What were the facts in this scheme?
On 27 October 2017, Snowden J sanctioned the scheme of arrangement under Part 26 2006 by which JAG Acquisitions (UK) Limited, a wholly-owned subsidiary of Michael Kors (UK) Holdings Limited (Michael Kors) acquired the entire issued and to be issued share capital of Jimmy Choo Plc (Jimmy Choo). The scheme provided for Jimmy Choo shareholders to receive 230 pence in cash for each Jimmy Choo share held by them. The consideration payable to the Jimmy Choo shareholders represented a premium to the pre-announcement market price at which the Jimmy Choo shares were trading and the proposal was unanimously recommended by the Jimmy Choo directors (who were advised by Bank of America Merrill Lynch and Citigroup Global Markets Ltd).
Prior to its acquisition, 67.66% of the issued capital in Jimmy Choo was held by JAB Luxury Brands GmbH (JAB). Michael Kors obtained irrevocable undertakings over approximately 69.21% of the Jimmy Choo shares (including from JAB in respect of its entire holding).
The majority obtained at the court meeting was 98.37% in number representing 99.99% in value. The turnout at the meeting was 33.98% in number and 81.63% in value.
Given the level of JAB’s shareholding in Jimmy Choo (and the fact that the Jimmy Choo shares were listed on the Main Market), there was, pursuant to Listing Rule requirements, a pre-existing relationship agreement in place between Jimmy Choo and JAB. This relationship agreement conferred on JAB rights to appoint directors and to receive information. It also contained provisions ensuring that Jimmy Choo could act independently of JAB. The relationship agreement ceased to have effect upon the scheme taking effect and, critically, no consideration was provided to JAB in relation to that termination.
Did any class composition issues arise?
On the face of the scheme itself, no class issues arose. Each shareholder was swapping the same class of share in exchange for the same cash consideration as every other shareholder (ie, swapping an ordinary share for 230p in cash). However, in analysing the class issue, it was incumbent on the court to consider any other agreements or arrangements entered into in connection with the scheme (see Re SABMiller Plc [2016] EWHC 2153 (Ch)). Two specific issues were considered by Snowden J in that regard.
First, Michael Kors and certain key members of the Jimmy Choo management team, including, in particular, its CEO, CFO and Creative Director agreed incentivisation arrangements to come into effect following completion of the scheme. The CEO and CFO were directors of Jimmy Choo (the Creative Director was not) and all three held small shareholdings. Jimmy Choo’s financial advisers had advised that the terms of the arrangements agreed were fair and reasonable. Snowden J was content that, while the potential payments under the incentivisation arrangements comfortably exceeded the consideration receivable by each in respect of their shareholding and would therefore be likely to be at the forefront of their minds when voting their shares, the arrangements did not require those members of the management team to be treated as falling into a separate class. In particular, Snowden J emphasised that it was undesirable to carve out a number of different classes of members by reason of interests held by them as employees. Rather, it was preferable to consider those interests as a matter of discretion when deciding whether or not to sanction the scheme.
Second, Snowden J considered the relationship agreement with JAB (and its termination) and the termination of other commercial arrangements and decided that these did not give rise to any class concerns.
In particular, the judge noted that (applying the classic approach to assessing dissimilarity of rights for the purposes of the class test) while the rights being taken into the scheme were different for JAB than for other shareholders (ie the rights it had under the relationship agreement which ended on the scheme taking effect), it was not impossible for JAB to consult together with the other shareholders in the same meeting. This was particularly the case given that no payments were being made to JAB in respect of the termination of the relationship agreement, and the rights it held under that agreement were inextricably linked to its shareholding and terminated as that was sold.
Snowden J also held that the two points set out above did not cause him to withhold sanction of the scheme in the exercise of his discretion.
What amounts to a ‘blot’ on a scheme?
Snowden J addressed the question of what the term ‘blot’ meant in the context of the test to be applied by the court when deciding whether or not to sanction a scheme in the exercise of its discretion and reaffirmed the narrower construction referred to in his decision in Re The Co-Operative Bank Plc [2017] EWHC 2269 (Ch). He rejected the broader construction that the term ‘blot’ was shorthand for the residual discretion that the court hearing the sanction application possesses once the other requirements identified by Morgan J in Re TDG plc [2008] EWHC 2334 (Ch) have been satisfied. Snowden J also reaffirmed that the court does not have a roving discretion to look behind the decision of the members or creditors to approve a scheme.
On the narrower approach (which the editors believe to be the correct approach) the term ‘blot’ conveys some technical flaw in the scheme, for example, where the scheme involves a reduction of capital and no special resolution was proposed to approve the reduction in accordance with s 641 CA 2006 or where the scheme simply does not work on its terms. An example of the former is the decision of the Guernsey Court of Appeal in Re Puma Brandenburg (18 May 2017 Civil Division – Appeal No 508) where the court ruled that a scheme providing for shares to be compulsorily acquired without obtaining the consent of the members (as required by the Guernsey statute) contained a blot meaning that the scheme could not be sanctioned.