the shareholdings voting at a class meeting ordered by the court is objectionable. It can be observed immediately that, if the votes of the Individual Shareholders had been counted, the jurisdictional pre-conditions of section 899(1) would not have been satisfied, so there would have been no basis on which the Scheme could have been considered for sanction at the hearing before me. The reverse position was considered by the Hong Kong Court of Appeal in the only other reported share-splitting case, namely Re PCCW Limited [2009] 3 HKC 292 (“PCCW”). In PCCW, however, the share-splitting was used to support the scheme and would not, even potentially, have caused a situation in which there would have been no sanction hearing. Moreover, since the PCCW case, the law has been changed in Hong Kong to abrogate the requirement for a scheme to be approved by a majority of the class of shareholders by number. A similar amendment was considered, but rejected, by Parliament in this country in 2006.

It can, therefore, be seen that the issues that this case raises are of some importance to schemes of arrangement in the future. It will be recalled also at the outset that schemes of arrangement are a very valuable corporate mechanism that have been much used since their introduction in 1862. They were originally only available as between a company and its creditors and then only when the company was in winding up. But section 24 of the Companies Act 1900 extended schemes to those between a company and its members or any class thereof, though still only when the company was in winding up. That latter requirement was removed by section 38 of the Companies Act 1907. Thus, a members’ scheme was possible from 1907 onwards, but like the original creditors’ schemes, they have always had to be approved by a majority in number of those voting. See the full historical analysis undertaken by Nourse J in In re Savoy Hotel Ltd. [1981] 1 Ch. 351 at pages 358-9.

The application before the court is by Dee Valley Group plc (the “Company”) for the court’s sanction of the Scheme between the Company and its members under Part 26 of the 2006 Act. The purpose of the Scheme is to enable Severn Trent Water Limited (“Severn Trent”) to acquire the entire issued voting ordinary share capital of the Company at a price of 1,825 pence per share. The details of the Scheme are fairly conventional for a scheme of this kind. I shall return to those that are relevant to the issues that I have to decide in due course.

The Company is one of two water companies in Wales and supplies water to some 125,000 customers in North-East Wales and North-West England. It has been in that business for some 150 years. Although it is the smallest independent water company in England and Wales, it is said that it has the most satisfied customers of them all in relation to value and that 92% of its customers are satisfied with the service it offers. Severn Trent is a major corporation in the same and other businesses. It is said by the opponents of the Scheme (but much disputed) that Severn Trent offers a lesser service to its customers at a higher cost.

7 individual shareholders in the Company oppose the Scheme. They are Mr Huw Cashmore (“Mr Cashmore”), Mr John Williams, Mr Stuart Owen (“Mr Owen”), Mr George Owen, Mr Stephen Jones, Ms Angelina Blower and Ms Johanna Cooke. A competing bidder for the company, which offered 1,706 pence per share for the shares in the Company, Ancala Fornia Limited (“Ancala Fornia”), also opposes the Scheme. The nominee company of an independent stockbroking firm, James Sharp & Co, supports the Scheme. That nominee company is called James Sharp (Rulegate Nominees) Limited (“James Sharp”) and holds 645,457 voting ordinary shares in the company representing 15.6% of the class of ordinary shareholders that attended the class meeting on 12^th January 2017 to consider a resolution to approve the Scheme (the “12^th January Meeting” or the “Court Meeting”). James Sharp represents 324 underlying beneficial shareholders.

After 30^th November 2016, when the court had directed that the Court Meeting should be held, Mr Cashmore bought three tranches of shares in the Company paying three sums of £2,900, £2,600, and £2,920 respectively to his stockbrokers, Redmayne Bentley. Share certificates were issued to Mr Cashmore on 20^th and 21^st December 2016. On 3^rd January 2017, 443 valid stock transfer forms were delivered by Mr Cashmore to the Company’s Registrars, Capita Registrars Limited (“Capita”), who passed them on to the Company. On 3^rd and 4^th January 2017, the Company registered the 443 new Individual Shareholders (to whom Mr Cashmore had transferred shares) each as holders of a single ordinary share in the Company. On 9^th January 2017, the proxy forms for many of these Individual Shareholders to vote against the Scheme at the 12^th January Meeting were delivered to Capita by Mr Owen.

At the 12^th January Meeting, 466 out of the 828 members present either in person or by proxy voted against the resolution to approve the Scheme. More than 75% of the class of voting shareholders did, however, support the Scheme. Prior to the Court Meeting the Company had taken the precaution of applying ex parte to Registrar Derrett in the Companies Court on 10^th January 2017 for an order. The application was supported by a statement made by Mr Ian Plenderleith (“Mr Plenderleith”), the Chief Executive of the Company, and by a skeleton argument prepared by Mr Andrew Thornton, counsel for the Company, and by oral arguments presented by Mr Thornton and by Mr Martin Moore QC, acting then and now for Severn Trent. Registrar Derrett’s order gave the Chairman of the 12^th January Meeting “permission to reject the votes of any member of the Company holding a share or shares who shall have derived his, her or its shareholding by way of transfer from [Mr Cashmore]”. In purported utilisation of that power, the Chairman, who was Mr Jon Schofield, non-executive Chairman of the Company, exercised his discretion to reject the votes of any member who derived their shareholding from Mr Cashmore. He thereby excluded the votes of the 434 Individual (transferee) Shareholders and reported the result of the Court Meeting on the basis that the Scheme had been approved by 363 members holding 1,454,463 shares in favour to 32 members holding 213,513 shares against. He also reported (as was also required by Registrar Derrett’s order) that, had the individual votes not been rejected, the resolution would not have been passed by the simple majority prescribed by section 899(1), because only 363 members would have voted in favour, but 466 members would have voted against.

