Corporate restructuring and takeovers Flashcards
What is a scheme of reconstruction?
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.
Briefly explain the process for putting a scheme of reconstruction into effect.
The process for putting a scheme of reconstruction into effect is as follows:
- 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 company or companies;
and - the members of the transferor company will usually receive shares in the company to which the business has been
transferred.
How can a member or creditor dissent from the scheme?
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.
What is a scheme of arrangement?
A scheme of arrangement 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 (CA 2006, s. 895(1)).
Provide some examples of the types of transactions that a scheme of arrangement can be used for.
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.
Briefly explain the three stages of putting a scheme of arrangement into effect.
The three stages of putting a scheme of arrangement into effect are:
- an application is made to the court and, if this application is successful, the court will summon meetings of the relevant creditors/members;
- approval of the scheme is sought from the relevant members/creditors; and
- an application is made to the court to sanction the scheme.
What are the effects of a scheme of arrangement coming into effect?
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 (see e.g. Re La Seda de Barcelona SA [2010] EWHC 1364 (Ch)).
How does a Pt 26A plan differ to a Pt 26 scheme of arrangement
There are four key differences between a Pt 26A plan and a Pt 26 scheme:
- A Pt 26 scheme is generally available to all companies, whereas a Pt 26A plan is only available to companies that
have encountered, or are likely to encounter, financial difficulties. - The rules relating to the Pt 26A plan expressly state who should be invited to attend the stage 2 meetings, whereas the Pt 26 rules do not state this.
- The approval thresholds for the stage 2 meetings differ. Approval for a Pt 26 plan is obtained if (i) a majority of those creditors or members present and voting must vote in favour the scheme, and; (ii) that majority must represent at least 75% in value. To approve a Pt 26A restructuring plan, there is no requirement for a majority to vote in favour of
the plan, so approval is obtained if 75% or more in value vote for the plan (s. 901F(1)). - A Pt 26A plan can be proved even if all the stage 2 meetings did not approve it. In order for a Pt 26 scheme to be approved, all the stage 2 meetings must have approved it.
What is the ‘cross-class cram down?’
The cross-class cram down allows the court to sanction a Pt 26A plan even if the plan was not approved by all of the stage 2 meetings.
What two conditions must be met for the cram down to be exercised?
The court can only exercise the cfram down if
- the court is satisfied that, if the compromise or arrangement were to be sanctioned, none of the members of the
dissenting class (i.e. those who did not vote in favour of the plan) would be any worse off than they would in the
event of the relevant alternative (s. 901G(3)), and; - the compromise or arrangement has been agreed by a number representing 75% in value of a class or creditors or members, present and voting at a stage 2 meeting, who would receive a payment, or have a genuine economic
interest in the company, in the event of the relevant alternative (s. 901G(5)). In other words, at least one of the stage 2 meetings must have approved the plan. If none of the stage 2 meetings approved the plan, then the court cannot
sanction it.
What are the three principal functions of the Takeover Panel?
The Takeover Panel has three broad functions:
- It must make rules giving effect to the rules set out Pts 1 and 2 of Sch 1C of the CA 2006. It does this through the
creation of the City Code on Takeovers and Mergers (the Takeover Code). - The Takeover Panel may give rulings on the interpretation, application or effect of the Takeover Code (s. 945(1)). These rulings are binding (s. 945(2)).
- The Takeover Panel may provide directions in order:
– to restrain a person from acting, or continuing to act, in breach of the Takeover 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 Takeover Code; or
– otherwise to secure compliance with the TAkeover Code (s. 946).
What is the principal purpose of the Takeover Code?
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.’
Can the Panel ignore a rule in the Takeover Code?
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).
Provide three examples of sanctions that can be imposed for a breach of the Takeover Code.
Sanctions that can be imposed include:
- issuing a public or private statement censuring the offender;
- 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
- publishing a statement indicating that the offender is not someone who is likely to comply with the Code (this is
known as ‘cold-shouldering’).
For how long must an offer remain open once the offer document has been published?
The offer must remain open for at least 21 days (rule 31.2).
