9) Schemes of Arrangement

Question 1

Where are the scheme document content requirements?

Answer 1

• Scheme document = offeror document and offeree doc for takeover code
  Needs to:
• Comply with Rule 24/25 Takeover code
• Only Rule 24.7 / 24.14 - disapplied in context of scheme
• By Para 16 App 7 TC
  • contain information re scheme timetable (para 3 of App7 TC)
  • incorporate info needed by para 14 of App7 of TC.
• scheme document
  • also comply w/ general obligation as to information contained in Rule 23 of the TC.

Question 2

What meeting needs to be held to approve the scheme?

Answer 2

• S899(1) - court meeting held to approve the scheme
• Then need partnership assurance GM held straight after court meeting
• To approve other company business relating to implementation of the scheme and the approval of amendments to partnership assurance articles

Question 3

What level of support does a scheme require at a court meeting?

Answer 3

• S899(1)
• Majority in numbers representing 75% IN VALUE of members / class of members
• Present and voting either in person or by proxy.

Question 4

What is the purpose of the partnership assurance GM?

Answer 4

• Approve other company business relating to the implementation of the scheme
• And the approval of amendment to the Partnership Assurance articles of association.

Question 5

What is the principle established in Re Hellenic and what are the practical implications of this?

Answer 5

• where the scheme is proposed to effect a takeover
• Bidder cannot exercise votes in relation to any shares it holds in the target company at a court meeting convened to approve a scheme of arrangement.
• If purchased prior to the scheme record time - not regarded as scheme shares

So basically you cannot buy shares in the target company and then use that voting power to vote in favour of a further acquisition - cannot act like a double agent for a scheme of arrangement

Question 6

Is a scheme of arrangement binding on those who vote AGAINST it at meetings?

Answer 6

• Yes is binding on them

- S899(3) CA

Question 7

Explain in bullet points why it is so important to determine classes of shareholders in the context of a scheme of arrangement?

Answer 7

Really important at the Hearing to sanction the scheme 
- Here courts must be satisfied that correct s/h classes are constituted
- Separate class identified = separate court meeting for that class needed to approve scheme. 
- Each CM must INDEPENDENTLY be in favour of the scheme
	○ Majority in number of shareholders in that class, 75% in value in each class.

Question 8

Which votes are required for a court meeting being required for independently voting in favour of the scheme?

Answer 8

• Majority in number of shareholders in that class

- 75% in value in each class

Question 9

What happens if in a scheme of arrangement, the court decides that separate class SHOULD have been constituted?

Answer 9

• Will refuse to sanction the scheme!
• Class = important question for the target company
• To determine at outset of the scheme process to make sure that
• Proper court meetings are constituted
• And the courts will not provide advance guidance on this question.

Question 10

Who is included in the same class? Write out the definition perfectly. which case gave this definition also?

Answer 10

• SOVEREIGN LIFE ASSURANCE v DODD
  • Bowen LJ comments
• Persons whos rights are not so dissimilar
• as to prevent them consulting together with a view to their common interest

Question 11

Does different classes of shares mean that there are different classes for the purpose of s899 procedure?

Answer 11

• Not necessarily meaning that you need a separate class of SHARES to have separate classes for the purposes of s899 procedure.
• Target instructs counsel for opinion to see if separate class should be identified.

Question 12

Explain the registrations that need to be done at companies house if the scheme of arrangement is going to become effective? What are the requirements for being registered at CH?

Answer 12

• Delivered to registrar - takeover code and s899(4)
• Scheme = transfer scheme - so original court order that bears the original court stamp needs to be sent to HMRC for payment of stamp duty
• Before being registered at companies house

Question 13

What sort of takeovers are schemes of arrangement suitable for and why?

Answer 13

• Recommended takeovers
• As it is the offeree company and not the offeror that is entering into an arrangement with its members
• SOA = not an offer to the public for the purposes of the prospectus directive
• Prospectus therefore not required for soa
• Unless the consideration is listed securities under s85(2)

Question 14

What are the 5 considerations to make when comparing a scheme of arrangement versus a contractual offer takeover?

Answer 14

1. Minority shareholders risk
2. Stake building benefits
3. Flexibility: can it be run as a hostile bid
4. Flexibility: easy to revise in competitive situation
5. Target shareholder support required?
6. Can retail investors prevent takeover

Question 15

What is the risk of the target having minority shareholders after a scheme of arrangement?

