The Legal 500

Introduction

In England and Wales the right of "squeeze out" in a takeover context is enshrined in section 429 of the Companies Act 19851. Section 429 of the Act, broadly speaking, permits a person making a takeover offer2 in respect of a company registered in England and Wales to compulsorily acquire the shares of the minority shareholders of that company where the Offeror has acquired or contracted to acquire not less than 90 per cent in value of the shares to which the offer relates.

Guernsey company law however, currently has no provision comparable to section 429 of the Act. There is therefore, no statutory basis for an Offeror to "squeeze out" the minority shareholders of a company registered in Guernsey in a takeover context. Finding a solution to this lacuna in the Companies (Guernsey) Law, 1994 (as amended)³ proved to be crucial in relation to a recent transaction (the "Gas Case")⁴ in which the prospective purchaser of a Guernsey registered company listed on the London and Channel Island Stock Exchanges wanted to obtain control of that company's entire issued share capital.

The ground breaking innovation came when the lawyers acting for the vendors on the transaction⁵ made the conceptual leap to consider the use of the Amalgamation of Companies Ordinance, 1997⁶ (which had traditionally been used to facilitate group rationalisations and restructurings) in a takeover context . The purposes of this Paper are to examine the application of the terms of the Ordinance in a takeover context⁷ and to consider the implications of the "squeeze out" authorisation threshold thereby created.

Overview of the Ordinance

The Ordinance permits, subject to its terms, two or more companies to amalgamate and continue as one company⁸ (which may be one of the amalgamating companies or a new company) provided that not less than one of the amalgamating companies is registered in Guernsey.

Briefly stated⁹ , the Ordinance requires the preparation of an amalgamation proposal¹⁰ which has to be:

(a) approved by the board of each amalgamating company;

(b) sent (amongst other things) to the members of each amalgamating company; and

(c) approved by special resolution of those members.

The Ordinance also requires notice of the proposed amalgamation to be given to every creditor of each of the amalgamating companies and published in Guernsey's official gazette¹¹.

In addition to these standard requirements, where any of the amalgamating companies is a Supervised Company¹² or is not a company registered in Guernsey, the companies may not amalgamate except under the authority of and in accordance with the conditions of the consent of the Guernsey Financial Services Commission .¹³

The Amalgamation Proposal

Section 3 of the Ordinance requires the Amalgamation Proposal to set out the terms of the Amalgamation. In a takeover context this would broadly equate to an explanation that the prospective purchaser has established a Guernsey resident special purpose company¹⁴ which will amalgamate with the target Guernsey company¹⁵ , with the shares belonging to the Target's shareholders being cancelled for cash consideration and the shares belonging to Newco's Shareholders continuing as the share capital of the Amalgamated Company.

Section 3 of the Ordinance goes on to require that the Amalgamation Proposal should specify:

1. the name of the Amalgamated Company. In a takeover context the name of the Amalgamated Company will usually, but does not have to, be the name of Newco;
2. the registered office of the Amalgamated Company. In a takeover context the registered office of the Amalgamated Company will usually, but does not have to, be the registered office of Newco;
3. the full names and residential addresses of the directors of the Amalgamated Company. In a takeover context the identities of the directors of the Amalgamated Company will usually, but do not have to, be the same as the identities of the directors of Newco (save where directors of the Target will be staying with the Target post amalgamation);
4. the share structure of the Amalgamated Company, specifying the number of shares in the Company and the rights, privileges, limitations and conditions attached to each share of the Company. In a takeover context, and given that the shares belonging to the Target's Shareholders will be cancelled, this will equate to a description of the share structure of Newco;
5. the manner in which the shares of each amalgamating company are to be converted into shares of the Amalgamating Company. This requirement is aimed at the traditional non-takeover variety of amalgamation in which the shares of each amalgamating company are converted into shares in the Amalgamated Company rather than being cancelled. The option to cancel shares rather than to convert them is enshrined in the following requirement;
6. if shares of an amalgamating company are not to be converted into shares of the Amalgamated Company, the consideration that the holders of those shares are to receive instead of shares of the Amalgamated Company. This is the requirement which opens up the Ordinance for use in a takeover context, because it envisages the possibility of the shares in an amalgamating company being cancelled in return for "consideration" rather than shares in the Amalgamated Company. This position is enhanced by the fact that the Ordinance does not define the word "consideration", and therefore it must be given its ordinary meaning which whilst obviously including a cash payment will permit prospective vendors and purchasers a degree of flexibility in determining the composition of the consideration package;
7. any payment to be made to a shareholder or director of an amalgamating company, other than a payment of a kind described in paragraph (f). This requirement is intended to pick up any non-consideration payments arising as a result of the amalgamation and bring them to the attention of the shareholders and creditors;
8. details of any arrangement necessary to complete the amalgamation. In a takeover context this requirement will usually result in the Amalgamation Proposal containing full details of the commercial conditions of the sale and any regulatory, listing authority and other consents that are required in order to complete the amalgamation; and
9. the date on which the amalgamation is intended to become effective. Given the transactional difficulties of setting, and sticking to, a particular effective date, the mechanism which is usually adopted is for the Amalgamation Proposal to define the effective date as "the date on which the Greffier¹⁶ issues the certificate of amalgamation in accordance with section 7(2) of the Ordinance". In this way the Offeror can control the date of amalgamation and can ensure that all the relevant conditions have been met.