In essence, the proponents of the Scheme submit that the Chairman had an inherent power to reject the votes of the 434 Individual Shareholders, and was right to do so because the power to vote at a class meeting directed by the court must be exercised for the purpose of benefitting the class as a whole and not for any collateral purpose. Once the Chairman had rejected the votes of the Individual Shareholders, the court had a discretion to approve the Scheme. In this case, the proponents say that the bulk of the Individual Shareholders themselves explained, in their responses to requests made under section 793 of the 2006 Act (“section 793”), that they were voting to protect their own or their family’s jobs with the Company. That, say the proponents, is not a permitted motivation as it is extraneous to the interests of the class. Moreover, the proponents say, the circumstances in which and the time when they acquired their shares demonstrates that the Chairman was right to reject their votes.

Conversely, the opponents of the Scheme submit, in outline, that both the manner in which the Individual Shareholders acquired their shares and their motivations in opposing the Scheme were entirely permissible. The position of the employees and customers of the Company is dealt with in some detail in the Company’s scheme document (the “Scheme Document”) recommending the Scheme, as the Takeover Code in fact requires. The directors of the Company have a duty to have regard the interests of the Company’s employees under section 172(1)(b) of the 2006 Act. They also have a duty to have regard to the need to foster the Company’s relationship with suppliers and customers, and impact of the Company’s operations on the community and the environment under sections 172(1)(c) and (d) of the 2006 Act. How then, ask the opponents of the Scheme, can it be impermissible for the members to have regard to such factors when considering whether to approve a Scheme that will undoubtedly affect the Company’s operations in these areas? Moreover, the opponents submit that every shareholder in the class has property in their share and is entitled to vote as they choose, and to decide in exercising their votes if the Scheme is in the best interests of the class. The court could only sanction the rejection of votes if it were shown that no reasonable shareholder would think it was in the interests of the class to vote against the Scheme; the court will not investigate the quality of the subjective views of the shareholders. The opponents argued also that the burden of proof was on the person impugning the vote to satisfy the court that there were grounds for doing so. Finally, the opponents of the Scheme submitted that Registrar Derrett’s order was improperly obtained and was not one that the court ought to have made. There were other ways that could have been employed to ensure that the court could consider the sanction of the Scheme in these circumstances. The Court Meeting could have been adjourned so that the Court could decide whether the votes should or should not be rejected. Alternatively, it would have been permissible to ask the court directing the Court Meeting to set an earlier record date so that new shareholders would be excluded from the count. But neither of these strategies was employed in this case, so it was submitted that the Scheme must be rejected as a matter of jurisdiction.

Before dealing with these arguments in greater detail and considering the applicable law, I should first briefly explain the chronological background in a little more detail.

During October and November 2016, Ancala Fornia and Severn Trent made competing public bids for the Company culminating in Severn Trent’s cash bid of 1,825 pence for each Scheme share with an option for shareholders to receive loan notes as an alternative to cash. Though Mr Cashmore and other staff members at the Company sought to buy shares in the Company at that time, they did so through an online broker, Degiro UK, which they discovered gave them no personal right to vote since the shares were held by a nominee company. Accordingly, it is worth noting that none of the 434 Individual Shareholders were voting shareholders as at 30^th November 2016 when Registrar Jones made his order convening the Court Meeting of the holders of the class of ordinary shareholders (the “Scheme Shares”) in Wrexham.

On 30^th November 2016, Registrar Jones’s order also provided that “for the purposes of establishing entitlement to attend and vote at the [Court Meeting] … and the number of votes which may be cast thereat be determined by reference to” the Company’s register of members at 6pm two business days prior to the Court Meeting (the “Record Date”). Registrar Jones also appointed the Chairman “to act as chairman of the said meeting”, and directed him to report the result of the meeting to the court.

On 2^nd December 2016, the Company issued its Scheme Document concerning the acquisition of the Scheme Shares by Severn Trent. The directors of the Company, advised by Investec Bank plc, unanimously recommended the acquisition.

Mr Cashmore bought his three tranches of shares in the Company in mid-December 2016 and his share certificates were issued on 20^th and 21^st December 2016. He signed numerous share transfers in respect of gifts that he was making of a single share to those who wanted one, and the share transfers were delivered in bulk, as I have said, to the Company’s registrar on 3^rd January 2017. The 434 Individual Shareholders were duly registered as shareholders in the Company on 3^rd and 4^th January 2017. On 6^th January 2017, the Company sent out section 793 notices to all those new shareholders asking, amongst other things, “whether you … were parties to any agreement to which section 824 of the Companies Act 2006 applies or to any agreement or arrangement relating to the exercise of any rights conferred by the holding of the Shares” and for particulars of any such agreement or arrangement. Some 150 shareholders responded by saying that they were concerned about their job or about the jobs of relatives or friends. A further 80 or so shareholders gave a reason concerning the Company’s customer service or the effects on the local community. It may be noted, however, that the Chairman was unaware of the nature of these responses at the time of the 12^th January Meeting.

On 9^th January 2017, Mr Owen delivered numerous proxy forms from the Individual Shareholders to Capita’s offices in Kent.

On 9^th January 2017, Mr Ian Plenderleith, a director and CEO of the Company made his witness statement in support of an application to the Registrar saying the following:-

On 9^th January 2017, Mr Thornton, counsel for the Company, filed a skeleton argument with the court including the following:-

“[1.4] As more particularly set out in the Witness Statement of Ian Plenderleith, the Chief Executive of the Company, in early January 2017, the Company became aware of a number of unusual movements on its register of members, in particular, the acquisition in the market of 461 Ordinary Shares by a single employee and then the transfer by that employee of one share each to 443 individuals (together with the single employee, the ‘Individual Shareholders’), by way of gift. On the face of it, this appears to be an organised attempt to defeat the Scheme (using the majority in number test outlined below). Given the constitution of the Individual Shareholders and the circumstances of the acquisitions of their interests, this may not necessarily be based on concerns in their capacity as members (holding one share each) of the Company but on the basis of opposition to the transaction other than in their capacity as members.