Answer 15

• Offeror gets 100% control is scheme is successful under s899(3)
• Get 0% if unsuccessful
• Rule 10 TC does NOT apply to scheme of arrangement
• 16(b) appendix 7 to TC

Question 16

What is the risk of the target having minority shareholders after an OFFER?

Answer 16

• Have to consider s979(2) - the 90% threshold
• s.979(2) CA: bidder can use compulsory acquisition procedure to get shares of minority shareholders.
• If the s.979 90% threshold is not reached, then King can let its offer lapse - avoid minority shareholders.
• Rule 10 TC: following this, could be left w minority shareholders.
• However, even if bidder did not reach the s.979 90% threshold, could still obtain majority control (and effective management/board control)
  • combined with threats to de-list etc.
  • may be incentive for shareholders to accept the offer.

Question 17

What are the benefits of bidder stakebuilding in a scheme of arrangement?

*learn this perfectly and write out full paragraph - understand it all *

Answer 17

• Stakebuilding = not beneficial. Offeror cannot vote its shares at the scheme meetings.
• Principle in Re Hellenic is that, if the scheme is proposed to effect a takeover
  • If bidder owns shares in the target
  • These shares held by bidder = separate CLASS of shares
  • Bidder should not vote on resolution to approve this schemes.
• But if shares are bought from friendly shareholders before CM
• reduces number of friendly shareholders in agreement in attendance at CM
• could INCREASE THE PERCENTAGE of opposing shareholders - not good
• BUT some bidders stakebuild in advance of soa to dissuade others, from launching a competing bid

Question 18

What are the benefits of bidder stakebuilding for an offer?

Answer 18

• Rule 10 takeover code - any shares that the offeror already owns or which it gets before the posting of the offer CAN be counted towards 50%+1 threshold
• S979 - but any shares bought before cannot count towards 90% threshold
• S979(8)(10) - any shares bought during the period where takeover offer CAN be accepted - usually count towards s979 90% threshold.

Question 19

Explain the flexibility of a scheme of arrangement - is it possible to run as a hostile bid?

Answer 19

• V. difficult, but not impossible to run as hostile bid

- Usually scheme requires target board’s cooperation to convene meetings.

Question 20

Explain the flexibility of a scheme of arrangement - is easy to revise in a competitive bid situation?

Answer 20

• Scheme = inflexible in context of competing bids
• if bidder wants to revise/improve the terms of its offer.
• Para 7 of App 7 to TC on top of this need to go back to Court, to approve new docs/ order new Court Meeting.
• In situ - bidder may choose to switch from a scheme to contractual offer structure.
• Under para 8 App 7 to TC, bidder would require the Panel’s consent before switching structures and would need to announce the switch under Rule 30.1 of the TC

Question 21

Explain the flexibility of an offer - is it possible to run as a hostile bid?

Answer 21

• Although offeror = subject to usual difficulties associated with hostile bids
• e.g.
  • access to info for DD purposes,
  • target shareholders ‘holding out’ for a better offer,
  • cost implications etc.,
  • contractual offer can be launched as a hostile bid.

Question 22

Explain the flexibility of an offer - is easy to revise in a competitive bid situation?

Answer 22

• (Rule 32.1(a))
• (Rule 32.1(c)).
• contractual offer can be revised at any time
• provided that revised offer is kept open for at least 14 days following the date of revision (Rule 32.1(c).
• on the date of revision the offeror (i) publishes a revised offer document on its website; (ii) announces its publication via a RIS; and (iii) makes the offer document available to its employee representatives and those of the offeree

Question 23

Explain the extent to which target shareholder support is required for a scheme of arrangement?

Answer 23

• S899(1) requirements

- And then apply this to the facts in the exam

Question 24

Explain the extent to which target shareholder support is required for an offer?

Answer 24

• Rule 10 of the Takeover Code:
  • 50% + 1 share to get bare control of target and declare the offer unconditional as to acceptances.
  • bidder shareholding in target CAN be counted towards 50% + 1 threshold
• s.979(2) CA 2006: However, King wants 100% control - so need 90% acceptances. cannot use current shareholding towards this under CA

Question 25

what are the different structures that could be adopted by the bidder?

Answer 25

scheme or contractual offer

Question 26

what are the 4 options of consideration that can be used?

Answer 26

cash
shares
loan notes
mixed

Question 27

what are the 3 advantages of cash consideration?

Answer 27

• Certain of value: cash is persuasive for offeree shareholders.
• Shareholders will prefer it as not diluted
  More likely for the target to recommend a cash bid - means offer more likely to be successful

Question 28

what are the 2 disadvantages of cash consideration?

