Practice makes Perfect – what's next for Jersey schemes of arrangement?
15 July 2020
The Companies (Jersey) Law 1991 allows a Jersey company to enter into a scheme of arrangement with its members or creditors (or any class of them), subject to the sanction of the Jersey court.
A scheme of arrangement is a very flexible mechanism which may be used, for example, to:
- introduce a new holding company into an existing group structure,
- restructure arrangements with creditors or, most commonly,
- implement a recommended takeover offer.
The Jersey statutory provisions relating to schemes are based on the English Companies Act 1985. Consequently, in recent years, the Jersey courts have tended to follow the decisions and practices of the English courts (which are persuasive but not binding in Jersey) when dealing with both the procedural and substantive issues associated with schemes of arrangement.
The recent publication of a new English Practice Statement1, the first since 2002, can therefore be expected to help shape future best practice when it comes to Jersey schemes of arrangement. In this briefing, we look at how the principles set out in the new Practice Statement could impact the ever-popular Jersey takeover scheme.
The Jersey scheme process
At its most basic, a Jersey takeover scheme involves five main stages:
- the negotiation of the commercial terms and the means by which the transaction will be implemented, the announcement of the agreed terms, and the preparation of the court and shareholder documentation required in advance of the first court hearing. At this stage, engagement with any relevant listing and other regulatory authorities also commences;
- the first court hearing (also referred to as the "directions hearing" or the "convening hearing") at which the target company applies to the court for an order convening one or more meetings of its shareholders to consider and vote on the scheme;
- the court-convened shareholder meeting(s) at which the shareholders decide whether to approve the scheme. The approval of a majority in number of those shareholders present and voting either in person or by proxy at the meeting(s), representing 75% or more of the voting rights voted by those shareholders, is required;
- if the shareholders approve the scheme, the target company returns to the Jersey court for a second court hearing (also referred to as the "sanctions hearing") and asks the court to sanction the scheme; and
- if the court sanctions the scheme, the court order is filed with the Jersey Registrar of Companies, at which point the scheme becomes effective and is binding on all the shareholders. The shares in the target are then transferred to the bidder (or cancelled and replaced with new shares issued to the bidder) and the consideration is paid by the bidder to the exiting shareholders.
The impact of the new English Practice Statement
The new English Practice Statement in part reflects the recent introduction of Part 26A of the English Companies Act 2006 by the Corporate Insolvency and Governance Act 2020, being one of the urgent measures adopted to aid financially distressed UK companies in the wake of COVID-19. There are no directly comparable Jersey law provisions to Part 26A.
However, as well as the Part 26A aspects, the new Practice Statement also builds on some of the more general practice principles that were previously applied in the UK and referenced in Jersey. Some of these expanded principles, if similarly applied in Jersey, will add extra clarity to the Jersey scheme process but will also impose additional obligations on applicants.
The directions hearing
Conduct and classification of shareholder meetings
The new Practice Statement retains the existing requirements for the directions hearing to settle key issues relating to:
- the conduct of the shareholder meeting(s); and
- the number of shareholder meetings required to approve the scheme.
Jersey case law establishes that the number of meetings will depend on whether any shareholders' rights against the company are so dissimilar that it is impossible for them to consult with the other shareholders with a view to a common interest; if they are so dissimilar, the court will order those shareholders to meet separately to consider and, if thought fit, approve the scheme. The analysis of the shareholders' rights in this context often requires considerable preparatory analysis as well as discussion at the directions hearing.
Issues relating to the conduct and classification of shareholder meetings will therefore remain a primary consideration at the directions hearing for Jersey schemes, as has been the case in the past.
Additional matters to be addressed
However, the new Practice Statement also expressly includes certain additional matters on which the English court now expects to be addressed at the directions hearing. These include the following:
(a) any issues as to the court's jurisdiction to sanction the scheme; and
(b) any other issue not going to the merits or fairness of the scheme, but which might lead the court to refuse to sanction it.
Whilst many scheme applicants would in any event look to address such matters with the court at an early stage, these principles establish a very clear expectation on the part of the English court that all technical legal issues potentially affecting a scheme's viability should be dealt with at the directions hearing. Assuming the Jersey court adopts a similar approach, we anticipate that any delay in raising these issues (for example, waiting until the sanctions hearing) will need to be fully and carefully explained.
Where a Jersey company's shares are listed on a stock exchange and/or the UK Takeover Code applies, the content and timing of announcements relating to a proposed scheme of arrangement are currently driven by the applicable listing rules and Takeover Code requirements. In most cases, an initial announcement is made at the point where there is a firm intention to proceed with the transaction.
By contrast, from a strictly Jersey law perspective, the first required contact with shareholders in relation to a scheme currently occurs only when the court-approved scheme circular, incorporating an explanatory statement and notice of the shareholder meeting(s), is despatched.
This position could potentially change quite significantly if the principles adopted in the new English Practice Statement are applied in Jersey. The Practice Statement requires that, where the conduct or classification of the shareholder meetings or any of the other matters outlined above are to be addressed at the directions hearing, the company will usually be expected to provide certain specific information (as discussed below) to those affected by the scheme in advance of the hearing. Since the conduct and classification of shareholder meetings is generally one of the core issues discussed at the directions hearing for Jersey schemes, this notification requirement can be expected to apply in most situations.
