Velocys Plc, Re

The company sought an order to convene a single meeting of holders of its ordinary shares to consider a members' scheme of arrangement under the Companies Act 2006 to facilitate a cash acquisition by Madison Bidco Limited. The critical legal issue was that an 8.3% shareholding was indirectly held by a person designated under The Russia (Sanctions) (EU Exit) Regulations 2019, raising potential prohibitions on voting, transfer of the shares and payment of sale proceeds (Regulations 5, 11, 12 and 14). The court concluded there was no insurmountable jurisdictional roadblock to convening a meeting because (i) the proposed convening Order gave the chair a discretion to disallow any vote that would be unlawful, preserving the point for the sanction hearing, and (ii) the Scheme mechanics and the company’s application for an OFSI licence meant no transfer or payment in respect of the designated person's shares would occur unless and until it was lawful to do so. On class composition, the court held that the designated shareholder’s position did not fracture the class: his rights going into the Scheme remained the same as other shareholders and his modified exit arrangements were not so different as to prevent the members consulting together. The court therefore ordered a single convening meeting, allowing time for the designated shareholder to take legal advice.

Background and parties:

• The applicant was Velocys plc seeking a convening order to call a meeting of holders of its Ordinary Shares to consider a members' scheme of arrangement under the Companies Act 2006 to enable acquisition by Madison Bidco Limited for cash consideration of 0.25 pence per share.
• An 8.3% interest in the Scheme Shares was indirectly held by Mr David Davidovich, who had been designated as a United Kingdom asset-freeze target under The Russia (Sanctions) (EU Exit) Regulations 2019.

Nature of the application and relief sought:

• The Company applied for a convening Order to call a single meeting of Scheme Shareholders to consider and, if thought fit, approve the Scheme of Arrangement.

Issues framed by the court:

• Whether the sanctions regime created a jurisdictional or other roadblock that would make it unlawful to convene a meeting or to sanction the Scheme (because of prohibitions on "dealing with funds", transfers and payments under the Regulations).
• Whether the position of the designated shareholder fractured the class such that separate meetings or different class composition were required.

Court’s reasoning:

• At the convening stage the court’s role is limited to identifying any clear jurisdictional impediment to sanction; the court should not make an Order if the Scheme requires or encourages unlawful activity.
• To avoid unlawful activity the proposed convening Order included a provision allowing the chair to disallow any vote that would be unlawful, while preserving the affected party's right to raise the issue at the sanction hearing. That approach struck a fair balance between preventing illegality and preserving the designated person’s ability to challenge the disallowance at sanction.
• As to transfers and payments, the Scheme provided that any shares held by a "Sanctions Disqualified Shareholder" would not be transferred until the later of the Scheme effective date and the earlier of an OFSI licence being obtained or the removal of the relevant sanctions; if a licence were obtained the proceeds would be paid into a frozen account until it was lawful to release them. The court found these mechanics adequate to prevent contravention of the Regulations.
• On class composition the court applied the established test (rights rather than mere interests; members fall in the same class if their rights are not so dissimilar as to make it impossible to consult together with a view to their common interest). The inability of the designated shareholder to vote arose from the sanctions regime rather than his shareholder rights, and his basic economic decision (relinquish shares for 0.25 pence each) remained the same as other shareholders. Authorities cited in this context included Sovereign Life Assurance Co v Dodd, Re TDG plc and Re Hawk Insurance Co Limited and the statutory majority requirement in Companies Act 2006 s.899(1).

Outcome and practical measures:

• The court concluded there was no insurmountable roadblock and that the class was not fractured, and therefore made an Order convening a single meeting of Scheme Shareholders. The Order included the protective voting provision and the parties agreed an extended period before the meeting to allow Mr Davidovich to take legal advice.

The court made an Order convening a single meeting of the Scheme Shareholders. The judge held there was no insurmountable legal roadblock from the sanctions regime because the convening Order and Scheme mechanics prevented any unlawful voting, transfer or payment in respect of the designated shareholder’s shares, and the designated shareholder’s position did not fracture the class of shareholders for the purposes of convening a single meeting.