In the recent Jersey decision In the matter of Atrium European Real Estate Limited  JRC198, on which Appleby advised Atrium European Real Estate Limited (AEREL), the Royal Court in Jersey offered judicial commentary on the headcount test in the context of a members’ scheme of arrangement of a listed company.
A scheme of arrangement in Jersey under the Companies (Jersey) Law 1991 (Jersey Company Law) enables a company to enter into a binding compromise or arrangement with its creditors and/or members (as the case may be) without the need to enter into an individual and separate contractual arrangements with each creditor or member and provides creditors, members and companies with a tried and tested mechanism to implement an arrangement, where it is not commercially or practically achievable to obtain engagement or agreement from all creditors or members, such as a global debt restructuring, takeover etc.
This article examines the key elements of the decision referred to above and how other jurisdictions have sought to deal with this legislative requirement in a transactional world, far removed from the 19th century English statute when this concept first appeared. Unlike today, where a majority of traded shares and debt are held by nominees, custodians or trustees, in 19th century England share and debt holders typically held their interests both legally and beneficially, so that there was rarely a distinction between the persons whose names appeared on the relevant register of members or debtholders and those ultimately beneficially entitled to those interests.
In the matter of Atrium European Real Estate Limited  JRC198
AEREL is a Jersey company listed on Euronext Amsterdam and the Vienna Stock Exchange. The decision of the Royal Court is from the convening hearing (often referred to as the ‘directions hearing’) whereby the Royal Court was asked to convene a meeting of independent shareholders (the Court Meeting) to vote on an offer made by NB (2019) BV being a subsidiary of the majority shareholder Gazit-Globe Limited (Gazit) to be implemented by a members’ scheme of arrangement under Jersey Company Law (the Scheme). The shareholders whose shares were to be subject to the Scheme held c. 39.9% of the issued shares of AEREL with Gazit and its subsidiaries holding the remaining shares.
At the time of the hearing, AEREL’s register consisted of seven members. Of these, four were individuals who were related to the principal of Gazit and had agreed to be bound by the Scheme and one was the corporate service provider to AEREL (who it was considered inappropriate to participate in the Court Meeting). This left only two registered members eligible to participate in the Court Meeting the court was being asked to convene.
One of the eligible registered members was a director of AEREL who had given an irrevocable undertaking to vote in favour of the Scheme and the second was Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V. (Euroclear). Euroclear is a nominee for underlying beneficial owners of shares of AEREL and was the registered holder of c. 99.96% of the shares in AEREL that would be subject to the Scheme. Euroclear held its interests in the shares in AEREL on behalf of custodians or intermediaries who in turn hold on behalf of the underlying beneficial owners often through further intermediaries. The layers of custodians and intermediaries were such that it would be impossible at any given time to identify with any certainty the number of underlying beneficial owners of shares that would be subject to the Scheme.
In Jersey, like many other jurisdictions, a members’ scheme of arrangement requires approval by a majority in number of members (being registered members) present (including by proxy) and voting at the court convened meeting representing three-quarters or more of the votes attached to the shares voted at the meeting. In this instance the Royal Court was invited by counsel for AEREL to make an order that should Euroclear receive instructions to vote both for and against the Scheme at the Court Meeting for the purposes of the headcount test Euroclear will be treated as having cast one vote for the Scheme and one vote against the Scheme.
The order sought by counsel is in keeping with previous schemes in Jersey and elsewhere and follows the well-established authority in the English decision of Re Equitable Life Assurance Society  BCC 319, although the specific fact pattern made its application particularly noteworthy.
The Royal Court has previously approved an alternative approach to the difficulties of the headcount test when faced with nominee shareholders in [Computer Patent Annuities Holdings Limited  JRC 011] (CPA). In CPA, the Royal Court approved an approach that meant each nominee shareholder was allocated a single vote but for each such vote to be subdivided into fractions of a vote in accordance with the number of beneficiaries represented by that holder. Those fractions could then be voted by the holder for or against the underlying scheme and the fractions aggregated to determine whether the majority in number voted for or against the scheme. Counsel for AEREL distinguished CPA from the facts in this instance and the Royal Court agreed. In CPA, the identifiable nominee shareholders held on behalf of a determinable pool of static beneficial owners, whereas in AEREL’s case the beneficial owners were not readily determinable due to the layers of custodians and intermediaries beneath Euroclear and the fact the beneficial interests in the shares continued to be traded on a daily basis.
