Village Roadshow Limited v Boswell Film GmbH
[2004] VSCA 16
•27 February 2004
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 7620 of 2003
| VILLAGE ROADSHOW LIMITED | |
| Appellant | |
| v. | |
| BOSWELL FILM GmbH | Respondent |
---
JUDGES: | CALLAWAY, BUCHANAN and CHERNOV, JJ.A. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 18-19 February 2004 | |
DATE OF JUDGMENT: | 27 February 2004 | |
MEDIUM NEUTRAL CITATION: | [2004] VSCA 16 | |
---
Company Law – Selective buy-back of preference shares – Scheme of arrangement making buy-back compulsory – Appeal against refusal of approval of scheme – Whether Corporations Act 2001, s.257D prevents a person whose shares are proposed to be bought back from voting against a special resolution of the kind referred to in s.257D(1)(a) – Whether preference shareholders were entitled to vote on such a special resolution pursuant to the company’s constitution – Whether the buy-back was “a proposal to reduce the share capital of the Company” within the meaning of the constitution – Appeal dismissed – Corporations Act 2001, ss.256C, 257B, 257D, 257H, 258E, 411, 1322, 1407.
---
| APPEARANCES: | Counsel | Solicitors |
| For the Appellant For the Respondent Australian Securities and Investments Commission | Mr J.G. Santamaria, Q.C. Mr B.J. Shaw, Q.C. Ms M. Rozner on 18 February 2004 | Minter Ellison Norton Gledhill |
CALLAWAY, J.A.:
Village Roadshow Limited, to which I shall refer as “the appellant” or “the company”, was incorporated under the Companies (Queensland) Code in 1986. Its issued capital, so far as relevant, consists of approximately 235 million fully-paid ordinary shares and approximately 250 million fully-paid A Class preference shares, to which I shall refer simply as “the preference shares”. A buy-back was proposed, pursuant to which the company would re-purchase all the preference shares. At least two meetings were required to implement the buy-back. As it was a selective buy-back, the terms of the buy-back agreement had to be approved by a special resolution passed at a general meeting of the company in accordance with s.257D of the Corporations Act 2001. Because it was proposed that the buy-back should be compulsory, a scheme of arrangement was required and, accordingly, at least one meeting convened pursuant to s.411 of the Act. The general meeting and a meeting of preference shareholders (“the scheme meeting”) were both held in Brisbane on 3rd November 2003. The resolutions proposed at those meetings were passed, purportedly by the required majorities, but, on 18th November 2003, Mandie, J. refused to approve the scheme of arrangement. This appeal is brought against that order. His Honour held that there were a number of defects in the procedure that had been adopted.
In addition to appealing, the company started again, proposing a new buy-back in substantially identical terms to the one with which we are concerned, but convening and structuring the meetings in accordance with his Honour’s reasons. The special resolution required by s.257D was proposed at a new general meeting and the scheme of arrangement was laid before a new meeting of preference shareholders convened pursuant to s.411. It was preceded by a meeting of the preference shareholders regarded as a class.[1] The new meetings were held on 21st January 2004 and are the subject of other proceedings in the Trial Division. Those proceedings are one of the reasons why, on 17th December 2003, Chernov, J.A. and I directed that there be an expedited hearing of the appeal. The case was heard over two days in the third week of first term 2004 and further written submissions were filed, by leave, the following week. We have written our judgments with a view to a speedy decision. The parties need to know whether we are, or are not, in agreement with the judge that the original scheme of arrangement should not be approved.
[1]The special resolution proposed at that meeting read:
“That any variation, abrogation or cancellation of rights attached to A Class Preference Shares effected or arising from the Buy-Back, the Buy-Back Agreements, the Scheme or the resolution approving the terms of the Buy-Back Agreements (resolution 2.1 in the General Meeting) be and is hereby approved and sanctioned.”
A number of questions were argued on the appeal and the Australian Securities and Investments Commission (“ASIC”) appeared, by leave, as an amicus curiae. The argument and the written submissions were, if I may say so, of a very high standard. I should like to record my indebtedness to counsel for their assistance. If the other members of the Court share my view of the case, it is necessary to decide only two questions:
1.Does s.257D prevent a person whose shares are proposed to be bought back pursuant to a selective buy-back from voting against a special resolution of the kind referred to in s.257D(1)(a)?
