Parliament would do well to carefully consider the reform proposals released on 28 January 2010 by the Corporations and Markets Advisory Committee (CAMAC) regarding the use of schemes of arrangement to effect changes of corporate control.
The CAMAC report demonstrates that not only are the scheme provisions in need of reform, but also that there are benefits from a considered review of provisions that affect our corporate sector.
Importantly, the report has ignored the misplaced calls from some quarters to restrict the use of schemes, or to even remove them altogether from the Australian mergers and acquisitions landscape.
The usual reason for complaint against schemes of arrangement centres around perceived lower approval thresholds. Critics say those lower thresholds mean that the bar in a scheme is set too low before dissenting minorities can have their shares compulsorily acquired.
In a takeover, the threshold required to achieve compulsory acquisition is 90 per cent. In a scheme, the approval of at least 75 per cent of the votes cast is required, along with a majority of shareholders by number. The thresholds for a scheme are different, but owing to voter turnout and the class voting system in a scheme, not necessarily lower than in a takeover.
While the approval thresholds in schemes are relevant to the question of minority protections, so too are the many protective features of schemes that are not found in takeover bids. These features include target board approval (schemes can only be used in agreed deals), ASIC review, court sanction, the effectively mandatory provision of an expert’s report and a shareholders’ meeting, complete with its class and interest voting exclusions.
A more recent addition to the trick bag of scheme sceptics is the argument that, as one submission to CAMAC put it, ‘few Boards dare take a robust view and reject Schemes’ with the consequence that once put to target boards, scheme proposals are readily accepted without question. The sceptics argue that this, combined with low approval thresholds, gives a scheme an inevitability that cannot be avoided. No doubt AMP, some Canadian pension funds and many other aspiring acquirers over the years wished that were so.
Complainants also suggest that schemes are done on the cheap when compared to bids and that they are so prevalent that bids are hardly used anymore. It is a simple exercise to expose these assertions for the fictions that they are. Objective analysis demonstrates there is little difference in the average premia between schemes and agreed takeover bids. That analysis also demonstrates that takeovers are still the preferred structure in agreed deals.
In light of these issues, critics of schemes have called for a more stringent application of the takeover avoidance provision in the Corporations Act to put an end to schemes or failing that, to at least severely restrict their use. The takeover avoidance provision states that a scheme should not be approved if it was proposed for the purpose of avoiding the takeover provisions or unless ASIC was otherwise satisfied with the scheme.
One of the key recommendations of the CAMAC report is for Parliament to repeal the takeover avoidance provision. This is the provision that is used by objectors to try and derail schemes. Recognising the role schemes play, CAMAC has recommended that objectors no longer have access to it.
This reform proposal is important for two reasons. First, it would ensure that schemes continue to occupy their useful role in Australian mergers and acquisitions. Schemes promote a competitive market for corporate control. Such a market is not advanced by 10 per cent shareholders being assured of blocking control transactions. While minority protections are important, so too is a well-functioning market for control of listed companies.
Second, merger proponents in my view have a right to expect that the relevant statutory infrastructure is sound and that there should not be deal risk from esoteric legal provisions. While schemes have to date survived various challenges over the years in relation to takeover avoidance, it should not be assumed that this will always remain the case.
CAMAC has also taken time to examine a range of other issues relevant to schemes. It has recommended measures to encourage documents that are less likely to be mistaken for metropolitan telephone directories. It has also recognised the plain anomaly in directors having due diligence defences in fundraising documents and in takeover documents, but not in scheme booklets.
Other suggested reforms include opening up the scheme provisions to the many managed investment schemes listed on ASX, as well as procedural reforms to schemes to deal with a wide range of issues that are presently in need of a legislative fix.
Once scheme reform is complete, a similar process of review and reform of the laws regulating takeover bids would be helpful too.
This article appeared in The Australian Financial Review on 29 January 2010.