As reported in our December 2014 newsletter, the Chancellor's Autumn statement announced the Government's plans to remove the ability for bidders to save stamp duty on a takeover by structuring it as a scheme of arrangement which includes a reduction of capital. A draft statutory instrument setting out the proposed changes to the Companies Act 2006 to effect this change has now been laid before Parliament.
Background to the change
Takeovers are structured either as a contractual offer to the target company’s shareholders to purchase their shares, or a scheme of arrangement - a court sanctioned process initiated by the target and governed by the Companies Act 2006.
In the context of takeovers, there are two main types of scheme of arrangement:
- a "transfer" scheme in which shares in the target company are transferred to the bidder; or
- a "cancellation" scheme in which the target's share capital is reduced to zero, and the reserve that is created is used to pay up new shares which are issued to the bidder.
As stamp taxes are charged on a transfer of shares* but not on an issue of new ones, a "transfer" scheme therefore results in a payment of tax (at 0.5% of the consideration paid for the shares), whereas, with a "cancellation" scheme, no such tax liability arises.
What is changing?
The draft statutory instrument amends section 641 of the Companies Act 2006 to prevent a company effecting a reduction of capital as part of a scheme of arrangement whereby a person (acting alone or with associates) will acquire all the shares, or all the shares of a particular class, in that company.
As the change prevents a company from reducing its share capital as part of a “cancellation” scheme of arrangement to facilitate its takeover, companies effecting a takeover will, in future, have to use a either a "transfer" scheme or a contractual offer, both of which will be liable to stamp tax.
The Government recognises, however, that there are situations where a scheme of arrangement which includes a reduction of capital may be appropriate, such as an intra-group restructuring, de-merger, rescheduling of debt, or return of capital. The instrument, therefore, includes a specific exemption for circumstances where the acquisition effected by the scheme amounts to a restructuring that inserts a new holding company into the group structure and the shareholders of that new holding company have not changed substantially from the shareholders of the company undertaking the scheme of arrangement.
The Government wishes to put legislation in place as soon as possible, so as to limit the scope for companies to bring forward takeovers or mergers specifically in order to circumvent the legislation. The regulations will come into force on the day after which they are made which is expected to be in the early part of this year.
The instrument contains a transitional provision that restricts the application of the regulations to bids where a firm intention to make an offer has been announced on, or after, the date that the regulations come into force, or, where the offer is not subject to the Takeover Code, to takeovers where the terms are agreed between the parties on, or after, the date that the regulations come into force.
Whilst the saving in respect of stamp tax was a benefit of cancellation schemes, it is not the sole advantage of using a scheme over a contractual offer. A key advantage of using a scheme is that it can be easier to acquire 100% control of target. This is because, provided that a majority in number, representing 75 per cent in value, of the target shareholders vote in favour, and the Court sanctions the scheme, it is binding on all shareholders whether they voted in favour or not. As transfer schemes will still be permitted to effect a takeover, we expect that schemes will still represent an attractive option for deal structuring in the right circumstances.
* Since 28 April 2014, transfers of shares that are admitted to trading on a recognised growth market and not also listed on a recognised stock exchange are exempt from stamp tax where the company in question has lodged notice of its eligibility with Euroclear. A market is a recognised growth market if it meets certain criteria. HMRC maintains a list of recognised growth markets which include AIM, ISDX and the High Growth Segment of the LSE's main market.