Shareholders with put option entitled to vote on plan?

Listrac Midco Ltd & Ors, Re [2023] EWHC 78 (Ch)Can shareholders with a put option participate in a meeting to vote on a Part 26A restructuring plan?

Overview

This case considered whether certain shareholders who had a put option were entitled to participate in a meeting to vote on restructuring plans for the companies under Part 26A of the Companies Act 2006 (the “Act“). The Court ruled that they were not, not because the shareholders’ rights had no economic value, but rather because the plans did not affect their rights or the economic value of their rights.

Background

Seven companies forming part of the Lifeways group, a group of care homes providing specialist residential support and care services for around 4,200 adults with complex needs, brought an application for orders that meetings of creditors be summoned under section 901(C)(1) of the Act for the purpose of agreeing restructuring plans under Part 26A of the Act.

Four of the plan companies – Lifeways Community Care Ltd (“LCC“), Living Ambitions Limited (“LAL“), Autism Care (UK) Limited (“ACUKL“) and Vitavia Property Management Limited (“VML“) – are subsidiaries of Lifeways Finance Limited (“LFL“). LFL is a subsidiary of Listrac Bidco Limited (“Bidco“), and Bidco is a subsidiary of Listrac Midco Limited (“Midco“). Midco has two classes of issued shares: class A ordinary shares and class B ordinary shares. Its majority class A shareholder is Listrac Intermediate Holdings (“Intermediate Holdings“). The class B shares were issued to existing and former members of the group’s management. The organizational structure of the relevant entities is depicted below.

The group experienced financial difficulties as a result of onerous obligations under some of its leases, nomination agreements and other liabilities in its residential supported living sectors, together with an unsustainable level of secured debt.

The restructuring plans contemplate that the secured creditors of the group will acquire ownership in exchange for the reduction of their secured indebtedness. It is also proposed that they will provide further liquidity under a new super priority secured loan facility on the condition that the group’s onerous lease and other contractual liabilities are reduced or released. LCC is the tenant of most of the leases sought to be compromised. Midco, as the top plan company in the group, will then be wound down on a solvent basis, and the secured creditors will acquire ownership of Midco’s shares in Bidco through a new secured creditor-owned vehicle for a nominal £1 on the basis that the shares themselves are worthless.

The following classes of creditors are proposed under the restructuring plans:

1. one class of secured creditors;

2. four different classes of landlords that are each treated differently under the plans; and

3. general unsecured creditors.

The B Shareholders’ Bundle of Rights

The group’s former CEO and a director of each of the plan companies, Mr Justin Tydeman, argued that a class meeting should be ordered for the current and former members of management holding class B shares in Midco, on the basis that their bundle of rights includes a contingent entitlement to claims against Intermediate Holdings, the majority A shareholder.

Under the terms of Midco’s Articles, the B shareholders have a put option which entitles them to require Intermediate Holdings to purchase their B shares if an “Exit” occurs. A disposal in the form of a transfer of Bidco to the new creditor-owned bidco would constitute an Exit. The amount of the option depends on whether the “Total Lender Repayments” (the total principal amount repaid to the lenders, including any amount repaid in connection with any Exit, taking into account any option amount payable to the B shareholders) are more or less than the “First Hurdle Amount”, which the evidence established to be c.£116 million. Where the Total Lender Repayments are less than the First Hurdle Amount, the option amount is a nominal sum of £1. Where the Total Lender Repayments exceed the First Hurdle amount, the option amount increases to figures that are substantially more than nominal.

The B shareholders also have rights in relation to the option amount under an intercreditor agreement, which provides that all amounts received in connection with the realisation of any part of the security is to be applied in an order of priority which provides for the liabilities to the B shareholders following an Exit to be paid in priority to the secured creditors.