2.If s.257D does not have that effect, were preference shareholders entitled to vote against the special resolution that was proposed pursuant to that section at the general meeting held on 3rd November 2003?
The appellant contended for an affirmative answer to the first question and a negative answer to the second. The respondent, a holder of both ordinary and preference shares which successfully opposed approval of the scheme below, contended for a negative answer to the first question and an affirmative answer to the second. ASIC supported the respondent’s contention in relation to the first question. It made no submissions in relation to the second. Mandie, J. decided both questions in favour of the respondent.
Before turning to the first question, it will be convenient to refer to some of the provisions of the Corporations Act and of the company’s constitution and to the way in which notice of the general meeting and of the scheme meeting was given. Chapter 2J of the Act deals with transactions affecting share capital. Part 2J.1 is concerned with “Share capital reductions and share buy-backs”. Its purpose is stated in s.256A. It then consists of three divisions. Division 1 (ss.256B-256E) relates to “Reductions in share capital not otherwise authorised by law”; Division 2 (ss.257A-257J) relates to “Share buy-backs”; and Division 3 (ss.258A-258F) relates to “Other share capital reductions”.
Section 257D(1) provides;
“(1)If section 257B applies this section to a buy-back, the terms of the buy-back agreement must be approved before it is entered into by either:
(a)a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person whose shares are proposed to be bought back or by their associates[2]; or
(b)a resolution agreed to, at a general meeting, by all ordinary shareholders;
or the agreement must be conditional on such an approval.” (Emphasis added)
The words “in favour of” were introduced by the FirstCorporate Law Simplification Act 1995 on 9th December 1995. They appeared in the new s.206E of the Corporations Law. The previous provision, s.206JA, had spoken of no votes being cast “in relation to” the resolution.
[2]In these reasons, for simplicity, I shall refer only to persons whose shares are proposed to be bought back and ignore associates.
Article 2.4 of the company’s constitution specifies the rights attaching to the preference shares. Article 2.4(a)(i) provides:
“(i)As to meeting and voting:
the right to receive reports and accounts (including balance sheets and profit and loss accounts and all reports thereon) and to receive notice of and to attend all general meetings of the Company, but an A Class preference share shall confer no right to vote at any general meeting except in one or more of the following circumstances:
(A)on a proposal that affects rights attaching to the A Class preference share;
(B)during a period during which any dividend (or part of any dividend) payable on the A Class preference share is more than 6 months in arrears;
(C)on a proposal to reduce the share capital of the Company;
(D)on a proposal to wind up the Company;
(E)on a proposal for the sale of the Company’s undertaking
and in each such case on a show of hands each person present who is a member or a representative of a member has one vote and on a poll each person present in person or by proxy representative or attorney has one vote for each A Class preference share held.” (Emphasis added.)
That article, and other articles to which I shall refer, were adopted by the company on or about 21st June 1996.
Article 1.1 contains definitions and article 1.2 contains interpretative provisions relating to number, gender and persons. Article 1.3 provides:
“Subject to the foregoing, words or expressions contained in these Articles shall unless the context otherwise requires be interpreted in accordance with the provisions of the Corporations Law and of the regulations pursuant thereto as in force at the date at which these Articles become binding on the Company.”[3]
[3]It was assumed that s.1407 of the Act did not affect the reference to the Corporations Law as in force at a particular date in this article. If that assumption were wrong, it would not affect my conclusion on the second question.
Part 9 of the articles deals with alteration of capital. Several of its provisions reflect company law as it used to be but is no longer. Article 9.1 authorizes the Company to alter the provisions of its memorandum by increasing its share capital by the creation of new shares, by consolidating and dividing share capital into shares of larger amount, by sub-dividing shares into shares of smaller amount and by cancelling shares that have not been taken or agreed to be taken or that have been forfeited. Article 9.2 provides, among other things, for the issue of shares at a premium or a discount. Articles 9.3 and 9.4 provide:
“9.3 Reduction of Capital
Subject to the Corporations Law and the Listing Rules, the Company may by special resolution reduce:
(a)its share capital;
(b)any capital redemption reserve fund; or
(c)any share premium account.
9.4Buy-Back Authorisation
(a)Subject to the Corporations Law and the Listing Rules, the Company may buy ordinary shares in the Company on terms decided by the Directors.
(b)This Article ceases to have effect on the day 3 years after the latest of the adoption of these Articles and last renewal of this Article.”