Answer 28

• Market capitalisation? Need to consider if they have sufficient reserves
  May need to raise DF / EF to be able to pay in cash

Question 29

what are the 3 advantages of shares as consideration?

Answer 29

• Good if do not have sufficient cash reserves and do not want to borrow the money
• Shares represent asset - income in the form of dividend which may increase in capital value over time.
• Some shareholders can use roll over relief to defer Capital Gains Tax

Question 30

what are the 4 disadvantages of shares as consideration?

Answer 30

• Value of shares may fluctuate over the bid process unlike cash: unattractive compared to all cash
• Shares in US company might not be attractive to UK investors. Although
• Listing of shares is time consuming and expensive - listing shares would need to be a condition of the takeover bid
• May require shareholder approval to issue shares.

Question 31

what are the characteristics of loan notes as consideration?

Answer 31

□ Alternative to cash for tax reasons
□ Generally unlisted
□ Redeemable at the holders option after 12-18 months of issue
□ Then twice yearly for a further 3-5 years
□ Usually sterling denominated
Slightly lower rate of market interest

Question 32

what are the advantages of loan notes consideration?

Answer 32

• Tax liability: can be redeemed over several years to use a shareholders CGT annual exemptions
• Usually non transferable so not require prospectus

Question 33

what are the disadvantages of loan notes consideration?

Answer 33

• Administration costs of creation and redemption of loan notes. Payment of interest under them
• They are non tradeable securities so less attractive to investors than shares.
• No long term capital growth in loan notes - not particularly valuable instrument

Question 34

what is mixed consideration?

Answer 34

□ Certain number of shares and certain amount of cash
□ Or might get a choice of mixed consideration and elect which one to receive
Mix and match election - can elect to get different types of consideration subject to another shareholder electing to get similar amounts in exact opposites. E.g. more shares and less cash - other will want more cash and fewer shares.

Question 35

what is the one advantage of mixed consideration?

Answer 35

• Popular to shareholders

Question 36

what is the one disadvantage to mixed consideration?

Answer 36

• Bidder needs to finance alternative options.

Question 37

what are the other regulatory issues that must be considered?

Answer 37

1. SH approval under NYSE rules
   Class tests - assessed by looking at the size of the target relative to the size of the offeror. Apply calculations to the transaction.

Question 38

which 3 things will the offer board consider if they are going to recommend a bid or not?

Answer 38

1. Current performance of the offeree: might be in process of cost cutting plan - wanting to increase profits. Might take a high price to convince the shareholders to sell.
   
   2. Price and form of consideration being offered by offeror - will want a premium before willing to give recommendation
   3. Competitive bidders who are likely to challenge the offeror - other white knights (competitive bidders) might make approaches. Might instigate a bidding war.

Question 39

How would I amend an acceptance condition drafted for a contractual offer?

Answer 39

• Set it at 90% rather than 60%, as is standard in all offer documents
• So that the Offeror may invoke the squeeze out compulsory acquisition procedure in s979.
• Then waive down to 50% rather than a lower value like 40% to comply with Rule 10.
• This will give Offeror the option to decide when to declare the issue unconditional as to acceptances.
• Can pass SR at 75% to threaten de-listing and reregister as a private company under s9CA.

Question 40

What are the options for a company once the minimum acceptance conditions have been met before day 60?

Answer 40

• let offer lapse as offer condition has not been met (although this is unlikely at this stage due to cost/ stage of timetable;
• extend the period for acceptance of offer up to maximum of Day 60;
• revise and extend the terms of the offer (i.e. offer more cash) to encourage more
shareholders to accept the offer; or
• waive the acceptance condition down and declare the offer unconditional as to acceptances at just over 50% (unlikely).

Question 41

What is the power of the offeror once they have reached 75% acceptances?

Answer 41

• Could delist or threaten to de list - LR 5.2.10 / LR 5.2.5R
• Threaten to take the company private because it would be able to pass a SR with 75% of the vote
• Would encourage the shareholders to sell up because they would NOT want to be left with unlisted private company shares.
• Note - ALWAYS ATTEMPT THE SHARE CALCULATIONS!

Question 42

Give an explanation of why the offeror might decide do declare an offer unconditional as to acceptances below 90%?

Answer 42

• On the basis that they already have control of the company
• And anticipate that remaining shareholders will accept in due course.
• There is also the ability to pass a special resolution at 75% which would allow them to de-list the company - LR 5.2.5 / LR 5.2.10 and then re-register as a private company under s97CA.