The Privy Council recently considered the test for class constitution in schemes of arrangement and the law on reduction of capital.
In particular, the Privy Council considered: (1) whether the minority shareholders (whose shares were to be cancelled as part of the scheme) constituted a separate class to the majority shareholders despite both being shareholders of the same class; and (2) whether the scheme involved an unauthorised reduction of capital.
Background
Cable & Wireless Jamaica Ltd v Abrahams[1] involved Cable & Wireless Jamaica Ltd (“CWJ”), a telecommunications company, which advanced a cancellation scheme of arrangement for the purposes of becoming the wholly owned subsidiary of Liberty Latin America Limited (“Liberty”), its indirect majority shareholder. The proposed scheme was designed to enable Liberty, through its subsidiaries, to compulsory acquire CWJ by way of voluntary takeover offer. Pursuant to a cancellation scheme of arrangement, all of the shares are cancelled and new shares are immediately issued to the new shareholder.
The scheme meeting of CWJ was held on 21 November 2018 at which a majority of shareholders approved the scheme. At the court hearing to sanction the scheme, Eric Jason Abrahams, a minority shareholder holding a total of 0.38% of shares in CWJ, opposed the grant of sanction on two grounds: (i) the scheme meeting had not been properly constituted; and (ii) there was an unauthorised reduction of capital. In his judgment, Batts J refused to sanction the scheme on the basis that the majority and minority shareholders should have formed separate classes (the majority shareholders were effectively the intended purchasers of the minority shares) and that a derivative action should be heard before the scheme was approved, but concluded that there was no reduction in company capital as the reduction was not permanent. CWJ appealed the decision to the Court of Appeal of Jamaica who agreed that the minority and majority shareholders should not have been part of the same class. On this basis, the Court of Appeal concluded that the meeting was not properly constituted and that it was unnecessary to resolve the reduction in capital issue. CWJ then appealed to the UK Privy Council.
Privy Council Judgment
Class constitution
The Privy Council confirmed the ruling of Batts J and, in doing so, considered and reaffirmed the established legal position in the UK on class constitution, holding that the constitution of classes should be confined to members “…whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”[2] and can therefore constitute a single class. The Privy Council confirmed that the test for the composition of classes is based on the similarity or dissimilarity of legal rights as opposed to interests.
In its judgment, the Privy Council highlighted that “the focus ought to be on rights before the scheme and the effect of the scheme on those rights (be it removing, varying or conferring them)”[3], and concluded that while the rights attaching to the minority and majority shareholders were the same prior to the scheme, the treatment of the minority and majority shareholders was different pursuant to the scheme, such that their rights following effectiveness of the scheme differed. The minority shares were to be cancelled in exchange for cash payment whereas the majority shares would remain the same. The Privy Council concluded that for this reason the scheme meeting was not properly constituted and approval of the requisite majority had not been achieved.
The Privy Council re-affirmed the practice as adopted by the UK Court of Appeal in Re Hawk Insurance Co Ltd[4] to determine, in so far as possible, the constitution of classes at the hearing to convene the scheme meeting.
Reduction of capital
The Privy Council found Batt J’s conclusion, that there was no reduction in capital (as there would be an immediate reissuance of the same amount), to be erroneous. The Privy Council highlighted that it was a well settled statement of the law that a scheme of arrangement may not be used to bypass the statutory requirements for a reduction in capital. In this instance, the proposed reduction was not authorised by the relevant Jamaican legislation and therefore Batts J did not have jurisdiction to sanction the scheme.
The Law in Ireland on Class Constitution in Schemes of Arrangement
Schemes of arrangement in Ireland are governed by Part 9 of the Companies Act 2014, as amended (the “Companies Act”). The law in Ireland relating to schemes of arrangement and the class constitution test is historically derived from, and similar to, the English company law (as described in the statement of law by the Privy Council in this judgment).
The position in the UK differs in that only the court can convene the scheme meeting whilst the directors of a company may also convene a scheme meeting under Irish law. In the recent cancellation scheme of arrangement undertaken by Dalata Hotel Group plc in respect of its acquisition by Pandox Ireland Tuck Limited, the board of Dalata Hotel Group plc convened the scheme meetings. However, it has become common practice for companies to the extent feasible within the timeframes (particularly having account for court vacation) to apply to the High Court for it to convene the scheme meeting(s) as they may also provide directions on the constitution of classes. Following receipt of requisite approvals at the relevant scheme meetings(s), the Irish High Court will then examine or re-examine the constitution of classes at the sanction hearing.[5] With respect to the test for class constitution, Irish law aligns with the UK position, in that the relevant test is that of “differing rights rather than differing interests.”[6] The Irish High Court in sanctioning a scheme of arrangement must be satisfied that[7]:
- sufficient steps have been taken to identify and notify all interested parties;
- the statutory requirements and all directions of the court have been complied with;
- the class(es) of members are properly constituted;
- there is no improper coercion of any of the members concerned; and
- the scheme of arrangement is such that an intelligent and honest person, a member of the class concerned, acting in respect of his or her interest, might reasonably approve of it.
In practice, there is tension between unnecessarily creating various classes which could potentially lead to a greater chance of a veto of the proposed scheme and the necessity of ensuring that those with identical rights should consult together with a view to their common interest.
Commentary
The Privy Council decision serves as a concise restatement of the test for class constitution in schemes of arrangement and a reminder that the importance in properly constituting the classes of members or creditors cannot be understated – the failure to do so will prevent the sanctioning of a scheme of arrangement. It is also a reminder that, in the case of cancellation schemes of arrangement, parties must comply with separate requirements for a scheme and capital reduction.
If you have any queries on the law relating to schemes of arrangement or the reduction of company capital, please contact David Fitzgibbon, Anna O’Carroll or your usual Matheson contact.
[1] [2025] UKPC 44
[2] Sovereign Life Assurance Company v Dodd [1892] 2 QB 573, [583]
[3] Cable & Wireless Jamaica Ltd v Abrahams [2025] UKPC 44 [paragraph 37]
[4] [2001] 2 BCLC 480
[5] Re UBS ETFs plc [2019] IEHC 660, [23]
[6] Re BTR plc [1999] 2 BCLC 675, [682–683]
[7] In Re Colonia Insurance (Ireland) Limited [2005] 1 IR 497