[1.6] The Company is concerned that the movements on the register could result in there not being a representative vote on the part of the members of the Company at the Court Meeting, and that the majority in number test will fail by a flooding of the meeting by the Individual Shareholders. The Company wishes to ensure that Part 26 of the Companies Act 2006 is, in the interests of all the members, correctly interpreted and applied with respect to the Scheme and that shareholders have a proper opportunity to vote on the Scheme in a manner which is in accordance with the Companies Act. Accordingly the Company is making the application in order that the Scheme may progress to the sanction hearing (if the Scheme is approved on the basis outlined below), at which hearing the relevant parties may present their respective arguments and a ruling can be sought to enable the correct execution of the Scheme.

[2.1] The Company wishes for the Scheme Shareholders to have a proper opportunity to consider the Scheme at a meeting held with a view to determining the genuine views of the shareholders as to the attractiveness (or not) of the proposed Scheme. The Hong Kong Court of Final Appeal has criticised (in a different context) what has become known as ‘share-splitting’ given that it has the effect of manipulating the vote at the Court meeting (see Re PCCW Ltd [2009] HKCA 178).

[2.2.] The Company seeks a direction that the Chairman of the meeting shall have discretion:

(a)

to reject [for the purposes of the majority in number test] those votes made by the Individual Shareholders but, if he does so, to record in his report to the Court both (i) the outcome on the basis of the rejected votes, and (ii) the outcome had those votes not been rejected; and/or (b) to adjourn the meeting in his absolute discretion.

[2.3] In the event that the Chairman utilises his power (a) above, this would enable all interested parties (including the Individual Shareholders) to argue whether that rejection was valid or not at the sanction hearing. The Company is not seeking any definitive ruling at this stage that the rejection of the Individual Shareholders’ votes is valid but will ask the Judge at the sanction stage to deal with that issue.

[2.4] This approach will allow the Scheme to continue on schedule whilst preserving the parties’ rights in relation to the scheme and its process.”

On 10^th January 2017, Registrar Derrett made the order that I have already referred to. She gave the Chairman permission to reject the votes of any member who had derived his share from Mr Cashmore, but did not recite in her order what Mr Thornton had submitted, namely that her ruling was not intended to be definitive and that the judge at the sanction stage would be asked to resolve any issue that arose as to the validity of the Chairman’s rejection of any of the votes.

On 11^th January 2017, the Company issued a public statement concerning the proposed acquisition explaining that it had come to the attention of the Company’s board of directors that a series of approximately 445 recent transfers of small holdings in Voting Ordinary Shares had taken place “which may distort the outcome of the shareholder vote at the Court Meeting”. A reference was made to Registrar Derrett’s order, but it was made clear that it was at the sanction hearing that the court would be given the opportunity to assess whether the transferred Shares should have been counted for the purposes of voting on the Scheme at the Court Meeting.

On 12^th January 2017, the Court Meeting and a general meeting of the Company took place. They were both chaired by the Chairman, Mr Jon Schofield. He reported to the court in relation to the Court Meeting that he had exercised his discretion to reject the votes of the 434 Individual Shareholders “in accordance with the order of [Registrar Derrett]” so that the statutory majorities were achieved, but that if their votes had not been rejected, the resolution would not have been passed by the simple majority of shareholders by number required by section 899(1), although it would in any event have been passed by more than 75% in value of the shareholders voting.

After the 12^th January Meeting and in preparation for this hearing, the 7 individual shareholders represented by Mr James Potts QC filed detailed evidence as to their reasons for acquiring their shares and voting against the Scheme. Whilst these statements offer an interesting insight into the thoughts and motives of these individuals, it cannot be assumed that they are necessarily representative of the 434 Individual Shareholders who voted against the Scheme. I have not, therefore, thought it necessary to record in detail in this judgment what these 7 shareholders told the court.

The parties did not entirely agree upon the issues that the court needed to determine, but it seems to me that they can be broadly summarised as follows:-

I shall deal with each of these issues in turn.

I have already stated in outline the competing positions of the parties. The proponents of the Scheme claim that a court meeting of a class of members is sui generis. It is not to be equated with a company’s general meeting. Accordingly, the well-known line of authorities beginning with Pender v. Lushington (1877) 6 Ch. D. 70 at 75-6 and Allen v. Gold Reefs of West Africa Ltd [1900] 1 Ch. 656 are inapplicable to court meetings, when they speak of a vote (in general meeting) being an unconstrained right of property that the holder is entitled to vote “from motives or promptings of what he considers his own individual interest”. The proponents submit that the constituency is different at a court meeting from that at a general meeting, because at a Court meeting the constituency is a class of members rather than the entire membership of the company. Ultimately, Mr Potts for the individual opponents placed his greatest reliance on the recent formulation of my immediate predecessor, Sir Terence Etherton C, in Re Charterhouse Capital Limited [2015] EWCA Civ 536, [2015] BCC 574 (“Charterhouse Trust”) at paragraph 90 to the effect that the court would only determine that votes had not been cast for the benefit of the relevant company if no reasonable person could consider that it was for its benefit. It is to be noted that that was a case about a company meeting rather than a class meeting. Sir Terence said this at paragraph 90 when he sought to extract the principles from a number of cases as to the circumstances in which an alteration to a company’s articles could be challenged as invalid even if passed by the requisite majority:-

“(1)

The limitations on the exercise of the power to amend a company’s articles arise because, as in the case of all powers, the manner of their exercise is constrained by the purpose of the power and because the framers of the power of a majority to bind a minority will not, in the absence of clear words, have intended the power to be completely without limitation. These principles may be characterised as principles of law and equity or as implied terms: Allen [1900] 1 Ch 656 at 671; Assenagon [2013] 1 All ER 495, [2013] Bus LR 266 (at [41]-[48]).

