The end for schemes of arrangement in UK takeovers?Print publication
In his Autumn Statement, the Chancellor announced the Government’s intention to stop the practice of using schemes of arrangement involving a reduction of capital to effect a takeover of a public company. There is no specific date for this as yet but the Government has said it will be effective from “early 2015”. A draft of the amending regulations was published and laid before Parliament on 12 January this year.
The draft regulations insert a new section 641(2A) into the Companies Act 2006, which prohibits a company from reducing its share capital as part of a scheme by which a person either acting alone or together with its associates would acquire all of the shares in a company or all of the shares of a particular class. (The new rules will not apply to a scheme which inserts a new holding company on the condition that all or substantially all of the members of the company undertaking the scheme become members of the new holding company and their proportionate shareholdings remain substantially the same).
In recent years we have seen an increasing number of public company takeovers structured as schemes of arrangement. A key advantage of using schemes has been that it is possible to structure the takeover in a way that avoids stamp duty. Whereas stamp duty is payable on the transfer of shares in UK companies at a rate of 0.5 per cent, the issue of new shares is not subject to stamp duty. (Stamp duty is not payable on the transfer of shares in an AIM company, however.) It has been possible to save stamp duty on a public company takeover by reducing the target company’s share capital and issuing new shares to the bidder under a court-approved scheme.
The stamp duty saving was a major factor in favour of structuring a takeover as a scheme of arrangement. It is probable that we will see fewer schemes used as a consequence. However, there are other reasons why a scheme may still be worthy of consideration:
- schemes become binding on all shareholders once approved by 75 per cent of them; with an offer, the bidder must obtain 90 per cent acceptances before it can begin the process of mopping up the remaining minority
- a scheme can often cater for difficulties associated with US shareholders more effectively than an offer. This is because there is an exemption from the registration requirements under the US Securities Act which covers schemes of arrangement.
Set against these advantages, the traditional offer route can for its part also boast some advantages:
- with a scheme, it is the target and its independent directors who are in control of the timetable whereas with an offer control of the timetable will generally be with the bidder
- if the bidder is prepared to live with the possibility of a continuing minority interest in the target, an offer is the quickest and easiest way of obtaining 50+ per cent control. By contrast, a scheme is an “all or nothing” arrangement. (In practice, if the bidder is being financed by bank borrowings, the finance documents will not normally declare the offer unconditional at anything less than 75 per cent so the advantage in this case will be largely theoretical.)
- an opposed minority of target shareholders may be able to block a scheme despite holding only a small number of shares between them, as a scheme must be approved both by a majority in number of the holders of the shares voting in person or by proxy and by shareholders holding 75 per cent of the nominal value of the shares being voted at the meeting
- the involvement of counsel and the courts will usually mean that a scheme is more expensive.
The new regulations will contain a transitional provision and the section 641(2A) prohibition will not apply to takeovers where a firm intention to make an offer has already been announced or the terms of an offer have already been made.
Walker Morris have completed a number of takeovers in the past few months which were structured as schemes of arrangement and which involved a capital reduction and the issue of shares to the bidder – which will soon be prohibited. We expect to see fewer transactions structured as schemes in the months to come. If you have any such transactions in the pipeline that may now need restructuring, please contact us to discuss your options.