A scheme booklet was prepared and sent to all shareholders. It was dated 26th September 2003. Appendix E contained the notice of general meeting and appendix F contained the notice of the scheme meeting.
The scheme booklet and the notice of general meeting were drafted in the belief that none of the exceptions in article 2.4(a)(i) applied and, accordingly, that preference shareholders were not entitled to vote at the general meeting. The notice of general meeting was silent even on their right to attend the meeting, although that right was referred to elsewhere in the booklet. The scheme booklet and the notice of general meeting were also drafted in the belief that, by reason of s.257D, members of the company who held both ordinary shares and preference shares (“combined shareholders”) were not entitled to vote on the resolution required by that section, even in respect of their ordinary shares. That was stated both in the booklet and in the notice itself.
Paragraph 2 of the notice of general meeting read:
“2. Special resolutions
The purpose of the meeting is to consider and, if thought fit, pass the following resolutions, each of which will be proposed as a special resolution:
2.1‘That the Buy-Back and terms of any Buy-Back
Agreements entered into under the Buy-Back are
approved in accordance with section 257D(1) of the
Act’.
2.2‘That conditional on all Preference Shares being bought
back under the Buy-Back and effective and from the
earliest date that all Preference Shares bought back
under the Buy-Back are cancelled in accordance with
section 257H(3) of the Act, the Constitution is modified
by:
(a)deleting the words “more than 6 months” where they appear in Article 2.4(a)(i)(B);
(b)in Article 2.4(a)(i)(E), adding the words “whole of the” before the word “Company’s” and the words “property, business and” before the word “undertaking”; and
(c)adding the following new Articles 2.3(a)(i)(F) and (G) after Article 2.3(a)(i)(E):
“(F)during the winding up of the Company; and
(G)on a resolution to approve the terms of a buy-back agreement”.’
3. Voting exclusion
No Ordinary Shareholder who is a Preference Shareholder or an Associate of a Preference Shareholder may vote on the resolution set out in paragraph 2.1 above.
VRL will disregard any votes cast on the resolution set out in paragraph 2.1 above by a Preference Shareholder or an Associate of a Preference Shareholder.”
I shall refer to the resolution in paragraph 2.1 of that notice as “the buy-back resolution”.
It will also be convenient at this stage to set out the resolution that was submitted to the scheme meeting. Paragraph 2 of the notice of that meeting read:
“2. Resolution
The purpose of the meeting is to consider and, if thought fit, pass the following resolution:
‘That, conditional on the resolutions to be put to the General Meeting having been passed at the General Meeting, the Scheme is approved (with or without modification as approved by the Court).’”
I shall refer to that resolution as “the scheme resolution”. Paragraph 3 of the notice correctly stated that only preference shareholders were entitled to attend and vote at the scheme meeting.
On 27th October 2003 ASIC sent a facsimile to the company stating that, in ASIC’s view, s.257D prevented combined shareholders from voting in favour of the buy-back resolution but did not prevent them from voting against it. Following discussions between the company and ASIC, the company sent a notice to the Australian Stock Exchange on 29th October 2003 and published notices in The Australian, The Age, The Sydney Morning Herald and The Brisbane Courier Mail newspapers the next day. The notices read:
“Voting at the forthcoming General Meeting
The General and Scheme Meetings of Village Roadshow Limited (‘VRL’) to approve the proposed scheme of arrangement between VRL and the holders of its A Class Preference Shares are to be held on Monday 3 November 2003 in the Presidential Room, Second Floor, Carlton Crest Hotel, King George Square, Brisbane commencing from 2pm Brisbane time.
The notice of the General Meeting states that holders of Ordinary Shares in VRL who also hold Preference Shares or are associates of Preference Shareholders are excluded from voting on resolution 1 in the notice of meeting (‘Excluded Holders’).
It has been suggested that, although Excluded Holders are not entitled to vote in favour of resolution 1, they are entitled to vote against resolution 1. To remove any doubt, VRL will record and report to the Supreme Court of Victoria all votes cast by Excluded Holders against resolution 1 and count those votes should the Court so determine.
Shareholders wishing to vote at the General Meeting can do so in person or by proxy, attorney or corporate representative. Proxy forms must be delivered prior to 7pm Melbourne time on 1 November 2003, including proxy forms of those Excluded Holders wishing to vote against resolution 1. Please contact the VRL information line on 1300 302 106 (toll free in Australia) or +61 2 9240 7460 (outside Australia) immediately if you would like another proxy form for the General Meeting.”