(2)

A power to amend will be validly exercised if it is exercised in good faith in the interests of the company: Sidebottom [1920] 1 Ch 154 at 163.

(3)

It is for the shareholders, and not the court, to say whether an alteration of the articles is for the benefit of the company but it will not be for the benefit of the company if no reasonable person would consider it to be such: Shuttleworth [1927] 2 KB 9 at 18-19, 23-24, 26-27; Peters’ American Delicacy Co (1939) 61 CLR 457 at 488.

(4)

The view of shareholders acting in good faith that a proposed alteration of the articles is for the benefit of the company, and which cannot be said to be a view which no reasonable person could hold, is not impugned by the fact that one or more of the shareholders was actually acting under some mistake of fact or lack of knowledge or understanding: Peters’ American Delicacy Co (1939) 61 CLR 457 at 491. In other words, the court will not investigate the quality of the subjective views of such shareholders.

(5)

The mere fact that the amendment adversely affects, and even if it is intended adversely to affect, one or more minority shareholders and benefit others does not, of itself, invalidate the amendment if the amendment is made in good faith in the interests of the company…

(6)

A power to amend will also be validly exercised, even though the amendment is not for the benefit of the company because it relates to a matter in which the company as an entity has no interest but rather is only for the benefit of shareholders as such or some of them, provided that the amendment does not amount to oppression of the minority or is otherwise unjust or is outside the scope of the power …

(7)

The burden is on the person impugning the validity of the amendment of the articles to satisfy the court that there are grounds for doing so: Citco [2007] 2 BCLC 483 at 491; Peters’ American Delicacy Co (1939) 61 CLR 457 at 482.

Mr Moore QC for Severn Trent relied on two cases for the proposition that the votes at a class meeting ordered by the court must be exercised for the purpose of benefitting the class as a whole and not for extraneous reasons. In neither case, however, was the court actually concerned with a court meeting.

In British America Nickel Corporation, Limited v. M.J. O’Brien Limited [1927] AC 369 (“British America Nickel”), the Privy Council considered whether a minority of a class of secured debenture holders of the appellant corporation were bound by resolutions passed by the majority of that class, where the power was conferred on the majority by the terms of a trust deed. The opinion of the Judicial Committee delivered by Viscount Haldane dismissed the appeal and upheld the decision of the lower courts to the effect that the minority was not bound, because the majority had not been motivated by what was most in the interests of the class, but by their own interests. The outcome is summarised at pages 377-378 as follows:

“At the trial in the Supreme Court of Ontario Kelly J. held that what was really done was that the majority at the meeting did not act in the bona fide exercise of the rights which the majority might exercise, but in consideration of what would benefit the Nickel Corporation and the personal interests of those whose votes were to be secured. The vote had been influenced by special negotiations in advance of the meeting. … There was an appeal to the Appellate Division, where Ferguson J.A. delivered the judgment. He agreed with Kelly J. in holding that the votes neither of Mr. Booth nor of the British Government would have been given for the scheme had they been influenced only by what was most in the interest of the bondholders. Both of these may, he thought, have acted honestly if mistakenly. But what really moved them was not a legitimate consideration of the improvement of their security, but that they felt that a refusal to approve the scheme would result in serious loss to other persons who had lent to or invested in the corporation. They wished to give these persons a chance, even if a risk to the bondholders had to be taken in doing it. This the Appellate Division held to have been improper”.

Mr Moore also relied on the following passage at pages 371-2 in British America Nickel explaining why the approach was applicable in that case:-

“To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice. The business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provision of such a power to a majority bears some analogy to such a power as that conferred by s. 13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted. It may be free from the general principle in question when the power arises not in connection with a class, but only under a general title which confers the vote as a right of property attaching to a share. The distinction does not arise in this case, and it is not necessary to express an opinion as to its ground. What does arise is the question whether there is such a restriction on the right to vote of a creditor or member of an analogous class on whom is conferred a power to vote for the alteration of the title of a minority of the class to which he himself belongs.” (see also pages 373-4 and 378-9).

In In re Holders Investment Trust Ltd [1971] 1 WLR 583(“Holders Investment Trust”), Megarry J decided that trustees voting at a class meeting of preference shareholders to approve a reduction of capital were not entitled to take into account their interests as holders of the majority of the ordinary shares in the company. He said this at page 589E-F:-

“That exchange of letters seems to me to make it perfectly clear that the advice sought, the advice given, and the advice acted upon, was all on the basis of what was for the benefit of the trusts as a whole, having regard to their large holdings of the equity capital. From the point of view of equity, and disregarding company law, this is a perfectly proper basis: but that is not the question before me. I have to determine whether the supporting trustees voted for the reduction in the bona fide belief that they were acting in the interests of the general body of members of that class. From first to last I can see no evidence that the trustees ever applied their minds to what under company law was the right question, or that they ever had the bona fide belief that is requisite for an effectual sanction of the reduction. Accordingly, in my judgment there has been no effectual sanction for the modification of class rights”.

Both sides placed some initial reliance on PCCW which concerned an application to sanction a scheme of arrangement under the then section 166 of the Companies Ordinance Hong Kong, which had the same jurisdictional requirements as section 899(1). In that case, however, as I have said, the situation was the reverse of this case, the split shares were not actually needed for a majority in number to approve the scheme, and the question before the court was whether the scheme should be approved as a matter of discretion, rather than one of jurisdiction. There are nonetheless some dicta of interest in the three full judgments delivered by the court. I shall deal here with all those dicta even though they do not all go the question under this issue.

