Halcrow Holdings Limited (Halcrow), an employee-owned consulting engineering business, applied to the High Court to sanction a scheme of arrangement (the Arrangement) under sections 895 to 899 Companies Act 2006 (CA 2006). The Arrangement involved the acquisition by a US-owned bidder of Halcrow's entire issued share capital in return for cash, shares or loan notes. Halcrow’s shareholders were its employees and a discretionary trust which held shares on trust for present and former company employees. The proposed Arrangement involved a reduction of capital and was challenged by a representative pensioner on the basis that the transaction failed to secure a legally binding guarantee of an injection of cash into the deficit-ridden Halcrow Pension Scheme (HPS).
The Court also considered whether the failure to give notice of the Arrangement to some shareholders was an accidental omission under section 313 CA 2006 and Halcrow’s articles, and could therefore be waived.
It was held that the risk of a different cultural approach to dealing with the HPS funding deficit as a result of the takeover was insufficient for the Court not to approve the Arrangement. In addition, the accidental omission of some shareholders from the notification process was one which could be waived and it did not prevent the Court from sanctioning the Arrangement.
Halcrow was an employee-owned consulting engineering company and the Halcrow group companies operated several defined benefit pension schemes, including the HPS, which had a substantial funding deficit. The purpose of the proposed Arrangement was to allow a US-owned bidder company to acquire Halcrow’s issued share capital. One representative pensioner opposed the Arrangement on the basis that it failed to secure a legally binding guarantee of a cash injection into the deficit-ridden HPS, and so the Arrangement would leave the HPS less likely to recover its deficit than would otherwise have been the case.
The adoption of the Arrangement and the reduction in share capital, were to be approved at a company meeting, and shareholders were to be provided with the relevant documents at least 14 clear days in advance. However, the company’s solicitors failed to spot a mistake in the printing matrix of document recipients, with the result that 306 shareholders did not receive full notice of the meeting.
The Court meeting was held in October 2011, with 427 of the 435 shareholders participating voting in favour of the Arrangement. The special resolution to approve the reduction in capital was approved. Those 427 shareholders held approximately 18.5 million shares (the total number of 1175 shareholders held approximately 20.76 million shares). However, 740 of the 1175 shareholders were not represented at the meeting (some 63 per cent).
The principal issues for the High Court to consider included:
- whether the failure to give notice to all shareholders could be treated as an accidental omission or an accidental failure, either under the articles of association of the company, or under section 313 CA 2006, and whether it was appropriate to sanction the proposal and to confirm the reduction of capital involved, notwithstanding that omission or failure; and
- whether the Arrangement and the reduction in share capital should be approved if the takeover facilitated by the Arrangement would mean that the company was less likely to recover the deficit under its pension scheme than would otherwise have been the case.
The High Court looked at Re TDG plc , where Morgan J described the following four matters that require the Court's attention before a scheme of arrangement may be sanctioned:
- the Court must be satisfied that the provisions of the statute have been complied with;
- it must be satisfied that the class of shareholders, the subject of the Court meeting, was fairly represented by those who attended the meeting, and the statutory majority are acting bona fide and not coercing the minority in order to promote interests adverse to those of the class they purport to represent;
- an intelligent and honest person, a member of the class concerned and acting in respect of his own interest, might reasonably approve the scheme of arrangement; and
- there must be no blot on the scheme of arrangement; that is, nothing unlawful or inappropriate about it.
The Arrangement was sanctioned and the High Court held:
- An accidental omission to give notice requires a genuine attempt to serve the shareholders in accordance with their rights, which fails. It was the solicitors’ intention to notify all shareholders and to provide them with copies of the relevant documents, and the failure to do so had been accidental. Halcrow had taken all reasonable steps to inform those shareholders once the error had been realised and the proposal was overwhelmingly supported by shareholders, considered in terms of value. Therefore, the accidental omission could and should be waived, both under the CA 2006 and Halcrow's articles of association.
- When deciding whether to approve the Arrangement, it was open to the Court to consider the interests of third parties, including the effect on the HPS and the concerns raised by pensioners were not insignificant. However, the Court held that any prejudice to the HPS and pensioners was not financial, but only the risk of a different cultural approach to the HPS by the buyer. The Arrangement was overwhelmingly approved by shareholders and the HPS would not, on paper, be any worse off. There was no blot on the Arrangement in that there was nothing unlawful or inappropriate about it
- It was appropriate to sanction the Arrangement as it complied with all formal requirements. The class of shareholders was fairly represented by those who attended the meeting. It had been shown that an intelligent and honest person, a member of the shareholder class concerned and acting in respect of his own interest, might reasonably approve the Arrangement and there was no relevant 'blot'.
- It was appropriate to approve the reduction in Halcrow's share capital. The HPS was no worse off than it would have been before the reduction. The Arrangement itself did not affect the sponsor’s obligations owed to the HPS and there was no evidence that the US company had any malign intentions towards the HPS. The pensioners had failed to show that there was any real likelihood that the reduction in Halcrow’s share capital would result in an inability of the company to discharge its debt under section 646(1)(b) CA 2006.
From the judgment, it seems that the Judge had some sympathy with the pensioners’ position and he thought it would have been far better if the buyer had responded to the requests by the HPS to provide some legally binding assurances as to the new parent's intentions with regard to the HPS and its future funding. However, the lack of such firm assurance was insufficient reason for the Court not to sanction the Arrangement. The Court found that the pensioners could not show that there was 'a real likelihood that the reduction [in Halcrow’s capital] would result in the company being unable to discharge [its] debt when it fell due'. The Pensions Regulator (TPR) had been alerted to the deal by the HPS pensioners and it had noted that clearance (a voluntary process) for the takeover had not been sought. TPR shared the trustees’ concerns and asked the HPS trustees to keep it updated, although TPR gave no indication that it was considering using its 'moral hazard' powers
(High Court sanctions takeover despite accidental failure to give notice and potentially detrimental effect on pension scheme funding position - Re Halcrow Holdings Limited  EWHC 3662 (Ch))