An announcement in similar terms was made by the chairman, Mr R.G. Kirby, to the general meeting when it convened on 3rd November 2003.
Against that background, I turn to the first question. In my opinion, the words “no votes being cast in favour of” in s.257D(1)(a) cannot be read as if they said “no votes being cast in favour of or against”. The words are unambiguous. Persons seeking to comply with the law, or like ASIC seeking to enforce it, should be able to rely on them. The fact that s.257D(2) refers to information that is material to “the decision how to vote on the resolution” is neutral.[4] Paragraph 5.9 of the explanatory memorandum when the language was changed in 1995[5] was simply inaccurate. The position was correctly stated in paragraph 5.10[6]. I refer to the explanatory memorandum on the assumption, without deciding, that reference may be had to it in the face of such clear language.
[4]Sub-section (2) was introduced by the Company Law Review Act 1998. Both the appellant and ASIC relied on paragraph 12.17 of the explanatory memorandum that accompanied the bill for that Act in 1997. Paragraph 12.17 related to the words “no votes being cast in favour of” in s.256C(2), but, in my opinion, it is too remote, and the implications sought to be drawn from it are too uncertain, to be of assistance. Company law must not be allowed to become a feat of detection or a paperchase beyond the resources of all but the most determined litigants.
[5]See [6] above.
[6]Those paragraphs read:
“5.9Selective buy-backs can only proceed if they are approved by all shareholders, or by a special resolution of the company on which no vote is cast by selling shareholders or their associates (Schedule 1, proposed subsection 206E(1)).
5.10Selling shareholders and their associates may not vote in favour of a special resolution to approve a selective buy-back (Schedule 1, proposed paragraph 206E(1)(a)).”
Mr Santamaria submitted that recourse should be had to the explanatory memorandum, and to the explanatory memorandum referred to in fn. 4, because there were two difficulties in the language of s.257D(1)(a) and because its apparent purpose would be better achieved by completely disfranchising persons whose shares are proposed to be bought back.[7] The first difficulty was that the words “no votes being cast” could not be read literally, for the section would then invalidate a resolution if a person whose shares were proposed to be bought back cast a vote in favour of it. The second difficulty was a perceived tension between the definition of “special resolution” in s.9 as “a resolution … that has been passed by at least 75% of the votes cast by members entitled to vote on the resolution” and “a special resolution passed … with no votes being cast in favour of the resolution” by certain persons otherwise entitled to vote.
[7]Reference was made to ss.15AA and 15AB of the Acts Interpretation Act 1901 (see s.5C of the Corporations Act) and, among other cases, to CIC Insurance Ltd. v. Bankstown Football Club Ltd. (1997) 187 C.L.R. 384 at 408.
The first difficulty is illusory. As Santow, J. said of the corresponding words in s.256C(2)(a) of the Corporations Law in Re Tiger Investment Co. Ltd.[8], if such a vote is cast, it does not go to the validity of the resolution. It is simply excluded in determining the result. The second difficulty is to be resolved by accommodating the language of s.9 to the language of s.257D(1)(a). The latter operates as a proviso to the former in the case of a “special resolution” approving a selective buy-back. It may well be that it would have been better wholly to disfranchise persons whose shares are proposed to be bought back and that s.257D gives too much weight to the wishes of opponents. That is a matter to which I shall return later. For the moment, it is sufficient to say that such policy considerations cannot displace the plain language of the statute.[9]
[8](1999) 33 A.C.S.R. 438 at [40].
[9]I do not overlook counsel’s argument that, if the legislature had intended such an important change in 1995, it would be expected that the explanatory memorandum would have referred to it.
For these reasons, I would answer the first question in [3] above in the negative. It follows that combined shareholders were entitled to vote against the buy-back resolution in respect of their ordinary shares and that s.257D did not prevent preference shareholders, or combined shareholders in respect of their preference shares, from voting against the resolution if they were otherwise entitled to do so pursuant to article 2.4(a)(i). Mandie, J. held that both sub-paragraphs (A) and (C) of that article applied. The respondent supported his Honour’s conclusion. The appellant contended that neither of those sub-paragraphs applied.