Rogers VP at paragraph 71, Lam J at paragraph 136, and Barma J at paragraph 174 made clear their disapproval of share-splitting so as to manipulate the voting at class meetings. Rogers VP described it as “a form of dishonesty”, and thought that it could be taken into account in deciding whether to sanction a scheme. Lam J said that it undermined “the underlying spirit of the dual requirements prescribed by the legislature as pre-condition for scheme approval”. Barma J said obiter: “Where the result of the arrangements is to create a majority of registered shareholders voting in favour of the scheme, which would not have been obtained but for the arrangements, the court can and should, when considering whether or not to give its sanction to the scheme, disregard the votes of such shareholders”.

Rogers VP held at paragraph 66 that there was no question of challenging the conclusion that the formal threshold had been reached, but nonetheless refused to sanction the scheme on the basis that he was not satisfied that the vote properly reflected the true votes of the shareholders because of the voting irregularities (paragraphs 66, 71 and 76). Under the heading of “Vote manipulation and the discretion of the court”, Lam J said this at paragraphs 140-148:-

“[141] With respect, I do not regard [Re Stranton Iron & Steel Co [1873] LR 16 Eq Cas 669, Pender v Lushington (1887) 6 Ch D 70 and North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589] to be of much relevance in the present context. Those cases were all concerned with the exercise of the voting power in a general meeting of the company. None of them dealt with the exercise of the court’s discretion under section 166. These cases only show that the vote cast by a shareholder who acquired such status by way of share-splitting was to be counted as a valid vote. There is indeed no quarrel about that. Mr Poon accepted that all the votes cast at the Court meeting should be counted for the purpose of establishing a majority in number for conferring jurisdiction on the court whether to consider the scheme is to be sanctioned.” …

“[147] … [W]hen the court exercises its discretion by refusing to sanction a scheme that has been approved by a statutory majority, the court is not disenfranchising the shareholders who voted in favour of it. They were not disenfranchised because their votes were counted for the purposes of establishing the statutory threshold. The court is simply carrying out its statutory function at the next stage and as explained above, the court is not obliged to adopt the view of the statutory majority. This is particularly so when the court is not satisfied that the statutory majority was achieved without vote manipulation practices.”

Barma J took a more nuanced view, making clear that he regarded it as axiomatic even in exercising his discretion to ask whether the court was satisfied that those voting had done so with the interests of the class in mind. He said this at paragraphs 180-199:-

“180.

In considering whether or not a particular set of arrangements offends the objectives of section 166(2), so as to require the court to consider whether votes cast in favour of a proposal should be disregarded when the court is determining whether or not to give its sanction to the scheme, I think that the question that has to be answered is whether or not the court is satisfied that those voting in favour of the proposal pursuant to such arrangements did so with the interests of the class in mind. This approach is, I think, supported by the authorities. …

189.

However, in my view, it is a non sequitur to contend that because it is not illegal or prohibited to arrange one’s shareholding in a company in such a way as to increase the number of individual shareholders it therefore follows that the court cannot and should not have regard to such arrangements when considering, in the context of a scheme of arrangement, whether or not the voting at a class meeting was fairly representative of the class of members concerned.

190.

When exercising its statutory function under section 166(2) to consider whether or not a scheme of arrangement ought to be sanctioned, it seems to me that it is important for the court to be satisfied that the members voting at the meeting fairly represented the class of which they were members, and that in casting their votes, they did so in a way that was bona fide in the interests of the class of which they purported to be members. …

199.

In these circumstances, the court should be very slow to grant its sanction for a scheme of arrangement in the face of its concerns as to whether or not the majority apparently achieved was truly reflective of the class in question. In the present case, I can see no reason for doing so”.

In the course of Barma J’s discussion at paragraphs 191-2, he considered the suggested asymmetry between the situation in that case and the situation that has now arisen in this case. He thought that it was a matter for the legislature to decide whether changes should be made to prevent share-splitting to defeat a scheme before the stage at which the court could exercise its discretion was reached.

Thus, what one can draw from the judgments in PCCW is that the court there accepted that voting manipulation achieved by share-splitting was improper and the fact that it had occurred could and should be taken into account when (and if) the court had to exercise its discretion as to whether to approve a scheme. In exercising that discretion, the court took into account the voting manipulation in considering whether the class was fairly represented by those who attended the meeting and whether the statutory majority were acting bona fide and not coercing the minority. Moreover, shareholders voting at a class meeting directed by the court had to have regard to the interests of the class.

As it seems to me, the approach adopted by the court in PCCW chimes with the way that Chadwick LJ approached the matter in Re BTR plc [2000] 1 BCLC 739 where he considered the discretion that the court should exercise in the following terms at page 747g-h, where he said:-

“A favourable resolution at 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 in favour 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. That, as it seems to me, is the check or balance which Parliament has envisaged”.

In these circumstances, I am not sure that the precise question that I have to decide has been authoritatively decided before. In this case, it is necessary to decide, in effect, on what basis, if any, votes at a class meeting directed by the court cast by a shareholder holding registered shares at the record date can be rejected. If they cannot be rejected in circumstances like those in this case, the court will be unable to consider the circumstances in which the shares were obtained and the votes were cast in exercising its discretion to sanction the scheme.

Both sides have addressed argument to the practical questions that would arise if the other were right. Mr Potts suggested that it would be most undesirable if the court or the chairman of a scheme meeting could interrogate the motives of those voting. Mr Moore submitted that there was no problem because neither the chairman of the meeting nor the court could act without evidence, so challenges would be rare. Moreover, there had to be some mechanism by which the court could prevent legitimate schemes being defeated at the class meeting stage, just because a dissentient minority in value chose to split their shares and create a majority in number against the scheme. If that were to occur regularly, the undoubted utility of schemes of arrangement to facilitate takeovers that were much in the financial interests of the majority would be damaged.

