Centralised Settlement Schemes under the Companies Act 2014: Insights from Xtrackers (IE) PLC v. Companies Act 2014 ([2020] IEHC 330)

Introduction

The case of Xtrackers (IE) PLC v. Companies Act 2014 ([2020] IEHC 330) heard by the High Court of Ireland on June 18, 2020, addresses the legal procedures and requirements for sanctioning a scheme of arrangement under the Companies Act 2014. The applicant, Xtrackers (IE) Public Limited Company (hereafter referred to as "the Company"), sought court approval for a proposed scheme aimed at centralizing the settlement process of its traded shares. This commentary explores the court's decision, the legal principles applied, and the implications of this judgment for future corporate restructuring schemes.

Summary of the Judgment

Xtrackers (IE) PLC applied for court sanction under Section 453 of the Companies Act 2014 to implement a scheme of arrangement. The proposed scheme intended to transition the settlement system of all sub-funds' shares from multiple Central Securities Depositories (CSDs) to a centralized International Central Securities Depository (ICSD) model. This shift aimed to mitigate liquidity fragmentation and operational challenges associated with the existing CSD model, especially when shares are listed across various global exchanges.

The High Court scrutinized the scheme based on established criteria, ensuring compliance with statutory requirements, proper notification of all interested parties, appropriate class formation, absence of coercion, and the scheme's reasonableness from an informed shareholder perspective. Despite procedural hiccups, including the need to reconvene meetings due to notification errors and adapt to constraints posed by the Covid-19 pandemic, the court ultimately sanctioned the scheme, subject to specific conditions ensuring final compliance.

Analysis

Precedents Cited

The court referenced several key cases to outline the framework for sanctioning schemes of arrangement:

Re Colonia Insurance (Ireland) Ltd [2005] IEHC 115 - Established the fundamental test for sanctioning schemes for solvent companies.
Re Depfa Bank plc [2007] IEHC 463 and Re SCISYS Group plc [2019] IEHC 904 - Applied the sanctioning test to takeover and acquisition schemes.
Re Ballantyne plc [2019] IEHC 407, Re UBS ETFs plc [2019] IEHC 860, and Re Allergan plc [2020] IEHC 214 - Further reinforced the sanctioning criteria across different contexts, including corporate restructuring and insolvency scenarios.
Historical reference to Re Oceanic Steam Navigation Co. Ltd [1939] CH 41 - Discussed the ultra vires doctrine, ensuring that schemes do not exceed the company's constitutional powers.

These precedents collectively affirm that while the core test for sanctioning schemes remains consistent, each case's unique factual matrix necessitates tailored judicial scrutiny.

Legal Reasoning

The High Court applied a well-established five-part test to determine whether to sanction Xtrackers' proposed scheme:

Identification and Notification of Interested Parties: The court examined evidence demonstrating that all scheme shareholders, including those holding shares via the CREST system, were adequately notified. This included comprehensive advertising in multiple newspapers and direct notifications through registrars.
Compliance with Statutory Requirements and Court Directions: The scheme adhered to Section 453 of the Companies Act 2014, obtaining the necessary special majority approval from shareholders and fulfilling all procedural mandates set forth by the court.
Proper Constitution of the Class of Members: The court confirmed that all shareholders constituted a single, appropriately defined class, ensuring that the scheme did not prejudice any subgroup within the membership.
Absence of Coercion: The court found no evidence of improper pressure or coercion influencing shareholders' approval of the scheme.
Reasonableness of the Scheme: Evaluated from the perspective of an intelligent and honest member, the court deemed the scheme fair, equitable, and in the best interests of the shareholders.

Additionally, the court considered modifications proposed within the scheme itself, such as delaying the effective date to accommodate the centralized settlement shift, ensuring these changes did not materially alter the scheme's substance or disadvantage any members.

Impact

This judgment reinforces the rigorous standards courts uphold when sanctioning schemes of arrangement, particularly emphasizing comprehensive notification, adherence to procedural requirements, and fair treatment of all shareholders. By centralizing the settlement process, Xtrackers aims to enhance operational efficiency and liquidity management across global exchanges. Consequently, this case may set a precedent for other investment companies seeking similar restructurings, highlighting the necessity for meticulous compliance and transparency throughout the scheme process.

Furthermore, the court's adaptability in addressing procedural challenges posed by the Covid-19 pandemic—allowing meetings to be held remotely—illustrates flexibility within the legal framework to accommodate unforeseen circumstances without compromising the scheme’s integrity.

Complex Concepts Simplified

Scheme of Arrangement

A scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors to restructure the company's operations or capital structure. It requires a majority approval from those affected and subsequent court sanction to ensure fairness and legality.

Central Securities Depository (CSD) vs. International Central Securities Depository (ICSD) Models

A CSD handles the custody and settlement of securities within a specific country or region. When a company's shares are traded across multiple exchanges globally, multiple CSDs can complicate settlement processes. An ICSD, however, centralizes this function internationally, streamlining operations and reducing fragmentation.

Special Majority

In the context of corporate resolutions, a special majority typically means a higher threshold than a simple majority—often requiring approval from at least three-fourths of the vote or value—to ensure significant consensus among shareholders for major decisions.

Ultra Vires

The term "ultra vires" refers to acts conducted beyond the scope of a company's constitution or legal powers. A scheme of arrangement must align with the company's constitutional documents and statutory provisions to be enforceable.

Conclusion

The High Court's sanctioning of Xtrackers' scheme of arrangement under the Companies Act 2014 underscores the judiciary's commitment to upholding rigorous standards in corporate restructurings. By meticulously assessing each criterion—ranging from proper notification and procedural compliance to the fairness and reasonableness of the scheme—the court ensures that such significant corporate actions are conducted transparently and equitably. This judgment not only facilitates Xtrackers' transition to a more efficient settlement model but also sets a benchmark for future schemes, emphasizing the importance of due diligence, comprehensive shareholder engagement, and adaptability in the face of unprecedented challenges like the Covid-19 pandemic.

Stakeholders within the corporate sector can derive valuable insights from this case, particularly regarding the intricate balance between operational efficiency and statutory compliance. As investment companies continue to evolve in increasingly global markets, the principles elucidated in Xtrackers (IE) PLC v. Companies Act 2014 will remain pivotal in guiding lawful and fair corporate transformations.