The board approval process

Section 4(1) of the Ordinance requires the directors of each amalgamating company to resolve that:

1. in their opinion the amalgamation is in the best interests of their amalgamating company; and
2. they are satisfied on reasonable grounds that the Amalgamated Company will, immediately after the amalgamation becomes effective, satisfy the solvency test laid down in section 13 of the Ordinance¹⁷ . For the purposes of the Ordinance a company passes the Solvency Test if it is able to pay its debts as they become due in the normal course of its business and if the value of the company's assets is greater than the value of its liabilities¹⁸ . The fact that this solvency resolution relates to the Amalgamated Company rather than each amalgamating company presents potential difficulties for the directors of both Newco and Target. The directors of Newco have a potential difficulty in that they will effectively be certifying the solvency of an entity they are not yet directors of, and the directors of Target will be certifying the solvency of an entity which will not be under their control at the time of the Solvency Test (i.e. immediately after the amalgamation becomes effective). Depending on the circumstances of the takeover (i.e. whether friendly or hostile) this element of the Ordinance may require considered planning; and
3. in the case of a Supervised Company, the company satisfies any other solvency requirements imposed pursuant to its relevant regulatory legislation.

Section 4(2) of the Ordinance requires the directors who vote in favour of the resolutions described in relation to section 4(1) above to sign a certificate¹⁹ stating that, in their opinion, the conditions set out in the resolutions are satisfied, and the grounds for that opinion. These Directors' Certificates then form part of the package of information which is sent to the shareholders of each amalgamating company.

The shareholder approval process

Section 4(3) of the Ordinance then requires the directors of each amalgamating company to give to each member of their company, not less than 28 days before the date on which the amalgamation is proposed to take effect:

1. a copy of the Amalgamation Proposal;
2. copies of the Directors' Certificates;
3. a summary of the principal provisions of, or a copy of, the memorandum or articles of association of the Amalgamated Company²⁰ ;
4. a statement of any material interests of the directors and other officers of the company in the Amalgamation Proposal, whether in that capacity or otherwise; and
5. such further information and explanation as may be necessary to enable a reasonable member to understand the nature and implications for the company and its members of the Amalgamation Proposal.

Section 4(5) of the Ordinance then requires that the Amalgamation Proposal be approved by special resolution of the members of each amalgamating company²¹ .

In relation to a Guernsey company a "special resolution" is defined in section 73 of the Law as meaning a majority of not less than three quarters of the votes recorded (including, where there is a poll, any votes cast by proxy) at a general meeting in respect of which notice specifying the intention to propose the resolution has been given.

In relation to a non-Guernsey company "special resolution" is defined in the Ordinance as meaning such resolution of the company, or such other action on the part of the company or its members, as the Commission shall certify in writing as being equivalent to a special resolution of a Guernsey company.

The crucial concept here is that the special resolution to accept the Amalgamation Proposal is passed with 75 per cent of the votes recorded at a general meeting. In this way, once the special resolution is passed, it is binding on all the other shareholders whether or not they attended the meeting and whether or not they voted in favour.

In this way an Offeror looking to acquire a company registered in Guernsey may acquire the shares of the minority shareholders of that company without their consent where the Offeror has acquired not less than 75 per cent of the shares to which the offer relates.

The notification process

Section 4(4)(a) of the Ordinance requires the directors of each amalgamating company to give written notice of the proposed amalgamation to every creditor of the company not less than 28 days before the day on which the amalgamation is proposed to take effect.

Section 4(4)(b) of the Ordinance requires the directors of each amalgamating company to publish notice of the proposed amalgamation in La Gazette Officielle not less than 28 days before the day on which the amalgamation is proposed to take effect, including a statement that:

1. copies of the Amalgamation Proposal are available for inspection by any member or creditor of an amalgamating company, or any other person to whom an amalgamating company is under any obligation or liability, at the registered offices of the amalgamating companies, and at such other places as may be specified (during normal business hours); and
2. a member or creditor of an amalgamating company, or any other person to whom an amalgamating company is under any obligation or liability, is entitled to be supplied free of charge with a copy of the Amalgamation Proposal upon request to an amalgamating company.

Care has to be taken when framing the timetable for such notifications as service of notice of documents under the Ordinance is governed by section 116 of the Law which requires seven business days after the date of posting for post to be deemed to have been received outside the United Kingdom, the Channel Islands and the Isle of Man. The procedure usually adopted is to post the relevant material to the members and creditors and then wait seven days after the day of posting (to ensure deemed receipt) before placing the relevant notices in La Gazette Officielle and then waiting 28 days after the date of publication before giving effect to the amalgamation.

Applications for the Commission's consent

Section 6 of the Ordinance defines the requisite components of the application to the Commission which include:

1. the Amalgamation Proposal (which has to comply with the provisions of section 3 of the Ordinance and have been approved in accordance with the provisions of section 4 of the Ordinance);
2. the Director's Certificates for each amalgamating company;
3. a certificate signed by the directors of each amalgamating company stating that the amalgamation has been approved in accordance with the provisions of the Ordinance;
4. a copy of the Memorandum and Articles of Association of the Amalgamated Company;
5. the name or proposed name of the Amalgamated Company;
6. where the proportion of the claims of creditors of the Amalgamated Company (in relation to the value of the assets of the Amalgamated Company) is greater than the proportion of the claims of creditors of any amalgamating company (in relation to the value of the assets of that amalgamating company), a certificate signed by the directors of the amalgamating company and by the directors (or proposed directors) of the Amalgamated Company stating that no creditor will be prejudiced by that fact;
7. a document signed by each person named in the Amalgamation Proposal as a director of the Amalgamated Company containing a statement of his consent to be a director thereof;
8. such other information and documents, verified in such manner, as the Commission may require (whether in relation to any particular application or otherwise), including, without limitation, where any amalgamating company is not a Guernsey company, evidence that the amalgamation is lawful under the law of the district, territory or place where the company is incorporated. This latter requirement is always dealt with by way of a legal opinion from lawyers in the relevant jurisdiction; and
9. such fee as may be prescribed by regulation (currently