Jersey Unreported Judgments

[2011]JRC007

royal court

(Samedi Division)

14^th January 2011

Before     :

J. A. Clyde-Smith, Commissioner, and Jurats Le Breton and Clapham.

IN THE MATTER OF THE REPRESENTATION OF WOLSELEY PLC

AND IN THE MATTER OF AN APPLICATION PURSUANT TO ARTICLES 62 AND 63 OF THE COMPANIES (JERSEY) LAW 1991

Advocate R. J. MacRae for the Representor.

judgment

the commissioner:

1.        On 6^th December, 2010, the Court confirmed a reduction of capital by Wolseley PLC ("the company") pursuant to Article 62 of the Companies (Jersey) Law 1991 ("the Companies Law"). 

2.        The company is a public company incorporated in Jersey with an authorised capital of 500,000,000 shares of 10p each.  The company's issued shares are traded on the London Stock Exchange. 

3.        The Wolseley Group is the world's largest specialist trade distributor of plumbing and heating products to professional contractors and a leading supplier of building materials to the professional market.  Its business is divided into six geographical segments, being the UK, France, the Nordic region, Central and Eastern Europe, USA and Canada.  The Wolseley Group has had approximately 47,000 employees as at 31^st July, 2010, operating in 25 countries. 

4.        Under a scheme of arrangement sanctioned by the High Court of England and Wales, it was proposed to place the company as a new parent company for the Wolseley Group.  Under the scheme, shares in the company were issued to the existing shareholders of the previous parent namely a separate UK incorporated company Wolseley PLC ("Old Wolseley") and the existing shares in Old Wolseley were cancelled. 

5.        Following the scheme of arrangement, there are 284,434,571 shares in the capital of the company in issue and a nominal share capital account with a balance of £28,443,457.10 in respect of the shares in the capital of the company in issue.  The company has a share premium account with a balance of £4,960,538,971.90.  Accordingly, the total aggregate balance of the company's capital accounts was £4,988,982,375. 

6.        By special resolution dated 21^st October, 2010, the subscribers to the company (being the sole members of the company at that date) resolved, pursuant to Article 61 of the Companies Law, to reduce the company's share premium account to nil and to transfer the amount of the reduction to the company's profit and loss account as a reserve of profit.  The sum standing to the credit of the company's share premium account was generated by the issue of shares in the company to shareholders in Old Wolseley. 

7.        The resolution was conditional on:-

(i)        the shareholders of Old Wolseley passing a special resolution approving the company's reduction of capital;

(ii)       the scheme becoming effective in accordance with its terms;

(iii)      the Royal Court approving the reduction of capital; and

(iv)      registration by the Registrar of Companies in Jersey of an Act of the Royal Court confirming the reduction of the share premium account and a minute approved by the Royal Court. 

8.        The shareholders in Old Wolseley approved the scheme at the scheme general meeting held on 2^nd November, 2010, after they had received a scheme circular dated 1^st October, 2010.  That circular and the prospectus issued by the company on 26^th October, 2010, prominently and clearly disclosed to the shareholders of Old Wolseley and the prospective shareholders of the company that the resolution effecting the capital reduction would be passed by the subscribers (in the case of the circular) or that the resolution had been passed (in the case of the prospectus), and that confirmation of the reduction of capital would be sought.  75% of the shareholders in Old Wolseley voted and of those, 99% voted in favour of the scheme. 

9.        The purpose of the reduction of capital was to create a reserve of profit in the accounts of the company, which will be available to the company to be distributed as dividends or applied towards any other lawful purpose.  Distributions paid out of this reserve should then benefit from favourable Swiss withholding tax treatment on payment and be regarded as a dividend on receipt by UK corporate shareholders. 

10.      As made clear by Ian Meakins, a director of the company, in his affidavit dated 24^th November, 2010, the directors of the company were aware of the changes in the Companies Law brought in by the Companies Amendment (No 9) (Jersey) Law 2008 which allow distributions to be debited to (amongst other things) a Jersey company's share premium account (Article 115(7)(a) of the Companies Law as amended)  provided that the directors who authorise the distribution can make the prescribed solvency statement.  However, the directors considered that it was in the best interests of the company to proceed with the reduction of capital.  Their principal reasons for considering this to be the case was the perceived expectations of the company's investor base that investors will receive dividends out of distributable reserves as that concept is understood under English law (which is the norm for UK companies and which is equivalent to the profit and loss account) and the desire of the directors to ensure that dividends are treated as income for UK tax purposes in the hands of each investor rather than a capital item (which is understood to have consequences for tax treatment in the UK and possibly elsewhere).  

11.      In Henderson Far East Income Limited [2007] JLR N16, the Court held (consistently with the English authorities under the equivalent provisions of the Companies Act 1985) that it must consider both the interests of shareholders and creditors.  It endorsed the test in Re Thorn EMI (1989) BCLC 612, namely that the Court must be satisfied that:-

"(a) the shareholders, particularly if there are different classes, have been treated equitably; (b) that the proposals for reduction have been properly explained to the shareholders and (c) that the reduction has a discernable purpose...". 

12.      The Royal Court also referred to English authorities which show that although a Court is slow to interfere in the internal management of a company (the concept of 'the company knows best') it will be concerned to ensure that the relevant proposal has been properly and adequately explained to the shareholders (although not cited by the Royal Court, this observation was likely based on Re Dorman Long and Company Limited [1934] 1 Ch 535).  The English authorities also state that the evidence must show that the cause of the reduction (and there are many possibilities) has been properly put to the shareholders so that they could exercise an informed choice and the cause must be proved by the evidence before the Court: see Re Jupiter House Investments (Cambridge) Limited [1985] BCLC 222. 

13.      We were satisfied that the shareholders had been treated equitably, the proposals for the reduction had been properly explained to them and that the reduction had a discernible purpose as set out above.  

14.      As to creditors, the company had no creditors.  Its sole asset is the 100% shareholding in Old Wolseley which on the effective date of the scheme (21^st November, 2010) had a value based on the company's market capitalisation, i.e. the number of the company's shares in issue multiplied by the opening price of the company's shares on 23^rd November, 2010, of £4,988,982,375. 

15.      We accepted Mr MacRae's submission that the reduction essentially involved an accounting entry - cancellation of share premium and credit to a reserve of profit - the reduction itself does not involve a diminution of liability in respect of any amount unpaid on a share or the payment to a shareholder of any paid up capital.  Any distribution to shareholders from the reserve of profit will require compliance with the provisions of Article 115 of the Companies Law in the ordinary way, including the making of a solvency statement. 

16.      On that basis, we agreed that, pursuant to Article 62(2) of the Companies Law, Article 62(3) - (5) would only apply if the Court were to direct that they should apply and we did not consider this to be a case where such a direction should be made. 

17.      In the circumstances, the Court confirmed the reduction of capital and approved the draft minute. 

Authorities

Companies (Jersey) Law 1991.

Companies Amendment (No 9) (Jersey) Law 2008.

Henderson Far East Income Limited [2007] JLR N16.

Re Thorn EMI (1989) BCLC 612.

Re Dorman Long and Company Limited [1934] 1 Ch 535.

Re Jupiter House Investments (Cambridge) Limited [1985] BCLC 222.