I shall consider article 2.4(a)(i)(C) first. The structure of article 2.4(a)(i) is that preference shareholders are entitled to receive notice of and to attend all general meetings but not to vote thereat except in specified circumstances. Most of those circumstances are described by reference to a proposal but one of them is described by reference to a period. One of the proposals is a proposal that affects rights. Two of the proposals are a proposal to reduce the share capital and a proposal to wind up the company. The other proposal is a proposal for the sale of the company’s undertaking.
The effect of the scheme is set out in Mandie, J.’s judgment as follows[10]:
[10]Re Village Roadshow Ltd. [2003] VSC 440 at [8].
“The Scheme defines ‘Buy-Back’ as the ‘buy-back by VRL of the Preference Shares pursuant to this Scheme’ and ‘Buy-Back Agreement’ as ‘an agreement between VRL and the Preference Shareholder under which VRL agrees to buy back all of the Preference Shareholder’s Preference Shares for the Buy-Back Consideration’ (in turn defined as $1.25 cash per preference share), and ‘Buy-Back Offer’ is also defined accordingly. The operative provisions of the Scheme are:
‘4. Scheme
(a)Subject to the Conditions [ie, passing of resolutions, making of Court Order etc.] having been satisfied, VRL will on the Record Date and without the need for any further act, be taken by force of this clause to have made a Buy-Back Offer to each Preference Shareholder at the Record Time.
(b)Effective immediately on VRL making the Buy-Back Offer to a Preference Shareholder, without the need for any further act, the Preference Shareholder will be taken by force of this clause:
(i)to have accepted the Buy-Back Offer; and
(ii)to have entered into a Buy-Back Agreement with VRL; and
(iii)to have [agreed to the mechanism for application of the Buy-Back consideration and issue of unsecured notes etc.]’”
Section 257H provides, among other things, that, once a company has entered into an agreement to buy back shares, all rights attaching to the shares are suspended and that, immediately after the registration of the transfer to the company of the shares bought back, the shares are cancelled. Section 258E(1) provides:
“(1)Any reduction in share capital involved in:
(a)the redemption of redeemable preference shares out of the proceeds of a new issue of shares made for the purpose of the redemption (see section 254K); or
(b)a company’s buying-back of its own shares under sections 257A to 257J if the shares are paid for out of share capital;
is authorised by this section.”
This was a buy-back of the kind referred to in s.258E(1)(b). The buy-back consideration was to be debited to the company’s share capital account.
In the light of the foregoing, there clearly was a proposal to reduce the share capital of the company in the sense that such a reduction was in contemplation. A clearer example of a reduction of capital could hardly be imagined.[11] Were the circumstances referred to in article 2.4(a)(i)(C) engaged? An affirmative answer requires that to vote on the buy-back resolution was to vote on a proposal to reduce the share capital of the company.[12] Four arguments were deployed against that conclusion.
[11]Compare Trevor v. Whitworth (1887) 12 App.Cas. 409 and Coles Myer Ltd. v. Commissioner of State Revenue [1998] 4 V.R. 728, especially at 741 lines 43-45 and 752 lines 49-51.
[12]I say “a proposal”, not “the proposal”, because “proposal” in article 2.4(a)(i)(C) means a proposal contained in a resolution submitted to a general meeting, but see fn. 16 below.
The first argument was that the buy-back resolution did not itself effect the reduction of capital, which was effected either by s.257H or by the scheme of arrangement. The buy-back resolution did no more, so the submission proceeded, than authorize the company to be a purchaser of its own shares.[13] An analogy was suggested with conventional reductions of capital under the old law, which had to be authorized by the articles but were effected by a special resolution confirmed by the court.[14] There are two possible answers to that argument. The first is based on the precise language of the buy-back resolution. The second is of a more general character.
[13]Compare s.259A(a).
[14]See, for example, s.64 of the Companies Act 1961 and s.195 of the Corporations Law as in force prior to the Company Law Review Act 1998.
Section 257D requires only “the terms of the buy-back agreement” to be approved at a general meeting. The buy-back resolution here may have gone further: not only were the “terms of any Buy-Back Agreements entered into under the Buy-Back” approved but also “the Buy-Back” itself. Paragraph 1 of the notice of meeting said that terms used therein had the same meaning as in the scheme booklet. “Buy-Back” was defined in the booklet as “the buy-back by [the company] of the Preference Shares pursuant to this Scheme”. It may be, therefore, that the buy-back resolution approved the entire transaction and not only the buy-back agreements that would be deemed to have been entered into by clause 4 of the scheme. I do not decide that point, partly because it may attach too much importance to the language of a resolution that was probably intended to do no more than comply with s.257D(1) and partly because I think there is a more general answer to the first argument.
