Why are takeovers of our listed companies suddenly being conducted by scheme of arrangement?
Readers following NZX listed companies would have noticed that two recent takeovers have involved the use of a court approved scheme of arrangement rather than a traditional offer under the Takeovers Code (Code) – JBS Australia's acquisition of a majority stake in Scott Technologies and Allnex Belgium's current bid for Nuplex Industries.
Directors and shareholders might well ask themselves why the shift in landscape towards schemes? The answer lies in the differences between a Code offer and a scheme and the advantages that the boards of bidders, target companies and their advisers, perceive in using a scheme.
A scheme of arrangement is simply a plan for a change of ownership of the listed target company put forward to the court for approval by both the court and the shareholders. Provided the requisite shareholder approval is obtained (being at least 75% of the votes of each interest class of voting shareholders as well as a simple majority of votes of all shareholders entitled to vote), and the scheme has been sanctioned by the court, all shareholders of the listed target company are bound by the scheme whether they voted in favour for it or not. There is no need to utilise the compulsory acquisition procedure under the Code to acquire the shares of the outstanding minority (a procedure which requires the bidder to hold at least 90% of the target company). The scheme route to full ownership clearly has a lower shareholder approval threshold than using a Code offer. For a bidder and its financers, this translates into greater deal certainty; an all or nothing result with no possibility of a minority remaining; less concern about acceptances from lost or untraceable shareholders that form a "dead share register" to achieve 90%; no entitlement under the Code for the target company to recover expenses on a failed offer (the current dispute on failed bid costs between Kathmandu and Briscoe may not have occurred under a scheme scenario); and more flexibility to deal with the target company's option scheme, convertible notes or any novel structuring issues. For the banks lending to the bidder, a scheme provides for a much simpler single funding date and security being granted over the whole target group without any opposition to financial assistance from minority shareholders.
Another advantage of a scheme is that it does not have a rigid timetable set down by the Code and can be stretched if desired. It is well known that seeking consent from the Overseas Investment Office (OIO) to a transaction involving the acquisition of "sensitive land" and other such regulatory consents eg competition clearances, means a longer transaction timetable. If any regulatory conditions cannot be achieved within a maximum of 120 days from the date of the Code offer the bidder effectively runs out of time to declare the offer unconditional such that the offer will lapse and a new offer will need to be launched. With OIO, consent for Scott Technologies took over six months to obtain and the Nuplex transaction required a number of competition clearances around the world. Putting the lower shareholder voting threshold aside, you can understand why a scheme was employed.
This article was written by Grant Dunn for the NBR newspaper (June 2016).