The High Court was tasked to consider an application to grant an order to convene a shareholders’ meeting in consideration of whether to approve a scheme of arrangement in the recent case Re GW Pharmaceuticals Plc (2021) EWHC 716.
SCHEME OF ARRANGEMENT
In the UK, a scheme of arrangement (the “Scheme”) is a binding agreement between a company and its shareholders or creditors on a voluntary basis, which is required under Part 26 of the Companies Act 2006 (the “CA”) to be sanctioned by the court. While it is not obligatory to have a Scheme in place, it sets out the parties’ obligations and rights in the event of a reorganisation or a restructuring of the company, and may be used alongside a formal insolvency procedure. Before sanctioning the Scheme, the court needs approval by the majority of creditors or shareholders. This can be done in two ways:
- the “headcount” test – where the approval is given by the majority in number `of the creditors or shareholders; or
- the “majority in value” test – where the approval is given by 75% in value of the creditors or shareholders.
This requirement is set out in section 899 of the CA.
The case concerns a GW Pharmaceuticals Plc (the “Company”) incorporated back in 2001. From mid-2001 to the end of 2016, the ordinary shares of the Company were listed for £0.001 each on the Alternative Investment Market of the London Stock Exchange. In 2013, the Company entered into a deposit agreement with Citibank N.A (the “Depositary”) to have the ordinary shares traded on the NASDAQ Global Market (“NASDAQ”) as American Depositary Receipts. Within the deposit agreement, it was stated that each American Depositary Share (“ADS”) represented 12 ordinary shares. The holders of the ADS were entitled to direct the votes attached to each ordinary share represented by the ADS. By March 2021, the Company had 986 shareholders. The Depositary held ordinary shares representing 97.4% of the entire issued share capital of the Company.
THE COURT CASE
Jazz Pharmaceuticals UK Holdings Limited (“Bidco”) is a wholly owned subsidiary of Jazz Pharmaceuticals PL (“Jazz“). A Scheme was put in place to allow Bidco to acquire the entire issued share capital of the Company (the “Scheme Shares”). On 3 February 2021, Jazz and the Company announced that an agreement had been reached with regards to the terms on which the acquisition was going to take place.
Before a general meeting could be held, a court meeting had to take place first to consider the Company’s proposals and for subsequent directions to be proposed by the court.
The Company asked the court for permission to allow a holder of Scheme Shares to appoint multiple proxies, on the basis that each proxy can only exercise the rights attached to the share(s) they have been provided with. This was consistent with the Company’s articles of association and section 324(2) of the CA. Whilst the court had no objection to this suggestion, it considered the method in which the votes were to be calculated to be of particular importance in this case, given that the Depositary held 97.4% of the Scheme Shares.
Looking at the two alternative approaches in determining the majority of votes where a holder of the Scheme Shares has appointed multiple proxies, the court was of the view that the headcount test was preferable, giving the following reasons:
- the majority test looks at the majority in the number of votes cast by the proxies in favour or against the Scheme. If the majority of proxies votes in favour of the Scheme, the shareholder will be deemed to have voted unanimously for the Scheme, and vice versa. If this test was used in this instance, the Depository’s vote alone would be conclusive, despite the rest of the shareholders taking a different view, as the Depository’s shareholding represented 97.4% of the entire issued share capital of the company; and
- the headcount test, however, assigns a vote to each proxy. Each vote will represent a fraction of the underlying shareholdings held by the shareholder. Unless shareholders vote entirely in favour of or against the Scheme, the votes will be carried out in fractions. As such, each proxy will be voting independently and each voter’s decision will be reflected properly in the counting of votes.
The court, therefore, concluded that the result of the headcount test would be more representative of the views of the shareholders, as well as improving the prospects of the necessary majority to be achieved at the court meeting.
PRACTICAL TAKE AWAY
Both the headcount test and the majority tests are recognisable methods of counting the votes in consideration of a scheme of arrangement. However, the court will consider the circumstances of the scheme on a case by case basis to decide which of the two is a more suitable approach when granting an order for a general meeting for the purposes of passing a scheme of arrangement.
To read the ruling please click here.
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