Although the Royal Court granted the order sought, the commercial reality of how the shares in AEREL are held prompted the Royal Court to remark that:
“it [the headcount test] is certainly capable of operating in a very inconvenient way given the commercial realities of how shareholdings may be structured in the 21st century…”
“it seems to us that the sooner this provision is given some attention by the legislature, the better. We are told some jurisdictions have removed the headcount test from their equivalent of Article 125(2) and in our view that would be very desirable…”
As the Royal Court alluded to in its decision, other jurisdictions which previously included the headcount test as part of their scheme approval process have legislated away from this whereas other jurisdictions have relied on the flexibility of the judiciary to approve idiosyncratic approaches depending on the facts.
Alternative judicial approaches to the headcount test
In the Cayman Islands, the Grand Court in In re Little Sheep (Unreported, Jones J, 20 January 2012) approved an approach that a custodian or clearing house would be treated as a “multi-headed member” for the purposes of determining the count for the headcount test. It was held by the Grand Court that the number of participants (i.e. the first layer of entities or brokers beneath the custodian giving instructions directly to the custodian) from whom the custodian received instructions, would determine the number of votes attributable to the custodian for the purpose of determining whether the majority in number had been achieved. Whilst laudable in principle this approach appears to be a half-way house, in that for the purposes of the headcount test, the views of beneficial owners are better reflected when compared to the traditional one for, one against approach, but it still does not reflect the views of the ultimate beneficial owners.
Perhaps an even starker example of judicial flexibility in respect of the headcount test was in the recent English decision in Re Stallargenes Greer plc (Unreported, 15th May 2019) which involved a single member register in a members’ scheme of arrangement. Here all the shares were held in dematerialised form and it was proposed that a handful of shares held by the sole nominee shareholder on behalf of the directors would be rematerialized and the directors undertook to vote their shares in the same proportion as the number of voting instructions returned for and against, irrespective of value, e.g. if 20% of the voting instructions were against the scheme then a fifth of the directors would vote their newly materialised shares against the scheme. This proposal was presented to the court at the convening stage and was accepted by the court at the sanctions hearing as an appropriate mechanism in the circumstances.
Alternative legislative approaches to the headcount test
Other jurisdictions have taken legislative steps to either remove the headcount test entirely from the scheme approval process or remove this requirement in certain circumstances.
From 2007, the courts in Australia have been given the power to dispense with the headcount test in creditors’ and members’ schemes of arrangement though it appears this power has been used very sparingly.
New Zealand abolished the headcount test in 1993 in favour of a threshold in such manner and terms as the court may specify. It is worth noting that the headcount test has been reintroduced in 2014 for certain listed companies.
In 2014, Hong Kong introduced new legislation for schemes of arrangement removing the headcount test in the context of takeover offers and general offers in members’ schemes. The headcount test was replaced by a 10% objection threshold whereby a member’s scheme to implement a takeover or general offer requires approval by a majority of 75% by value and must not be opposed by more than 10% by value of the shareholders of that class. The headcount test is retained for creditors’ schemes and members’ schemes that do not involve a general offer or takeover offer.
Given the parallels between the Jersey Company Law and Companies Act 1985 (and latterly Companies Act 2006) it is unclear whether there is an appetite from the Jersey legislature to implement reforms to deviate from English company law on such an important mechanism. There is clearly a strong argument that the headcount test has lost its purpose particularly in a world of dematerialised electronically traded shares in listed companies. Equally there is an argument that the courts, in jurisdictions where the headcount test is still relevant, are receptive to and accommodating of solutions proposed by counsel that embrace the spirit of the headcount test. The later approach can be potentially criticised on the grounds of causing unpredictability and, in a world were advisors are at pains to limit deal execution risk, perhaps now is the time for Jersey to legislate on this issue. This appears to be the view of the (former) Bailiff in the present case when he stated:
“…it would seem that perhaps the legislature should give further consideration to this Article (Article 125(2) of Companies (Jersey) Law 1991) in early course.”
Appleby’s lawyers in Jersey are experts in dealing with instructions from public and private companies contemplating takeover offers, potential bidders for public and private companies and companies seeking to compromise with their creditors, all of whom seek to utilise the scheme of arrangement framework as a means of achieving their desired corporate outcome. Recent examples include advising (i) LSE listed Kennedy Wilson Europe Real Estate plc on its merger with by NYSE-listed Kennedy-Wilson Holdings, Inc. and (ii) Atrium European Real Estate Limited on a recommended offer from Gazit-Globe Limited. Do reach out to one of the contacts below should you require any further information.