Mr Potts called on the support of three authoritative textbooks. At paragraph 4.29 of O’Dea on Schemes of Arrangement Law and Practice, the authors suggest that “Rather perversely, splitting holdings in order to defeat a scheme is ‘easier’ than splitting holdings in order to support a scheme. In the former case, the court has no jurisdiction to sanction a scheme if the statutory majorities are not obtained, whatever the motive of the creditor or member”. At page 66 of Professor Jennifer Payne’s book on Schemes of Arrangement: Theory, Structure and Operation, 2014, it is explained that “the courts in general have no discretion to sanction a scheme where share splitting has been used to boost the position of those opposed to a scheme”. Finally in this connection, the editors of Buckley on the Companies Acts express the view at paragraphs 24-35 that “If transfers are made to achieve a majority in number without the approval of the court, the court may decide in the exercise of its discretion not to sanction the scheme, notwithstanding that the requisite majorities have been achieved. The court is powerless in the face of transfers made in order to thwart a scheme”.

In my judgment, despite these broad statements, the matter must be approached from first principles. A scheme of arrangement is a creation of statute. Scheme meetings are directed under section 896(1) of the 2006 Act which provides that “[t]he court may … order a meeting of the creditors or class of creditors, or of the members of the company, or class of members (as the case may be), to be summoned in such manner as the court directs”. The purpose of meetings so directed is to ascertain whether “a majority in number representing 75% in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy at the meeting summoned under section 896, agree [the] compromise or arrangement” within section 899(1). Only then does the court’s discretion to sanction the scheme arise. Since the class meeting ordered under section 896(1) is ordered by the court, it must be under the control of the court. The circumstances applicable to the company’s own meetings do not, therefore, automatically apply. The meeting or meetings are called to establish whether or not the court’s discretion to sanction a scheme can, as a matter of jurisdiction, be invoked. It is, however, most important in my judgement to consider what the court is doing once it embarks on exercising that discretion. It is then deciding, amongst other things, first whether the statutory pre-requisites have been fulfilled, and secondly whether the class attending the meeting the court called was fairly represented by those attending the meeting, whether the statutory majority were acting bona fide and not coercing the minority in order to promote interests adverse to those of the class they purport to represent. It is quite clear from that exercise that the court is indeed concerned with those matters in sanctioning a scheme. The clue as to what members are supposed to be doing in voting at the court’s class meeting is also, I think, to be found in that second well-established formulation. The members are supposed to be fairly representing their class, and acting bona fide, and not coercing a minority in order to promote interests adverse to the class they purport to represent.

If the court can inquire as to the voting motivations at the sanction stage, it seems to me that, where there is evidence that some impropriety has taken place in voting (which will anyway always be an exceptional case), it can and must consider whether the statutory majorities were actually achieved.

The test itself is, as I have said, made clear by the exercise that the court undertakes at the sanction stage. That points clearly to the need for the class members at the court meeting to be voting in the interests of the class and not to promote interests adverse to the class they purport to represent. This approach ties in with that adopted in slightly different, but comparable, positions, in British America Nickel and Holders Investment Trust. Those cases concerned class meetings where the objective was to ascertain the views of the class as a class. The situation was different in Charterhouse Trust, where the court was concerned with the circumstances in which the votes on a resolution to alter a company’s articles could be challenged. As Mr Moore and Mr David Chivers QC, counsel for James Sharp, submitted, a class meeting ordered by the court is sui generis. Its objective is to determine fairly the views of the class as to the interests of the class.

A further objection to the “interests of the class” test propounded by the proponents of the Scheme was said to be that the court could not interrogate the motives of voters at a class meeting and should not attempt to do so. It was only at the second stage of the process where sanction was considered that the court could consider whether the interests of the class had been fairly represented and whether the statutory majority were acting bona fide and whether they were coercing the minority in order to promote interests adverse to those of the class. Mr Potts was forced, of course, to acknowledge that, if he was right, in a case of this kind, the sanction stage would never be reached, because the majority in number threshold would not be passed so as to enable the scheme to proceed to a sanction hearing.

In my judgment, the objection based upon the need for the court to look into the minds of shareholders is ill-founded. It will only be in a very unusual case, such as this one, that an attempt could be made to challenge the motives of the opponents of a scheme. That is because evidence is required to do so. Such evidence will rarely be available. Moreover, as will appear when I come to the next issue, I do not think that many of the ‘motives’ complained about by the proponents of the scheme would be likely in a normal case to disqualify the votes.

I have therefore concluded that members voting at a class meeting directed by the court must exercise their power to vote “for the purpose of benefiting the class as a whole, and not merely individual members only” (see Viscount Haldane’s formulation in British America Nickel). I am not sure that the gloss suggesting that members at such a meeting must not vote for extraneous reasons is helpful. The key is that the members of the class must vote in the interests of the class as whole and not in their own specific interests if they are different from the interests of the class. I turn under the next heading to consider when a vote might be held to contravene this requirement.

There were two main objections to the votes cast by the Individual Shareholders. First, it was said that the members were motivated by the protection of jobs at the Company and by the interests of the local community and the environment, rather than the interests of the class of ordinary shareholders in the company. Secondly, it was said that the Individual Shareholders had acquired their single shares from someone who was splitting his holding with the sole purpose of transferring the shares to persons who would vote so as to defeat the Scheme; in those circumstances, it was axiomatic that the Individual Shareholders could not and would not be voting in the interests of the class. I shall deal with each of these two objections in turn.

It is, however, first important to realise that I am concerned at this stage of the case with the situation at the 12^th January Meeting, and with the Chairman’s actions at that meeting, but not with any later developments that occurred.

