16 - Corporate Restructuring And Takeovers

Question 1

What is a scheme of reconstruction?

Answer 1

A scheme of reconstruction allows a company (the transferor company) to transfer all or part of its business to another company (or companies), and the transferor company is then voluntarily wound up.

Question 2

Briefly explain the process for putting a scheme of reconstruction into effect.

Answer 2

• The transferor company passes a special resolution to voluntarily wind itself up;
• The scheme of reconstruction must be sanctioned;
• The scheme, once sanctioned, will be put into effect and will bind the members and creditors of the transferor company;
• The transferor company is liquidated and all or part of its business transferred to another another company or companies; and
• The members of the transferor company will usually receive shares in the company to which the business has been transferred.

Question 3

How can a member or creditor dissent from the scheme?

Answer 3

Members can dissent from the scheme by leaving a written statement to this effect at the company’s registered office within seven days of the resolution being passed (IA 1986, s. 111(2)). The liquidator will then be required to either:

• abstain from carrying out the reconstruction; or
• purchase the dissenting member’s shares at a price to be determined by arbitration or agreement (s. 111(2)).

Creditors have no right of dissent under the IA 1986, but can try to stop the scheme by petitioning the court for a winding up order.

Question 4

What is a scheme of arrangement?

Answer 4

It is a compromise or arrangement between a company and (i) its creditors, or any class of them; or (ii) its members, or any class of them (CA2006, s. 895(1)).

Question 5

Provide some examples of types of transactions that a scheme of arrangement can be used for.

Answer 5

A scheme can be put into operation in order to undertake a wide variety of aims, including:

• to implement a takeover or a merger (as recognised by s. 900(1));
• to restructure a company’s debt;
• to attempt to rescue a financially struggling company (e.g. an administrator may propose that the company enter into a scheme of arrangement with its creditors);
• to divide or demerge a company; or
• to restructure share capital.

Question 6

Briefly explain the three stages of putting a scheme of arrangement into effect.

Answer 6

1. An application is made to the court and, if this application is successful, the court will summon meetings of the relevant creditors/members;
2. Approval of the scheme is sought from the relevant members/creditors; and
3. An application is made to the court to sanction the scheme.

Question 7

What are the effects of a scheme of arrangement coming into effect?

Answer 7

The sanctioned scheme will bind the company and those creditors or members who are affected by it (s. 899(3)). The scheme will not bind third parties, although it can indirectly affect third party rights (LA SEDA DE BARCELONA SA (2010)).

Question 8

What are the three principal functions of the Takeover Panel?

Answer 8

1. It must make rules giving effect to certain provisions of the Takeover Directive (CA2006, s. 943(1)), namely the City Code on Takeovers on Mergers.
2. The Takeover Panel may give rulings on the interpretation, application or effect of the City Code (s. 945(1)). These rules are binding (s. 945(2)).
3. The Takeover Panel may provide directions in order:
   - to restrain a person from acting, or continuing to act, in breach of the City Code;
   - to restrain a person from doing, or continuing to do, a particular thing, pending determination of whether that or any other conduct of his is or would be a breach of the City Code; or
   - otherwise to secure compliance with the City Code (s. 946).

Question 9

What is the principal purpose of the Takeover Code?

Answer 9

The introduction to the Takeover Code provides that its principal purpose is:

‘to ensure that shareholders in an offeree company are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders in the offeree company of the same class are afforded equivalent treatment by an offeror. The Code also provides an orderly framework within which takeovers are conducted. In addition, it is designed to promote, in conjunction with other regulatory regimes, the integrity of the financial markets.’

Question 10

Can the Panel ignore a rule in the Takeover Code?

Answer 10

The Panel may derogate or grant a person a waiver from the application of a rule either:

• in the circumstances set out by the rule; or
• in other circumstances where the Panel considers that the particular rule would operate unduly harshly or in an unnecessarily restrictive or burdensome or otherwise inappropriate manner (in which case a reasoned decision will be given).

Question 11

Provide three examples of sanctions that can be imposed for a breach of the Takeover Code.

Answer 11

1. Issuing a public or private statement censuring the offender;
2. Reporting the offender’s conduct to a UK or overseas regulator, or professional body (notably the FCA), and that regulator or body can then decide whether to take action against the offender; and
3. Publishing a statement indicating that the offender is not someone who is likely to comply with the Code (this is known as ‘cold-shouldering’).

Question 12

For how long must an offer remain open once the offer document has been published?

Answer 12

The offer must remain open for at least 21 days (rule 31.1).

Question 13

When will an offeror be required to make a mandatory offer?

Answer 13

Rule 9.1 provides that this ‘mandatory offer’ must be made where:

• a person (on their own or acting in concert with others) acquires an interest in shares that carry 30% or more of the company’s voting rights; or
• a person (acting on their own or in concert with others) is interested in shares which carry between 30% and 50% of the company’s voting rights, and that person (or someone acting in concert with them) acquires an interest in any other shares that increases the percentage of shares carrying voting rights in which he is interested.

Question 14

What are squeeze-out and sell-out rights?

Answer 14

Sell-out rights provide the shareholders of an offeree company with the ability to compel the offeror to purchase their shares once certain conditions are met.

Squeeze-out rights empower an offeror to compel the offeree’s shareholders to sell their shares once certain conditions have been met.