In recent years, schemes of arrangement (as opposed to offers) have increasingly become the structure of choice for effecting recommended takeovers, all-share mergers between companies of a similar size and larger deals where the consideration is to be satisfied in cash. A scheme of arrangement (which is a statutory procedure under Part 26 of the Companies Act 2006 (“CA 2006”)) enables a company to make a compromise or arrangement with its shareholders or creditors (or any class of them). The legislation does not prescribe the subject matter of a scheme and in theory it can be a compromise or arrangement about anything which the creditors or members may properly agree amongst themselves.
Last year the majority of takeovers, including the following, were effected by way of a scheme: Sinochem Corporation’s offer for Emerald Energy Plc; Adecco S.A.’s offer for Spring Group plc; Resolution Limited’s offer for Friends Provident Group plc; SEGRO plc’s offer for Brixton plc; and Apollo Global, Inc.’s offer for BPP Holdings plc.
In the context of a takeover bid, a scheme will be proposed by the target company to its shareholders which, if it is to proceed, must be approved at a special shareholders’ meeting (convened at the direction of the court) by a majority in number of the shareholders represented at the meeting (whether in person or by proxy), who together hold not less than 75 percent in value of the shares held by those shareholders represented at the meeting. Following approval by the shareholders, the scheme must then be sanctioned by the court and a copy of the court order filed with the Registrar of Companies. Once effective, the scheme is binding on all shareholders (or shareholders of the relevant class) thereby ensuring, if the scheme relates to the entire issued share capital of the target, that a bidder acquires 100 percent of the shares of the target.
This article briefly considers certain factors which may make a scheme more attractive than an offer from a bidder’s perspective in the context of a takeover, as well as certain disadvantages which may make it more appropriate for a bidder to proceed with a takeover by way of an offer.
Whilst it is possible in certain circumstances for a bidder to reserve its right to change the structure of a takeover and switch from a scheme to an offer, this is beyond the scope of this article.
Acquiring 100 percent of the Target
Where a bidder is seeking to acquire 100 percent of the target’s shares, it will need to consider the most effective way of achieving this goal. This may be crucial for a private equity bidder, for example, who will usually want to be certain of achieving 100 percent control of the target without minority interests remaining following the takeover.
As mentioned above, once a scheme has been sanctioned by the court, it binds all shareholders of the target (or the relevant class of shareholders to which the scheme relates) even if they have not voted in favour of the scheme. In contrast, if the bidder were to make an offer it would have to obtain 90 percent of acceptances from the target’s shareholders in order to be entitled to buy out any minority shareholders (using the compulsory acquisition or “squeeze out” procedure under the CA 2006) who have not accepted the offer.
In addition, the period for acquiring 100 percent of the shares of the target under a scheme is often shorter than under an offer which can take up to 5 months for the bidder to find out whether there is any opposition to it acquiring 100 percent control of the target using the squeeze out procedure under the CA 2006.
Profile of Target’s shareholders
The shareholder profile of the target may make a scheme more likely to be successful than an offer. Where there is a large shareholder in the target, the bidder will need to consider carefully the likely course of action to be taken by that shareholder, particularly if the bidder has reason to believe that the shareholder concerned is not prepared to accept an offer. Where this is the case, it may affect the bidder’s ability to obtain the 90 percent of acceptances it requires in order to be able to compulsorily acquire any shares held by any minority shareholders in the target. In such circumstances it may be more appropriate for the takeover to proceed by way of a scheme.
The same considerations may apply in the context of a target with a large number of small shareholders many of whom may not be expected to take any positive action to accept the bidder’s offer. In such circumstances and where there is no organised minority opposed to the scheme, the level of support required to vote to approve the scheme will be lower (i.e. a majority in number of shareholders present (in person or by proxy) at the special shareholders meeting who between them hold 75 percent in value of the shares held by those shareholders present). However, it is possible for an organised minority of shareholders opposed to the scheme, who between them hold more than 25 percent in value of the shares represented at the special shareholders’ meeting that is convened to approve the scheme, to prevent the scheme from being approved, whereas the comparative percentage required to block the passage of an offer would be 50 percent.
