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High Court considers the Ramsay principle in the context of a proposed scheme of arrangement

23 November 2016

In Re Home Retail Group Plc [1], the High Court considered the so-called Ramsay principle of purposive construction [2] in deciding whether a cancellation scheme following the sale of a business, to be carried out in connection with a takeover, fell within the anti-avoidance provisions contained in section 641(2A), Companies Act 2006 (CA 2006).

Background

Home Retail Group plc (the Company) intended to dispose of its Homebase business and make a capital return to its shareholders of the net cash proceeds of the sale. Before the sale had been completed, the Company reached agreement in principle on a takeover by J Sainsbury Plc (Sainsbury). The consideration that the bidder was to pay took into account that the Company would be returning £200m to shareholders.

The arrangements were to be effected in various stages as follows:

First, there would be a scheme of arrangement under which a new company, Sainsbury's Intermediate Holdings Limited (Newco), would become the Company's holding company, with the Company's existing shareholders obtaining corresponding holdings in Newco.

Second, there would be a reduction of capital of Newco to effect the previously announced return to shareholders.

The third stage was that shares in Newco would be transferred compulsorily to Sainsbury in accordance with Newco's articles of association.

The Company sought permission from the Court to convene a shareholders' meeting for the purpose of considering a scheme of arrangement under Part 26, CA 2006 and, subject to shareholder approval, an order sanctioning the scheme. In particular, the Company required confirmation that the arrangements did not fall within the anti-avoidance provisions in section 641(2A), CA 2006, which prohibit a company from reducing its share capital as part of a scheme of arrangement where the purpose of the scheme is to acquire all the shares of the company, except where the acquisition amounts to a restructuring that inserts a new holding company into the group structure.

The Court had previously made an order giving the Company permission to convene a shareholders' meeting but had declined to express a view on the applicability of section 641(2A) until HMRC had had an opportunity to consider the implications of the proposal. The Company therefore contacted HMRC concerning the arrangements prior to the hearing and it confirmed that it had no observations or comments to make.

High Court judgment

Sections 641(2A) to (2C), CA 2006, are intended to prohibit reductions in share capital by target companies in takeovers using schemes of arrangement in order to protect the stamp duty base. Section 641(2A) provides that a company may not reduce its share capital as part of a scheme by virtue of which broadly, one or more people are to acquire all the shares in the company. The provisions provide for an exception which is contained in section 641(2B)(2)(a). The question for determination by the Court was whether that exception was applicable to the arrangements under consideration.

The Company argued that the exception applied because the proposed scheme involved the Company having a new parent undertaking (i.e. Newco), that all or substantially all the members of the Company would become members of Newco and that the shareholders' shareholdings in Newco would correspond to those that they had held in the Company.

The Company contended that the Ramsay approach to statutory interpretation should not be applied to section 641(2B), CA 2006, as the transactions with which the Court was concerned had a real commercial purpose. 

In granting the order sought, the Court did not find it necessary to confirm whether the Ramsay principle would be applicable to the legislation under consideration. It stated at paragraph 14:

"Should the Ramsay principle be capable of applying to section 641 (2B), it must nevertheless, as I see it, be the case that it will not bite on a cancellation scheme which is part of a real world transaction having a clear commercial and business purpose. The cancellation scheme envisaged here seems to me to be of that type." 

Comment

The Court was of the view that the exception contained in section 641(2B) applied to the scheme if the subsection was read literally, but the question it had to consider was whether the Ramsay principle of purposive construction would produce a different result. The Court said that it was arguable that the Ramsay principle had no application to the legislation under consideration, but in any event, even if it did, it would not bite on a cancellation scheme which was part of a real world transaction and which had a commercial and business purpose.

 

[1] [2016] EWHC 2072 (CH).

[2] WT Ramsay Ltd v IRC [1982] AC 300 and subsequent cases.