There was some debate also in the course of argument as to the powers of the chairman of a court meeting to reject votes cast of his own motion. It seems to me that the court must indeed have an inherent power to direct the mode in which meetings are to be held (see Vaughan Williams J at page 395 in In re English, Scottish and Australian Chartered Bank [1893] 3 Ch. 385, and Maugham J at pages 652 and 660 in In re Dorman, Long and Company, Limited [1933] 1 Ch. 635 – even though it was noted that the Court of Appeal in the former case had not approved Vaughan Williams J’s view). Moreover, once a court has directed that a meeting take place, I cannot see why the chairman should not conduct the meeting in accordance with normal principles. He may have many decisions to make in order to achieve the objective of the meeting. The court would normally, I think, only interfere with such decisions if they were perverse, made in bad faith, contrary to the court’s directions, or on the basis of a mistaken understanding of the law (cf. paragraphs 65-67 of Lewison J in Re British Aviation Insurance Company [2006] 1 BCLC 665). It seems to me that the validity of votes cast at the court meeting is to be judged as at the time of that meeting and not with the benefit of hindsight that may be acquired after the meeting and before the sanction hearing. Conversely, the sanction of the court is to be evaluated as a matter of discretion on the basis of all the facts placed before the court at that hearing.

In directing the chairman to hold a court meeting, the court is effectively directing him to take all appropriate steps to hold a fair meeting for the purpose of ascertaining the votes of the class for or against the scheme. He must, for example, be able to reject proxies if they obviously do not emanate from the member in question. The court would, it seems to me, wish to respect the decisions made by its appointed chairman as to the proper conduct of the court meeting, unless one of the defaults mentioned above were established.

In these circumstances, it seems to me that the Chairman in this case did not require the authority of Registrar Derrett’s order in order to have the power to reject the votes of the Individual Shareholders on proper grounds if any such grounds existed. In the result, however, he also had the express permission of the court to reject the votes of Individual Shareholders who had acquired their shares from Mr Cashmore.

I turn then to consider whether the motives of the Individual Shareholders as the Chairman knew them to be could legitimately have led the Chairman to reject their votes. In fact, it may be noted that the Chairman’s evidence was that he had exercised his discretion “to reject the votes of any member who derived his shares from Mr Cashmore” as suggested by the Registrar’s order. He did not say that he had done so on the basis of the motives of the Individual Shareholders.

The opponents of the Scheme point to the contents of the Scheme Document, the Takeover Code, and section 172 of the 2006 Act as indicating the relevance of the employees and the customers of the Company and of the environment to the interests of the Company and of the class of members voting at the Court Meeting. In fact, however, the Chairman had no evidence of the motives of the Individual Shareholders when he undertook the vote at the Court Meeting. He did not know what the section 793 responses had said, and he did not have any evidence from Individual Shareholders. All he knew was that the Individual Shareholders had acquired their shares from Mr Cashmore as part of “an unprecedented situation where, on the face of it, there appeared to be an organised attempt to vote down the Scheme using the statutory majority in number test” (see the Chairman’s 2^nd statement at paragraph 20). Accordingly, it is clear that the Chairman would not have been justified in this case in rejecting the votes of the Individual Shareholders on the simple ground that their motivations were not for the benefit of the class as a whole or that they were motivated to benefit themselves only.

Since the point was argued, however, it seems to me that the proponents of the Scheme could not have succeeded in justifying the rejection of the votes of the Individual Shareholders merely by referring to their own evidence as to their motivation or to the responses to the section 793 notices. The interests of the class may be very complex and are not always going to be purely financial. Of course, Severn Trent’s offer was larger than Ancala Fornia’s offer and, therefore, the immediate financial interests of the class would seem to favour Severn Trent’ offer. But it could not, I think, be said that a shareholder acting in the interests of the class might not properly think that the interests of employees of the company, customers or the environment might not outweigh the financial interests of the class and favour rejection of even a good financial offer (cf. Re Waste Recycling Group plc [2003] EWHC 2065 (Ch), where Lloyd J at paragraphs 10 and 17 considered an individual shareholder’s position when motivated by environmental considerations). It is in this difficult territory that I think the court is likely to take some persuading to interrogate precisely the members’ reasons for voting as they did. Environmental factors might, for example, indicate that a takeover in the future by another bidder would be more advantageous for the existing shareholders. The thought processes of members are likely to be complex and intertwined and, unless it can be shown, as it was in both British America Nickel and Holders Investment Trust,that the members were motivated by their own interests in a quite different capacity, it will, I think, be hard to reject votes by looking into their minds.

I turn then to the second ground of objection, which is essentially the one on the basis of which the Chairman actually rejected the votes of the Individual Shareholders, namely that they had each acquired a single share from Mr Cashmore’s share-splitting in circumstances where the objective can only have been to manipulate the voting at the Court Meeting and to defeat the Scheme. I would not go so far as Rogers VP in PCCW so as to characterise vote manipulation as per se dishonest. Nor do I think that the actions of these Individual Shareholders were dishonest. They no doubt genuinely believed that the Severn Trent bid should be defeated for the greater good of the community at large, albeit including themselves and their relatives.

I do, however, agree with Lam J when he said that share splitting undermined “the underlying spirit of the dual requirements prescribed by the legislature as pre-condition for scheme approval”. I also agree with Barma J that “arrangements made so as to artificially boost the number of shareholders voting in favour of a scheme of arrangement” are objectionable.

In my judgment, the Chairman’s knowledge of the circumstances in which the Individual Shareholders had acquired their shares gave him sufficient evidence to conclude that the votes of the Individual Shareholders at the 12^th January Meeting were not being cast for the purpose of benefiting the class as a whole. That was not specifically because their imputed or expressed motives fell outside the band of what is permissible. It was because the only possible explanation for the conduct of the Individual Shareholders was to further a share manipulation strategy to defeat the Scheme by use of the majority in number jurisdictional requirement. The actions of the Individual Shareholders in accepting the gift of a single share in the circumstances I have described demonstrated that they could have given no consideration to the interests of the class of members which they had joined. They can only have joined that class with the pre-conceived notion of voting down the Scheme. There was no other reason to acquire one single share in the Company at that crucial time after the Court Meeting had been directed. Both the Chairman and the court could and should, in my judgment, take these matters into account in considering whether the votes of the Individual Shareholders were valid. In my judgment, they were not. The Chairman was entitled to protect the integrity of the Court Meeting against manipulative practices such as share-splitting that would frustrate its statutory purpose.

