On 15 September 2017 Morgan J. sanctioned a scheme of arrangement providing for the acquisition of the entire issued and unissued share capital of Hargreave Hale Limited (“the Company”) by Canaccord Genuity Wealth Group Holdings (Jersey) Liimited (“Canaccord”).
Most acquisition schemes of arrangement undertaken pursuant to Part 26 CA 2006 concern listed companies with the structure of the scheme simply providing for the transfer of the shares in the Company to the bidder. In contrast, transactions undertaken by way of share purchase agreement generally involve a more complicated set of arrangements involving, for example, the provision of warranties and indemnities, deferred consideration provisions and/or locked box structures.
Although undertaken under Part 26 CA 2006, the structure of the Hargreave Hale scheme more closely resembled an SPA approach than a traditional transfer scheme structure. For example, although the scheme provided classic clauses providing for the transfer of the scheme shares, an obligation on the company to register the transfer and an obligation on the part of Canaccord to pay the agreed consideration, the Scheme also empowered any director of the Company to enter into a deed of accession on the part of the Scheme Shareholders that binded them to SPA type obligations (including deferred consideration and locked box arrangements).
Schemes of that form, where the bulk of the effective provisions are contained in separate documents and made binding on stakeholders pursuant to the terms of a scheme are more often encountered in schemes between companies and their creditors but the principles are the same. Recent cases such as Re SABMiller plc [2106] EWHC 2153 (Ch) (members’ scheme) and Re The Co-Operative Bank PLC (as yet unreported) (creditors’ scheme) have established that in analysing such schemes (whether on jurisdictional or discretionary grounds) the Court will consider the totality of the arrangements between the company and its stakeholders, not merely the narrow terms of the scheme itself.
Other than the SPA style provisions contained in the scheme, here were a number of interesting additional issues dealt with at the sanction hearing.
First, Morgan J. accepted that a transaction bonus payable to the management team (which comprised some directors and some non-directors and some shareholders and some non-shareholders) did not give rise to a class issue nor a fairness issue and reached the same conclusion in relation to earn-out arrangements which provided for the management team to receive up to £2.5 million. The relevant earn-out arrangements were based on the same performance criteria that triggered payments of deferred consideration to the scheme shareholders and required the members of the participating management team to remain within the employment of the group for periods of not less than 12 months. The Court is generally content with arrangements that are genuinely entered into with members in their capacity as employees and which do not amount to the provisions of disguised consideration for the acquisition of their shares.
Second, the judge accepted the now familiar analysis that members of a target company who give warranties and indemnities by way of separate agreement (thereby accepting a potentially worse deal than other shareholders) do not generally fall into a separate class.
Third, Morgan J. returned to the question raised by Mann J. in Re Jelf Group plc [2015] EWHC 3857 (Ch), namely, whether a takeover scheme amounted to a “compromise or arrangement” for the purposes of Part 26 CA 2006. The Hargreave Hale scheme not only contained the usual obligation on the Company to register transfers but also provided for the consideration to be received in the first instance by the Company and distributed by it to the scheme shareholders (rather than the more common approach of the consideration being payable directly to the scheme shareholders by the bidder). That provision made it clearer than most schemes that there was some involvement on the part of the company in the transaction.
Ultimately, Morgan J. held that the Re Jelf test was satisfied for the same reasons Mann J was satisfied in Re Jelf itself (namely that it was inappropriate to reconsider a long-standing principle that a takeover scheme amounted to an “arrangement”) but did indicate during submissions that he did not find it compelling that the inclusion in a scheme of an obligation imposed on the company to register the transfers involved in the scheme gave the transaction the necessary “give and take” to constitute an arrangement on the basis that directors were to be expected to effect registration even in the absence of an express provision in the scheme (that being the provision that the courts in Re Jelf and Re Poundland Group plc (unreported) 15 September 2016 (Nugee J) held to be crucial to establishing the necessary give and take to constitute an arrangement). Although the decision of Snowden J in Re SABMiller plc [2016] EWHC 2153 (Ch) is likely to constitute the last word on this issue (the judge in that case finding it particularly compelling that Parliament could be taken to have restricted reduction schemes in the belief that transfer schemes were still available), Morgan J. did indicate that Parliament sometimes misunderstood what it had enacted!