Lakes Distillery Company Plc, Re

The application under Part 26 of the Companies Act 2006 to sanction a scheme of arrangement to effect the sale of The Lakes Distillery Company Plc to Nyetimber was granted. Key legal issues were (i) whether the explanatory statement adequately disclosed directors' interests, in particular convertible loan notes (CLNs) carrying a purported 100% "make‑whole" premium on change of control; (ii) the proper construction of the CLN redemption clause; and (iii) whether the CLNs or associated payments fractured the single class of shareholders so as to defeat the convening of a single court meeting. The court concluded (a) on construction and surrounding evidence that the make‑whole premium was payable on change of control, (b) that the CLNs and their premium were not part of or collateral to the Scheme such as to fracture the class, and (c) that disclosure in the Explanatory Statement was nonetheless deficient but did not create a jurisdictional impediment. The court exercised its discretion to sanction the Scheme without directing a further meeting, having concluded that a further meeting was unlikely to produce a different result and that there was no "blot" on the Scheme.

Background and relief sought

The Lakes Distillery Company Plc applied under Part 26 Companies Act 2006 for the court's sanction of a scheme of arrangement by which Bidco (Nyetimber Wines and Spirits Group Ltd) would acquire all the Company's ordinary shares for 116 pence per share. The application followed a Court Meeting at which the requisite statutory majorities approved the Scheme.

Procedural posture

• The hearing was adjourned from 21 May 2024 to 11 June 2024 because the court raised concerns about adequacy of disclosure of directors' interests in CLNs in the Explanatory Statement and their impact upon class composition.
• Further evidence, a draft supplementary circular and written submissions were filed for the adjourned hearing.

Issues framed by the court

1. What rights do the CLNs confer on holders on true construction of their terms, in particular whether the clause for a 100% premium applies on a change of control?
2. Whether the repayment arrangements for the CLNs (including the premium) are collateral to, or part of, the Scheme such that the shareholder class is fractured and the convening directions were inappropriate.
3. Whether disclosure in the Explanatory Statement of directors' interests and the make‑whole provisions was adequate, and if not, whether a further meeting should be directed.

Court's reasoning and findings

• Construction of CLNs: having regard to the Indicative Terms, contemporaneous communications and the parties' common intent, the court read clause 7 so as to give effect to a 100% make‑whole premium on change of control (either by rectification or by reading the reference in clause 7.2 to clause 7 as a whole).
• Class composition: applying authorities that the court must consider collateral arrangements (Re PA Consulting; Re Baltic Exchange) the judge found the CLNs were negotiated as urgent, independent funding measures and not part of the Scheme or causally linked arrangements. The CLNs therefore did not fracture the single class of ordinary shareholders and the directions for a single meeting were appropriate.
• Disclosure: the explanatory statement did not sufficiently and prominently disclose the directors' CLN interests and the make‑whole premium. The deficiency was material in the sense relevant to the court's discretionary assessment, but it did not amount to a jurisdictional impediment to sanction.
• Exercise of discretion: applying the statutory criteria and authorities (including the tests in Buckley and TDG Plc), the court concluded there was no blot on the Scheme and that the statutory majorities were acting bona fide. On balance the court exercised its discretion not to require a further meeting because the additional disclosure was unlikely to change the outcome, and non‑sanction would risk severe prejudice to shareholders given the Company's precarious position.

Outcome

The court sanctioned the Scheme. The judgment records cautionary observations about the importance of clear, context‑specific disclosure and the court's supervisory role when schemes compel shareholders' proprietary rights or creditors' contractual rights.

The court sanctioned the Scheme. The judge held that the CLNs, properly construed in light of the Indicative Terms and contemporaneous negotiations, carried a 100% make‑whole premium on change of control; that the CLNs were not part of or ancillary to the Scheme so as to fracture the single class of shareholders; that disclosure in the Explanatory Statement of directors' CLN interests and the make‑whole provisions was deficient but did not create a jurisdictional bar; and that in the exercise of the court's discretion a further meeting was not required because it was unlikely to change the result and refusal to sanction would risk prejudice to shareholders.