If a scheme is structured as a cancellation scheme, no stamp duty would be payable on a takeover since no transfer of shares or agreement to transfer shares would have occurred. Instead the existing shares of the target would effectively be cancelled (by the court sanctioning the scheme) and new shares in the capital of the target issued to the bidder. From a bidder’s perspective, this could make a significant saving in the overall transaction costs, particularly if the value of the target is substantial.
Obtaining merger relief
If the ability of a bidder to take advantage of merger relief is an important objective, a scheme may be more appropriate than an offer. If merger relief is not available this may impact on the level of the target’s pre-acquisition profits which can be treated as distributable by the bidder. Merger relief is only available where at least 90 percent of the target is acquired. Under a scheme which is approved by shareholders and sanctioned by the court, a bidder can be certain of acquiring 100 percent of the target whereas under an offer it cannot be assumed that the bidder will acquire at least 90 percent of the target in order for merger relief to be available.
A scheme can usually cater, more easily than an offer, for the difficulties of dealing with any shareholders whom the target can no longer contact or who are the holders of bearer shares. Where the consideration to be paid is cash, a scheme can provide for any cheques which remain uncashed for a certain period of time (i.e. 6 months) to be cancelled and the proceeds held by an independent trustee on trust for the relevant untraceable shareholders for an appropriate period of time which will usually be between 6 to 12 years. During this period any shareholder who can prove they are entitled to the monies held on trust will be able to recover such monies together with any accrued interest less any expenses. Where this is the case, the scheme will usually expressly provide that at the expiry of the ‘appropriate’ period the bidder will be released from holding any such monies on trust for any untraceable shareholders and that such monies will revert to the bidder.
A similar approach can be adopted where securities of the bidder are to be issued to the target’s shareholders as consideration. In such circumstances, the securities of the bidder will be issued to an independent trustee who will hold them on trust for any untraceable shareholders. At the expiry of an ‘appropriate’ period of time, such securities may be sold and the proceeds (plus any accrued dividends) may be invested for a further period of time after which they may be transferred to the bidder. Again, provided that the relevant shareholder can prove ownership of the shares and/or proceeds from the sale of such shares (including any accrued dividends) during the intervening period, they will be able to recover such shares or monies from the trustee.
Implementation of the Scheme
From the bidder’s perspective, perhaps the main disadvantage of proceeding with a scheme is that the target’s directors will determine the timetable for implementing the scheme. In practice, however, the bidder and the target will enter into an implementation agreement whereby the target will provide certain undertakings to implement the scheme in accordance with an agreed timetable. However, this does not prevent the target company’s directors withdrawing from the scheme in the event of a third party making a higher offer. Where a higher offer is made after the shareholders’ meeting (approving the scheme) but before the scheme has been sanctioned by the court, the directors are unlikely to effect the scheme without convening a further shareholders’ meeting in order to obtain authority to proceed, since by failing to do so they may liable for breach of their general duties under CA 2006.
The timetable for implementing a scheme may allow for a competing bidder to intervene since the Takeover Code provides that a shareholders’ meeting to approve the scheme cannot be held less than 21 days after the scheme circular is posted. In contrast, an offer can be declared unconditional as to acceptances earlier than day 21 (which is usually the first closing date of an offer under the Takeover Code).
Where there is a competing bidder for the target, it is possible for the bidder to alter the scheme in favour of the target’s shareholders. However, this would require the involvement of the court and must be done prior to the court meeting sanctioning the scheme. In contrast, under an offer the bidder would merely be required to submit a revised offer document, which is easier to do.
The legal costs of implementing a takeover by way of a scheme will usually be higher than those of an offer, given the need to prepare additional documentation and instruct counsel to present the scheme before the court. However, the additional costs of the bidder implementing a scheme can usually be balanced by the amount of stamp duty saved.