A selective buy-back[15] need not be compulsory. A company might offer to buy back shares on a selective basis, leaving it to the offerees whether or not to accept. There would be no need for a scheme meeting but a resolution pursuant to s.257D would still be required and, immediately after the registration of the transfers to the company of the shares bought back, those shares would be cancelled. In a case like that, to vote on the resolution submitted to the general meeting pursuant to s.257D, even if it did no more than approve the terms of the buy-back agreement, would be to vote on a proposal to reduce the share capital of the company by buying back some of its shares[16]. There would be no other opportunity to vote on the proposal. As a matter of ordinary language, and ordinary language is important, article 2.4(a)(i)(C) would entitle a preference shareholder to vote on the resolution. The position can be no different where there is a scheme of arrangement as well.
[15]The term is defined in s.9.
[16]It is true that the resolution would not itself effect the reduction of capital, but article 2.4(a)(i)(C) refers to a proposal to reduce the share capital. The point may be illustrated by reference to article 2.4(a)(i)(D): A “proposal to wind up the Company” is not limited to a special resolution under s.491 but would include, for example, a special resolution under s.461(1)(a). See also ss.459P(1)(a) and 462(2)(a).
The second and third arguments may be considered together. The first was that the reference to reduction of the share capital in article 2.4(a)(i)(C) was to be understood against the background of the Corporations Law as in force when the articles were adopted and that the Law, like the Corporations Act, distinguished between conventional reductions of capital and share buy-backs.[17] Moreover, then as now, the definition of “voting share” in s.9 distinguished between “a proposal to reduce the body’s share capital” and “a resolution to approve the terms of a buy-back agreement”. The latter had been omitted from article 2.4(a)(i). Reference was also made to the Listing Rules as they stood in 1996 and now.[18] Accordingly, it was submitted, article 2.4(a)(i)(C) referred only to proposals to reduce the share capital of the company pursuant to Division 1 of Part 2J.1.[19] The third argument was that the reference to reduction of the share capital in article 2.4(a)(i)(C) and the omission of any reference to a share buy-back reflected the separate treatment of reduction of capital in article 9.3 and share buy-backs in article 9.4. If the references to any capital redemption reserve fund and any share premium account are ignored, in the light of changes in company law, the practical result of those two arguments may be the same.[20]
[17]It was submitted that the distinction was even more pronounced, because s.195 of the Corporations Law required a conventional reduction of capital to be confirmed by the court. See [23] above.
[18]Compare rule 3K(5) with rule 6.3.
[19]Compare Re Northern Engineering Industries plc [1994] 2 B.C.L.C. 704 at 708 and 712-713.
[20]It was not the same, however, in 1996, when the articles were adopted. See ss.191(1) and 192(5) of the Corporations Law as then in force.
In my opinion, both arguments should be rejected, because they have insufficient force to displace the plain meaning, at least to a lawyer, of the words “a proposal to reduce the share capital of the Company”. Preference shareholders have an interest in any such proposal, just as they have an interest in any proposal to wind up the company or for the sale of its undertaking.[21] Their rights should not be cut down by an uncertain inference drawn from the scheme of Part 2J.1 of the Corporations Act[22] or from the Corporations Law or the Listing Rules in force in 1996 or from the way in which Part 9 of the articles is arranged. Articles 9.1, 9.2 and 9.3 were derived from old precedents[23] and article 9.4 was added after buy-backs of ordinary shares were introduced in 1989. Article 1.3 does not require a different conclusion.
[21]In the case of some buy-backs, even if they involve a reduction of capital, there will be no proposal on which to vote (see s.257B), and preference shareholders’ votes will be of no effect if a resolution is agreed to by all ordinary shareholders in accordance with s.256C(2)(b) or 257D(1)(b), but those are not reasons to read down article 2.4(a)(i)(C).
[22]Although the first sentence of s.256A appears to distinguish between reductions in share capital and share buy-backs, the heading of Division 3, which follows the division dealing with buy-backs, is “Other share capital reductions” and s.258E(1) expressly recognizes that a “reduction in share capital” may be involved in the kind of buy-back with which we are concerned. See also note 2 to s.256B(1) and signposts 6 and 7 in s.257J.
