The High Court has confirmed that a proposed cancellation scheme of arrangement involving a nominee company did not fall foul of anti-avoidance provisions in the Companies Act 2006.

Background

A “cancellation scheme” is a scheme of arrangement between a company and its members under which the company’s entire share capital is reduced and cancelled, then immediately re-issued to one or more persons. A cancellation scheme can be achieved only through a court order, as it is not possible to reduce a company’s share capital to zero using the solvency statement procedure.

Cancellation schemes used to be a popular structure for public company takeovers. Cancelling and re-issuing the shares meant that there was no transfer of shares, and hence the bidder did not need to pay stamp duty reserve tax (SDRT) (for dematerialised securities) or stamp duty.

Since 4 March 2015, a new section 641(2A) of the Companies Act 2006 (CA 2006) has prohibited a reduction of capital as part of a “scheme” for the purpose of acquiring all the shares in a company. This put an end to cancellation schemes of arrangement as a takeover structure. However, under section 641(2B) CA 2006, it is still possible to implement a cancellation scheme in order to insert a new parent undertaking, provided two conditions are met:

  • all or substantially all of the company’s members become members of the new parent undertaking; and
  • they hold the equity share capital in the new parent undertaking in the same or substantially the same proportions as they held in the company.

In essence, section 641(2B) contemplates a simple “share-for-share exchange” between the company implementing the capital reduction and scheme and the new holding company.

What happened here?

This case involved Unilever plc. Unilever operates a dual-holding company structure, with Unilever plc (incorporated and listed in the UK) and Unilever NV (incorporated and listed in the Netherlands) acting as “joint holding companies”.

Unilever wished to simplify its group structure by inserting a new holding company in the Netherlands. To achieve this, it wished to implement the following structure:

  • Unilever plc’s articles would be amended to force all but a few “excluded shareholders” to transfer their shares to a nominee company.
  • Unilever plc, the excluded shareholders and the nominee (now a member of Unilever plc) would enter into a cancellation scheme, under which Unilever plc’s share capital would be reduced and cancelled and the new Dutch holding company would issue shares to those shareholders.
  • Unilever NV would be merged into the new Dutch holding company under a Dutch triangular merger.
  • The nominee would transfer its shares in the new Dutch holding company to Euroclear Nederland, which would in turn issue publicly tradeable depositary interests representing those shares to the original shareholders who had transferred their shares to the nominee.

On a literal reading of the legislation, it appeared that the proposed scheme of arrangement fell within the exemption in section 641(2B), because the shareholders of Unilever plc immediately before and after the scheme was to become effective would be the nominee and the excluded shareholders.

However, when looked at more holistically, the shareholders of Unilever plc at the very beginning and very end were different. Before the transfers to the nominee, the shareholders would comprise numerous individuals and companies, whereas, at the end, they would comprise Euroclear Nederland and the excluded shareholders.

This potentially laid the arrangements open to the so-called “Ramsay principle”. This states that, where steps are inserted into a transaction merely to avoid tax, the court can disregard them and look at the ultimate purpose of the transaction when deciding whether tax is payable.

Unilever plc therefore asked the court for clarification on two issues:

  • That its literal interpretation was correct and, in particular, that the word “scheme” in section 641(2B) referred solely to the English scheme of arrangement (an isolatable element of the structure), and not the arrangements as a whole (including the Dutch merger).
  • That, if the court decided to apply the “Ramsay principle”, it would not find that the transfer of the shares to the nominee company was inserted merely to avoid paying stamp duty.

What did the court say?

The court said that, for the purposes of section 641(2B), the “scheme” referred to the English scheme of arrangement in isolation. Therefore, on a literal reading, the exemption was satisfied and the reduction of capital was permitted.

Furthermore, applying the Ramsay principle, the court found that there was no reason to construe the word “scheme” more broadly and, in any event, the transaction did not feature any artificial steps designed merely to avoid paying stamp duty.

Practical implications

This is a useful decision. Questions have existed over the anti-avoidance provisions in section 641(2B), particularly their potential extent, since they were introduced.

In many cases, as in this one, there will be a sensible and justifiable rationale for implementing a more complex or involved transaction structure than a simple “share-for-share exchange”. In this case, the rationale was to enable the former shareholders of Unilever plc to hold their economic interest in the new holding company through depositary interests.

The court was no doubt helped by the fact that the scheme did fall literally within the wording of section 641(2B). However, the judge’s decision to give the word “scheme” a restricted meaning whilst also examining the wider rationale behind the transaction should give comfort that the courts will take a sensible and commercial approach when deciding whether a transaction falls within the exemption in section 641(2B) or is caught by the prohibition in section 641(2A).