Specific matters to be notified
The majority of the matters requiring this advance notification, such as the purpose and effect of the scheme and the fact it is being promoted, will typically already be included in the initial listing or regulatory announcement relating to the scheme. However, some of the information may not be known, or may not be known with sufficient certainty, at the time of the initial announcement, particularly:
- the number of shareholder meeting(s) that will be required and their composition (as noted above, this often requires in-depth legal analysis); and
- any issues relating to the court's jurisdiction or other reasons why the court's sanction may not be given (these often come to light during the process of preparing for the directions hearing, but may not do so immediately).
In addition, the new Practice Statement:
- requires those affected by the scheme to be notified of where and when the directions hearing will take place and the fact they are entitled to attend; and
- expressly contemplates the possibility of stakeholders being entitled, within a limited time after the directions hearing, to object to the court's decision regarding the constitution of the shareholder meeting(s) before they take place.
In contrast, in Jersey, shareholders have usually only attended the sanctions hearing to raise any objections they may have to the scheme and process overall.
The combined effect of these new requirements, if applied in Jersey, is likely to mean that:
- the parties will need to agree a position on the most complex legal issues relating to the scheme much further in advance of the directions hearing than is currently the case;
- an additional notice will be required in the run-up to the directions hearing, explaining the position the parties have reached on these issues and that they will be discussed at the directions hearing. This notice will need to be given sufficiently far in advance of the hearing to enable those affected to consider what is proposed, to take appropriate advice and to attend the directions hearing if they wish;
- at the directions hearing, the applicant will need to explain the steps that have been taken to notify these matters to shareholders and what, if any, response the applicant has received; and
- shareholders will generally be expected to raise any objections on these matters at the directions hearing or, if the objection relates to the constitution of the shareholder meeting(s), as soon as possible after the hearing. If they wait until the sanctions hearing, the court will expect them to show good reason why they did not raise their objection earlier.
In addition to setting out these expanded principles relating to the directions hearing and associated pre-notification requirements, the new Practice Statement also touches on certain issues that arise where interests in a company are held indirectly through nominees or other intermediaries.
Particularly where a company is listed, it is common for brokerage firms, banks and other custodians to hold the legal title to the company's shares on behalf of multiple different beneficial owners. In this situation, the names of the beneficial owners do not appear on the register of members of the company and they have no entitlement to receive notice of, or to vote at, shareholder meetings in their own right. Instead, they must rely on their third party custodian to vote and otherwise exercise the rights attaching to the shares on their behalf and in accordance with their instructions.
This practice has previously given rise to questions relating to the treatment of beneficial owners in the context of a scheme of arrangement. Specifically, cases have focussed on how shareholder votes should be counted to give effect to the wishes of the beneficial owners in a manner consistent with the statutory approval requirements for schemes2. Whilst a poll vote gives voice to the views of beneficial owners in terms of ascertaining whether 75% of the votes have been cast in favour of the scheme, the additional need to determine whether a majority in number of the shareholders have voted in favour has led to different approaches being taken to account for beneficial owner opinion3.
In an apparent acknowledgement of these and other difficulties presented by indirect ownership mechanisms in the context of schemes, the new Practice Statement expressly states that the English courts will wish to understand the following at scheme directions hearings:
- how it is proposed that shareholders are to be given notice of the shareholder meeting(s) convened to consider the scheme; and
- where interests are held indirectly and it is proposed that the votes to be cast at the meeting(s) should reflect the view of the beneficial owners in some way, the proposals in this regard and any facts justifying those proposals.
The inclusion of these requirements in the Practice Statement may serve to encourage even greater focus on this issue in the context of Jersey schemes. It may also reinforce suggestions previously made by the Jersey court that the statutory provisions relating to Jersey schemes should be revisited to address the challenges posed by intermediate layers of beneficial ownership in the current corporate climate4.
Finally, the Practice Statement includes a reminder that explanatory statements relating to schemes of arrangement should:
- be in a form and style appropriate to the circumstances of the case, including the nature of the shareholder base;
- be as concise as the circumstances admit;
- explain the commercial impact of the scheme and provide shareholders with "such information as is reasonably necessary to enable them to make an informed decision as to whether or not the scheme is in their interests, and on how to vote on the scheme"; and
- direct shareholders to the material part(s) of any document incorporated into the explanatory statement by reference.
In light of this, we anticipate that the Jersey courts may well pay added attention to the form, style and length (as well as the content) of explanatory statements going forward, ensuring that the essential information is presented in the most user-friendly manner appropriate to the company in question.
The new English Practice Statement, while not directly applicable to Jersey schemes of arrangement, may well reshape the approach of the Jersey courts to certain important aspects of the Jersey scheme process.
In some areas, the Practice Statement will serve to reinforce the best practice principles already adopted in Jersey; in other areas, it is likely to drive changes benefiting not only the Jersey courts themselves but also, ultimately, future applicant companies and their stakeholders.
1 Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006) - Sir Geoffrey Vos, Chancellor of the English High Court - 26 June 2020 (as already applied in Re Colouroz Investment 2 LLC & Ors  EWHC 1864 (Ch)).
2 For example, Representation of CPA  JRC 011; Atrium European Real Estate Limited  JRC 198.
3 Re Equitable Life Assurance Society  BCC 318; Representation of CPA  JRC 011.
4 Atrium European Real Estate Limited  JRC 198 at paragraph 34.