As I have said, I have formed the clear view that the Chairman was right to reject the votes of the Individual Shareholders. In these circumstances, I do not need to decide whether the court could, even if the Chairman had wrongly rejected the votes, have approved the Scheme. I can say, however, that it seems to me that the court could not have acted in that way. As I started this judgment by saying, section 899(1) provides two distinct jurisdictional pre-conditions. If they are not both satisfied, then I cannot see how the court has the jurisdiction to approve the Scheme as a matter of discretion. It is, as successive writers have pointed out, a matter for the legislature to determine whether the majority in number pre-condition should continue to apply. So far, the UK Parliament has decided that it should not be changed. Different decisions have been taken in other jurisdictions.

Mr Moore submitted that, even if the Chairman was wrong to reject the votes of the Individual Shareholders, the court nonetheless had a discretion to approve the Scheme because in fact he had rejected the votes and reported to the court that the statutory majority in number test was satisfied. Since I have concluded that the Chairman was right to reject the votes of the Individual Shareholders, this question does not arise and I shall leave it to be determined on some occasion when the facts require it to be decided.

I shall now consider the exercise of the court’s discretion to sanction the Scheme under section 899(1). It is noteworthy that the opponents did not submit that, if the majority in number pre-condition were held to be satisfied, the court should nonetheless exercise its discretion to refuse to sanction the Scheme.

In the course of two full court days of argument and in preparing this judgment, I have had the opportunity to consider in detail the terms of the Scheme and the Scheme Document itself. I have formed the view that the provisions of the 2006 Act have been complied with. I have also considered whether the members of the class voting at the 12^th January Meeting were fairly represented by those who attended the meeting. In my judgment, they clearly were, once the attendance of the Individual Shareholders whether in person or by proxy was discounted. I have formed the view also, based on all I have already said, that the statutory majority (ignoring the Individual Shareholders) were acting bona fide and were not coercing the minority in order to promote interests adverse to those of the class they purported to represent.

I have also considered whether an intelligent and honest person as a member of the class or ordinary shareholders in the Company, who was concerned and acting in respect of his own interest, might reasonably approve the scheme. In my judgment, such a person would be likely to do so. The Scheme is obviously very much in the financial interests of the members of the Company. Finally, I have considered whether there is any blot on the Scheme. It has not been suggested that there is, and I do not consider there to be one.

In these circumstances, it is, I think, appropriate for the court to exercise its discretion to sanction the Scheme.

There was much debate in argument about the propriety of Registrar Derrett’s order. The opponents submitted that it should never have been made. They suggested that there were other approaches that could have been adopted in order to “hold the ring”. For example, the Chairman could have been asked to report the votes without determining whether the majority in number test had been satisfied and then to adjourn the meeting until after the court had determined the validity of the votes. Alternatively, the court could have set an earlier record date so as to exclude the newly registered Individual Shareholders.

In my judgment, it was appropriate for the Company to apply to the court for directions once it became apparent that the Individual Shareholders had acquired a large number of individual shares by a share-splitting exercise with the only apparent objective being to defeat the Scheme. My only reservation about what occurred is that the Registrar did not include in her order the caveats that were entered on behalf of the Company. Mr Thornton had submitted that the Company was not “seeking any definitive ruling at this stage that the rejection of the Individual Shareholders’ votes is valid”, but that it would “ask the Judge at the sanction stage to deal with that issue”. Those matters ought, I think, to have been recited in the order that the Registrar made so that persons served with the Order understood that it was merely clarifying the powers of the Chairman and not pre-determining the court’s view of the rights of the Individual Shareholders. I acknowledge that the Company made a public statement immediately after the hearing on 11^th January 2017, explaining that Registrar Derrett’s order had been made and that the court was to have the opportunity at the sanction hearing to decide whether the transferred Shares should have been counted for the purposes of voting on the Scheme. But, in my view, the caveats entered by the Company at the hearing ought to have been included in the court’s order itself. The application itself was not, however, objectionable, and, as Mr Thornton also submitted, this approach allowed the Scheme to continue on schedule whilst preserving the parties’ rights.

I do not accept Mr Potts’ submission that all the shareholders in the class ought to have been notified of the Company’s application to Registrar Derrett. It was not akin to an application for an interim injunction. It was intended merely to clarify the powers of the Chairman. As such, it was not even an essential step to take. The rights of the Individual Shareholders to argue as they have done that their votes were valid and should have been counted were, as I have said, preserved. It would have been impracticable in the time available to give all the numerous members an opportunity to attend the hearing.

I do not need, it seems to me, to comment on the other possible approaches to the problem that Mr Potts suggested, but which were not adopted in this case. The court’s consideration of those approaches can also await a case in which they have actually been attempted.

I have, therefore, concluded that members voting at a class meeting directed by the court must exercise their power to vote for the purpose of benefiting the class as a whole, and not merely individual members only. The Chairman of the 12^th January Meeting had sufficient evidence to conclude that the votes of the Individual Shareholders were not being cast for the purpose of benefiting the class as a whole. That evidence had nothing to do with the imputed or expressed motives of the Individual Shareholders. The Chairman was, however, justified in concluding that the only possible explanation for the conduct of the Individual Shareholders in each accepting a gift of a single share immediately after the Court Meeting had been directed was to further a share manipulation strategy to defeat the Scheme by use of the majority in number jurisdictional requirement.

In these circumstances, I have concluded for the reasons I have given that, as a matter of the court’s discretion, the Scheme should be approved. I will hear counsel as to the precise form of order that is appropriate.