This article explains the main differences between, and the main advantages and disadvantages of, a takeover bid and a scheme of arrangement
Why are takeover bids and schemes important?
Australian takeover laws generally prohibit someone from acquiring control of a listed Australian company or managed investment scheme, or an unlisted Australian company with more than 50 members, except through a limited number of exceptions.
The two most common methods to acquire control of are:
- an off-market takeover bid; and
- a scheme of arrangement.
The choice of method can have a material impact on the likely success of the control transaction
Choosing the most appropriate method to effect a control transaction first requires an understanding of their main differences and their relative advantages and disadvantages.
The main differences between an off-market takeover bid and a scheme of arrangement
What is an off-market takeover bid?
Under an off-market takeover bid, the bidder makes individual written offers directly to all target securityholders to acquire their securities in return for payment of the offer price.
Target securityholders are free to decide whether or not to accept the bidder's offer – if they accept the bidder acquires their target securities.
What is a scheme of arrangement?
A scheme of arrangement is a procedure that allows a company to reconstruct its capital, assets or liabilities with the approval of its shareholders and the Court.
A scheme can be used to effect the same outcome as a takeover bid by transferring all shares in the target to the bidder in return for consideration paid by the bidder to the target shareholders.
Who controls the process?
Under an off-market takeover bid, the bidder makes the offers and largely controls the process. It is the bidder who determines the offer price, the offer terms and conditions, and the offer period.
As a takeover bid is driven by the bidder and does not require target consent or co-operation, it can be used for a 'friendly' or 'hostile' acquisition of a target.
Under a scheme of arrangement, the target company seeks the approval of its shareholders and the Court to propose the scheme following an initial approach by the bidder. Therefore it is the target who controls the scheme process, with some involvement from the bidder.
As a scheme requires the agreement and co-operation of the target, it is only suitable for a 'friendly' acquisition of a target.
What documentation is required?
Under an off-market takeover bid, target securityholders are provided separate disclosure documents by each of the bidder and the target.
The bidder's disclosures and the terms of its offer are contained in a 'bidder's statement'. The bidder's statement generally contains all information known to the bidder that is material to a target securityholder's decision whether to accept the offer.
The target responds to the bidder's statement in a 'target's statement'. The target's statement contains the target directors' recommendation, and usually an independent expert report valuing the target securities.
Under a scheme of arrangement, target shareholders are provided a single disclosure document called a 'scheme booklet' that is prepared by the target (with the assistance of the bidder).
Broadly, the scheme booklet contains all of the information that is typically included in the bidder's statement and target's statement, and includes an independent expert report valuing the target shares.
What approvals are required?
Under an off-market takeover bid, no approvals are required from target securityholders or the Court. Rather, target securityholders either accept or reject the bidder's offer.
Under a scheme of arrangement, approvals are required from both target securityholders and the Court. The Court must first approve the despatch of the scheme booklet to members and the convening of the meeting of target securityholders.For the scheme to be approved, a resolution in favour must be passed at meetings of each class of target shareholders by both:
- 75% of the votes cast on the resolution; and
- more than 50% in number of the target shareholders voting on the resolution (in person or by proxy).
If target shareholders approve the scheme, the target will then return to Court for a second time to seek Court orders approving the scheme.
No ASIC approval is required under either a takeover bid or a scheme. However, under a scheme, the draft scheme booklet is lodged with ASIC for a 14 day review period, and the Court may not approve the scheme unless ASIC has given the Court a statement that ASIC does not object to the scheme.
What does success look like?
Success under an off-market takeover bid can span a range of outcomes:
- A bidder seeking 100% ownership of a target will need to hold at least 90% of all target securities before it can compulsorily acquire the remaining securities from target securityholders who have chosen not to accept the offer. As such, the 90% ownership threshold is typically considered to be the defacto success threshold for a bidder seeking a 100% outcome.
- A bidder seeking 'control' rather than 100% ownership may be content to receive aggregate acceptances of its offer that give it ownership of 50% or more of all target securities.
Success under a scheme of arrangement is typically 100% ownership. A scheme is attractive to a bidder seeking 100% ownership of a target as it delivers an 'all or nothing' outcome – if the scheme is approved the bidder has certainty that it will reach 100% ownership of the target.
What can the terms be?
Under both an off-market takeover bid and a scheme, the consideration may consist of any form including cash, listed or unlisted securities, or a combination.
Both an off-market takeover bid and a scheme can be subject to conditions, although some conditions are prohibited in takeover bids and uncommon in schemes such as conditions that rely on the bidder's subjective opinion or that can be controlled solely by the bidder.
Under a takeover bid, the offers must all be on the same terms, including the offer price. A scheme allows flexibility to treat different target shareholders differently, but this may give rise to separate classes in voting to approve the scheme.
Generally, a scheme is subject to fewer prescriptive rules than a takeover bid, allowing greater flexibility to include ancillary features such as asset transfers and capital reductions.
How long does it take?
Under an off-market takeover bid, the timing is uncertain as the offer period is typically initially set at one month, but is extended several times. The offer period is likely to be at least 3 months, but may be extended for up to a year.
In addition, at least 4 to 6 weeks are required after reaching 90% ownership under a takeover bid to complete compulsory acquisition.
Under a scheme of arrangement, there are usually no extensions to the transaction timetable and compulsory acquisition is not necessary. The Court and shareholder approval process follows more certain timing milestones. The scheme process is likely to be about 4 months from the date of the bidder's first approach to target.
Advantages and disadvantages of schemes of arrangement compared to takeover bids
In the Australian market in recent years, schemes of arrangement are more common than takeover bids to acquire control.
The popularity of schemes is due to a number of key advantages that schemes offer bidders and targets compared to takeover bids. Those advantages include:
- the certainty of obtaining 100% ownership if the scheme is approved;
- the ‘majority in number and 75% in value' shareholder approval thresholds for a scheme are generally considered lower thresholds than the 90% of all securities required to commence compulsory acquisition following a takeover bid;
- flexibility to incorporate terms in a scheme that would not be permitted under a takeover bid; and
- a more certain timetable.
However, schemes are subject to a number of disadvantages compared to takeover bids. Those disadvantages include:
- it is more difficult and time consuming to make changes to the terms of a scheme (such as increasing the consideration in response to a rival offer) than is the case for a takeover bid. Changes of terms in a scheme generally require returning to Court to seek permission, an adjournment of scheme meeting, and supplementary disclosures;
- in a takeover bid, a pre-bid stake in the target held by the bidder may be advantageous as it may deter third parties from entering the contest for control. A pre-bid stake may be a disadvantage under a scheme because those shares will not be voted in the same class as other target securityholders to approve the scheme, therefore enlarging the effective vote of all other target shareholders on the scheme resolution;
- the need to seek Court approval, and greater ASIC involvement in the scheme process, introduces execution risk which is not applicable to the same extent in takeover bids; and
- the time and cost required to implement a scheme is generally greater than that to obtain control under a takeover bid. Much of the cost in a scheme would be borne by the target, but these costs will of course be inherited by the bidder if the scheme is successful.