[23]Compare articles 9.1 and 9.3 with regs. 40 and 42 in Table A in the Fourth Schedule to the Companies Act 1961.
Had they not been illegal, share buy-backs of the kind with which we are concerned, where the shares bought back are paid for out of share capital, would clearly have fallen within the words “a proposal to reduce the share capital of the Company”, which had long been common in articles specifying the rights attaching to preference shares. After 1989 and particularly after 1995, when buy-backs were extended to preference shares, references to share buy-backs began to be introduced into descriptions of preference shareholders’ voting rights of the kind found in the definition of “voting share” in s.9 and in the Listing Rules and in companies’ constitutions, but that did not mean that the denotation of the words “a proposal to reduce the share capital of the Company” changed where, as in article 2.4(a)(i), no such addition was made.[24] A share buy-back of this kind continued to be a reduction of capital. The only difference was that it was now lawful.
[24]We should not substitute speculation about the reasons why the company’s solicitors omitted an express reference to buy-backs in article 2.4(a)(i) for interpretation of the words that the company adopted by special resolution.
The fourth argument turns on what are said to be the anomalous results of combining article 2.4(a)(i)(C), as I have so far construed it, with a negative answer to the first question. Only preference shareholders who are opposed to a selective buy-back are able to express their will at the general meeting. The holders of three-quarters or more of the ordinary shares and the holders of three-quarters or more of the preference shares may be in favour of it, but the proposal is liable to be defeated. The argument may be put in either of two ways. One is that share buy-backs should be taken to have been deliberately omitted from article 2.4(a)(i) in order to avoid those anomalies. The other is that, in any event, a construction should be preferred that takes account of s.257D and avoids them.
The fourth argument would have greater force if selective buy-backs were restricted to preference shares, but they are not.[25] The lack of even-handedness, if I may so describe it, in s.257D(1)(a) is just as capable of producing anomalous consequences when it is proposed that ordinary shares be bought back on a selective basis. That being so, it is adventitious that a departure from what I have described as “the plain meaning, at least to a lawyer”[26] of article 2.4(a)(i)(C) would reduce the incidence of the anomalies, or perceived anomalies[27], caused by s.257D.
[25]Even then it might not be accepted. One should be cautious before holding that an article was adopted in a particular form to overcome an anomaly in legislation or that it should be construed to achieve that result.
[26]At [27] above.
[27]The fourth argument arose late in the hearing and was the subject of further written submissions. I have assumed that the anomalies are real, but that need not be decided.
The argument from anomaly is in fact against the appellant. Article 2.4(a)(i)(C) applies in relation to a reduction of ordinary share capital, not just preference share capital. It applies to a selective, as well as to an equal, reduction of capital. If preference shareholders are entitled to vote on a proposal to reduce ordinary (or preference) share capital, what possible difference can it make that the mechanism is a share buy-back? If they are entitled to vote on a resolution pursuant to s.256C(2)(a) to approve a selective reduction of ordinary (or preference) share capital, why should they not be entitled to vote on a resolution pursuant to s.257D(1)(a) to approve a selective buy-back? It is the appellant’s proposed reading
down of article 2.4(a)(i)(C) that would result in anomalies.
For these reasons, I would answer the second question in [3] above in the affirmative. It is unnecessary to consider whether article 2.4(a)(i)(A) also applied. The preference shareholders, and combined shareholders in respect of their preference shares, were wrongly denied the right to vote against the buy-back resolution. The attempted remedial action described in [14] above was not directed to that problem. It was common ground that, in those circumstances, the irregularity could not be cured by, or by an order under, s.1322 of the Act and that the scheme of arrangement could not be approved. Even if all the other questions argued before us were resolved in favour of the appellant, that conclusion would not be displaced. Given the need for expedition, it is not only unnecessary but undesirable to delay our judgments by considering them. It was not submitted that that would assist either of the parties in connexion with the new scheme.[28]
[28]Even if it had been so submitted, I should have been reluctant to give, in effect, an advisory opinion, particularly in the circumstances of this case.
I would dismiss the appeal.
BUCHANAN, J.A.:
I agree with Callaway, J.A. that the appeal should be dismissed for the reasons stated by his Honour.
CHERNOV, J.A.:
In this matter, I have had the advantage of reading the judgment of Callaway, J.A. in draft form. For the reasons he states I consider the appeal should be dismissed.
---