Mr Tydeman’s Submissions

Section 901C(3) provides that “every creditor or member of the company whose rights are affected by the compromise or arrangement must be permitted to participate in a meeting ordered to be subsection (1)”. Mr Tydeman submitted that the B shareholders are members of Midco whose rights (their entitlement to require Immediate Holdings to purchase their shares for the option amount on the occurrence of an event constituting an Exit) will be affected by the Midco plan so as to engage the right to participate in a meeting conferred by section 901C(3) of the Act.

Counsel for Mr Tydeman adopted Zacaroli J’s comments in Re Hurricane Energy Plc [2021] EWHC 1418 (Ch) about the broad ambit of the words “affected by” that B shareholders’ rights are affected by the Midco plan. She argued that the substance of the transaction to be given effect by the plan is a sale of Midco’s shares in Bidco for the sum of £100 million, with the price being set-off against Midco’s liability to the secured creditors. She argued that the secured creditors had engineered a situation whereby the shares in Bidco will be transferred to them and refused to consent to the release of their security when offers in the region of £130 million were received for the shares. If such offers had been accepted, the rights of the B shareholders would have been triggered, and the resulting proceeds would have been used to discharge the amounts payable to them in priority to the secured lenders pursuant to their rights under the intercreditor agreement.

Counsel for Mr Tydeman further submitted that, because the shares in Bidco had been valued at between about £117 million and £130 million, the sale to the secured creditors under the plans would constitute a transfer at undervalue, which meant that the B shareholders’ economic interest in Midco, reflected in the value of their shares on the exercise of the option following a sale of Midco’s shares in Bidco, would be materially affected by the plans. She also argued that the proposed sale to the secured creditors under the plans would prevent the B shareholders from benefiting from their contractual rights under the intercreditor agreement, with the consequence that the proposed amendments to the intercreditor agreement would deprive the B shareholders of their contractual rights either to agree or refuse to agree to those amendments.

The Court’s Decision

The Court acknowledged the elegance with which these submissions were made, but nevertheless rejected them. In order for there to be Total Lender Repayments capable of amounting to at least the First Hurdle Amount, there must be a repayment of at least c.£116 million to the secured creditors. That is not going to occur under the plans, nor was it ever going to occur outside the plans. To suggest that it might have done so is to misunderstand that the £117 million and £130 million valuation was an enterprise value for the group, not a valuation of the Bidco shares as Mr Tydeman wrongly assumed.

There was no evidence that any offer to purchase the group would have led to a repayment of the Outstanding Lender Principal Amount which would have led to anything more than a nominal payment on exercise of the put option. To the contrary, the two offers received would not have done so. The evidence was clear that, if the plans were not to proceed, the likely outcome would be a successful credit bid of their claims by the secured creditors. It followed that Mr Tydeman was not correct to say that, if the offers had been accepted, the rights of B shareholders would have been triggered and the resulting proceeds of sale from the shares would have been used to discharge the amount payable to them in priority to the secured lenders. Nor was there any basis for concluding that those rights had any value that was capable of being affected by the plans or their implementation.

With respect to the intercreditor agreement, the Court disagreed that the agreement was being varied without the B shareholders’ consent. All that was proposed is that there should be a new intercreditor agreement which governs the question of priority going forward. Such rights as the B shareholders have would continue to be governed by the old intercreditor agreement, but this is wholly theoretical because their rights to exercise the option crystallise and then lapse on the implementation of that part of the plans which amount to an Exit and will not, whether under the plans or in the counterfactual, generate any payment entitlement to which it might apply.

In short, the Court concluded that neither the contractual terms of the shareholders’ rights themselves nor their economic value will be affected by the plans so as to engage section 901C(3) of the Act.

Judge: Mr Justice Trower

Counsel: Tom Smith KC, Paul Fradley and Annabelle Wang of South Square (instructed by Willkie Farr & Gallagher (UK) LLP) for the Applicant Companies; Tina Kyriakides of Radcliffe Chambers (instructed by Harrison Clark Rickerbys Limited) for Mr Justin Tydeman