Velocys Plc, Re

At the convening stage of a scheme of arrangement, the court must ask whether any jurisdictional or other roadblock would unquestionably prevent sanction, including whether the scheme requires or encourages unlawful activity.

Shareholders affected by sanctions do not necessarily form a separate class. Class constitution depends principally on members’ rights, compared at the scheme’s entry and exit points. A disability arising from sanctions rather than shareholder rights does not itself fracture the class. Differences in exit rights will not do so where they remain sufficiently similar to permit consultation in a common interest and the underlying economic assessment remains the same.

Velocys plc sought an order convening a single meeting of holders of its ordinary shares to consider a members’ scheme facilitating its acquisition by Madison Bidco Limited.

An indirect 8.3% interest was held by a designated person subject to an asset freeze under The Russia (Sanctions) (EU Exit) Regulations 2019. The sanctions potentially prevented voting, transfer of the shares and immediate payment of consideration. The company proposed protective provisions in the convening order and scheme, including obtaining an OFSI licence and paying consideration into a frozen account.

The issues were whether the sanctions created an insurmountable roadblock and whether the affected shares belonged to a separate class requiring a separate meeting.

1. The court had already granted the convening application and gave reasons for making an order convening a single meeting of the Scheme Shareholders.

2. At the convening stage the court’s role is limited, but it must consider whether a jurisdictional or other roadblock would unquestionably prevent sanction. A scheme requiring or encouraging unlawful activity would present such a roadblock. Here, the proposed order allowed the chair to disallow votes where advised that voting would be unlawful, while preserving the shareholder’s ability to raise the issue at the sanction hearing. The scheme also postponed transfer until it became lawful and prevented funds being made available until payment was lawful.

3. Class composition is determined by members’ rights rather than interests. The relevant approach identified in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 asks whether rights are so dissimilar that members cannot consult together in a common interest.

4. The affected shareholder’s inability to vote arose from the sanctions, not from any difference in shareholder rights. Creating a separate class would be artificial and could prevent the statutory majorities required by section 899(1) of the Companies Act 2006. The court could instead protect the position at sanction by considering whether the class was fairly represented, acted bona fide, and approved a scheme which an intelligent and honest person might reasonably approve, as illustrated by Re TDG plc [2009] 1 BCLC 445.

5. Although the affected shareholder’s exit rights differed because payment might be delayed, the comparison at entry and exit was appropriate: Re Hawk Insurance Co Limited [2001] 2 BCLC 48. The difference was limited and did not prevent the shareholders from making the same basic economic assessment or consulting together. The class was therefore not fractured.