Re Dee Valley Group plc

Key legal principles: At a class meeting summoned by the court under Part 26 of the Companies Act 2006 the court must be satisfied that the class attending the meeting fairly represents the class and that the statutory majority are acting bona fide and not to promote interests adverse to the class. Votes at such a court-directed class meeting must be cast for the purpose of benefiting the relevant class as a whole rather than merely to advance individual or collateral interests. Section 899(1) requires both a majority in number and 75% in value of those present and voting; both preconditions are jurisdictional.

Material grounds for decision: The chairman of the court-ordered class meeting was entitled to reject votes cast by 434 newly registered shareholders where there was cogent evidential material showing those single-share holdings had been created by a single transferor by way of gift in order to manipulate the majority-in-number test. The chairman and the court could properly take account of such a share-splitting strategy when determining whether the votes were cast for the benefit of the class. Consequently, the statutory preconditions were satisfied once those votes were excluded and the court sanctioned the scheme under section 899(1).

Background and parties: The Company sought court sanction of a scheme of arrangement under Part 26 of the Companies Act 2006 to permit Severn Trent Water Limited to acquire Dee Valley Group plc. Opponents included seven individual shareholders and a rival bidder, Ancala Fornia Limited. A stockbroker nominee holding a material block supported the scheme.

Facts: After the court had directed a class meeting, an employee (Mr Cashmore) purchased several tranches of shares and transferred one share each by gift to some 443 individuals who were then registered shortly before the record date. Many of those transferees returned proxies opposing the scheme. The transfers produced a numerical majority against the scheme at the court-ordered meeting if their votes were counted.

Procedural posture and relief sought: The Company applied for the court's sanction of the Scheme under section 899(1) and for directions that the chairman of the court meeting have discretion to reject votes derived from the transfers. Registrar Derrett made an interim order permitting the chairman to reject votes of members whose shares derived from Mr Cashmore. The chairman exercised that discretion at the 12 January meeting and excluded 434 votes; the Company then sought sanction from the Chancellor.

Issues framed by the court:

• What is the proper test to determine validity of votes at a court-directed class meeting?
• Were the votes of the transferee individual shareholders valid and should they have been counted?
• If the chairman was wrong to reject them, could the court nevertheless exercise a discretion to sanction the scheme?
• If rejection was correct, should the court exercise its discretion to sanction?
• Was Registrar Derrett's order appropriate?

Court's reasoning: The court treated meetings summoned under section 896(1) as sui generis and under the control of the court. The relevant legal test is whether votes are cast for the purpose of benefiting the class as a whole and not to promote interests adverse to that class. The chairman has inherent powers to ensure a fair meeting and to reject votes where there is evidence of manipulation, and he did not need the Registrar's order to have that power. The chairman had sufficient evidence (timing and structure of purchases and transfers) to conclude that the transferees could only have received single shares to effect vote manipulation and therefore could not have considered the interests of the class in a genuine way. The court therefore accepted the chairman's exclusion of those votes. Having determined that the statutory preconditions were satisfied after exclusion of the manipulated votes, the court exercised its discretion to sanction the scheme, having considered the statutory checks (compliance, fair representation, bona fides, reasonableness of the scheme to an intelligent and honest member, and absence of any blot).

Wider context: The Chancellor observed this was a novel application of share-splitting to defeat a scheme and noted comparative authority (Re PCCW) and statutory history; he emphasised the rarity of cases where voter motives can be meaningfully investigated and expressed that Registrar Derrett's order should have recorded that it was not a definitive determination on the validity of votes.

First instance: The court sanctioned the Company’s scheme of arrangement. Rationale: members voting at a court-directed class meeting must vote in the interests of the class as a whole; the chairman properly rejected votes of 434 transferee shareholders because the circumstances (timing, single-share gifts from a single transferor) demonstrated a share-splitting strategy to manipulate the majority-in-number jurisdictional requirement, so those votes were not valid. With those votes excluded, the statutory preconditions were met and the court, after considering the statutory discretionary factors, sanctioned the Scheme.