Schemes of Arrangement and Shareholder Voting

A recent case has shown that courts will take a dim view of an attempt to defeat a scheme of arrangement by manipulating shareholder votes, according to a corporate lawyer.  “A scheme of arrangement is a court-sanctioned process which can be used to implement a wide range of company restructurings and other matters” says Philip Round a partner at George Green’s Wolverhampton office.  “It is commonly used to sanction company takeovers.  Whilst it requires shareholder approval at a court-convened meeting, the shareholders are obliged to exercise their voting power for the purpose of benefiting the members, or class of members, as a whole.  When the court subsequently decides whether to sanction the scheme, it will consider whether the shareholders have acted in good faith and company legislation has been complied with.”

Mr Round continues, “The case of Re Dee Valley Group Plc concerned a scheme of arrangement to sanction Severn Trent Plc’s takeover of Dee Valley.  As is usual on a scheme of arrangement, the takeover required approval by a majority in number and 75% by value of the shareholders voting, before a court hearing to sanction the scheme. Following the court’s direction to convene the general meeting, one of the shareholders purchased certain tranches of shares which it subsequently gifted to several hundred individuals. At the shareholder meeting the requisite majority by value approved the scheme but not the majority by number of shareholders, due to the votes against the resolution by those who had been gifted shares.”

Mr Round explains, “The court held that the votes against the resolution cast by those members who had received the shares for the apparent purpose of defeating the scheme should not be counted, as it was important to protect the integrity of the court against manipulative practices such as share splits.”

Mr Round concludes, “The case demonstrates that a court-directed meeting to approve a scheme of arrangement is different from a normal shareholder meeting as it is court-controlled, and the judgment will discourage those members who might otherwise wish to defeat a scheme of arrangement through manipulation of voting numbers.”