Old Mutual Plc, Re

The company applied under section 896 of the Companies Act 2006 for permission to convene meetings to approve two schemes of arrangement forming part of a corporate "Managed Separation". The court held that the prohibition in section 641(2A) did not prevent the Demerger Reduction under the First Scheme because that scheme was not one by virtue of which a person would acquire all the company's shares, and that section 641(2B) disapplied the prohibition in relation to the Cancellation Reduction under the Second Scheme because New Holdco would become the company's new parent and members would hold shares in New Holdco in the same proportions. The court considered but rejected the argument that the Ramsay line of cases required treating the two schemes as a single tax-avoidance composite scheme on the facts. The court also addressed the protection of creditors under sections 645–646 and, on the basis of the company's proposed "Locked Box" undertaking with a 10% minimum asset coverage of cash or near-cash assets, provisionally concluded that there was no real likelihood that the Demerger Reduction would prevent the company discharging its liabilities and therefore that settling a list of creditors was unnecessary.

Background and relief sought: Old Mutual plc sought permission under section 896 Companies Act 2006 to convene two separate scheme meetings to approve (i) a demerger of Quilter via a reduction of capital and cancellation of share premium (the First Scheme) and (ii) the insertion of a South African parent company, Old Mutual Limited (New Holdco), as the new holding company by cancellation/transfer and re-issue of shares (the Second Scheme). The applications were listed before a High Court judge because of particular concerns about the application of section 641(2A) (a statutory prohibition on reductions of capital in certain takeover-type schemes) and whether a list of creditors should be settled under section 646 following the Demerger Reduction.

Issues framed:

• Whether the reductions of capital involved in the Schemes were barred by section 641(2A) CA 2006, including whether the two Schemes should be treated as a single composite transaction under the Ramsay line of authority.
• Whether there was a "real likelihood" under section 646 that the Demerger Reduction would render the company unable to discharge its debts, and accordingly whether the court should require settlement of a list of creditors under section 646, or dispense with it under section 645(3).
• Whether the constitution and voting of classes for the proposed scheme meetings were appropriate given transfers to nominees and reclassification of share capital.

Reasoning and decision: The judge analysed the legislative purpose of sections 641(2A)–(2C), noting the explanatory memorandum to the amending regulations which targeted cancellation schemes used to avoid stamp duty in takeovers but expressly exempted intra-group restructurings and demergers. The First Scheme was not a scheme by which a person would acquire all the company's shares; the Second Scheme would result in New Holdco becoming parent and members holding New Holdco shares in the same proportions, so section 641(2B) disapplied the prohibition. The court considered the Ramsay principle and related authorities but concluded that the Schemes each had distinct commercial purposes and that it was unnecessary to treat them as a single tax-avoidance composite scheme on the facts. On creditor protection, the judge applied the "real likelihood" test from Re Liberty International and related authorities, reviewed the company's identified liabilities (principally bonds) and the proposed Locked Box assets (gilts, cash and limited equity exposures) and, after requiring amendment to the undertaking so that at least a 10% margin of Permitted Assets would remain in the Locked Box, provisionally concluded that there was no real likelihood of the Demerger Reduction preventing the company from meeting its liabilities and that a settled list of creditors was unnecessary. The court also accepted the company's proposals on class constitution and convened the two separate scheme meetings.

The court granted the application to convene the two scheme meetings under section 896 CA 2006. It held that section 641(2A) did not bar the Demerger Reduction in the First Scheme and that section 641(2B) disapplied the prohibition in respect of the Cancellation Reduction in the Second Scheme. The court rejected treating the two Schemes as a single composite scheme for the purposes of section 641 on the facts. The court provisionally decided, subject to the agreed Locked Box undertaking (with a 10% minimum asset coverage in liquid/permitted assets), that it would not require settlement of a list of creditors under section 646 and would convene the requested meetings.