Schemes of arrangement are commonly used mechanisms under the Corporations Act 2001 to acquire listed companies or restructure corporate groups. There are two principal structures that can be used to acquire all the voting shares in a public listed company - a takeover bid under Chapter 6 of the Corporations Act or a scheme of arrangement under Chapter 5 of the Corporations Act. In the listed public company sector, schemes of arrangement are increasingly being used instead of takeover bids to achieve a change of corporate control.
What is a Scheme of Arrangement?
A scheme of arrangement is a scheme put in place to bind the company's creditors and/or members to some form of rearrangement of their rights and obligations. The arrangement must be approved by the Court as well as by creditors and/or members of a company, or any class or classes of them, in accordance with section 411, Part 5.1 of the Corporations Act.
How does it work?
The four main steps in implementing a scheme of arrangement are:
- First Court Hearing - the Court orders that meetings of affected creditors and/or members be convened
- Creditors and/or members must approve the scheme by special majority
- Second Court Hearing - the Court then makes orders approving the scheme
- A copy of the Court's order is lodged with the Australian Securities and Investments Commission (ASIC), from which time the scheme takes effect.
Section 411(17) of the Corporations Act states that the Court must not approve a scheme unless:
- it is satisfied that the scheme has not been proposed forthe purpose of enabling any person to avoid the operation of any of the takeover provisions of Chapter 6
- ASIC produces a certificate to the Court stating that it has no objection to the scheme.
However, a Court need not approve a scheme merely because ASIC has produced its certificate to the Court. ASIC will not produce its certificate unless the shareholders of the target receive protection under the scheme equivalent to the treatment they would receive under a takeover. This requires that the target shareholders have access to the type and standard of information in the scheme documentation which would be required for a bidder's statement, and for the scheme to provide essentially the same protections as are provided to target shareholders in a Chapter 6 takeover bid.
Even if ASIC has no objection to the scheme documentation, it is not usual for ASIC to provide its certificate at the first court hearing. ASIC's policy is to wait until the second court hearing, where the company seeks approval for the scheme, to ensure that the scheme meeting has been properly convened and held before it provides its approval.
For a scheme to succeed and in order to obtain 100% of the target, a bidder needs a majority of the shareholders by number present and voting at a general meeting, who represent 75% by value of the shares present and voting, to approve the scheme. Under a takeover bid, the holders of at least 90% of shares must take positive action to accept the bid before the outstanding minorities can be compulsorily acquired.
Schemes of arrangement have certain advantages over Chapter 6 takeover bids, including:
- A scheme is an 'all or nothing' proposition with an outcome known by a certain date - either the shareholders and the Court approve the scheme, in which case, the acquirer will obtain 100% of the target or the scheme is not approved and the acquirer gets nothing.
- The nature of a scheme of arrangement allows for a more flexible approach to the structure of a transaction, as anything can be included in the scheme documents.
Other important points to note include:
Friendly - The most recognised distinction between a scheme of arrangement and a takeover conducted under Chapter 6, in relation to a change of control, is that a scheme of arrangement is only useful in friendly (not hostile) transactions.
Procedure - The advantage of flexibility of structuring must be weighed against a more flexible procedure in a takeover. A takeover does not require Court approval or the approval of the target shareholders in a general meeting.
Changes - In a scheme, once the scheme documentation is dispatched to the shareholders and the meeting dates are set, the effect of intervening events may be harder to manage because the shareholders must also be given sufficient time to consider information relevant to their decision, and any changes to the terms of a scheme during the process will require the parties to return to Court for approval.
Control - While a takeover is a process run by the bidder, a scheme of arrangement is a process run by the target, as it is effected through a meeting of the target's shareholders to approve the scheme.
Schemes of Arrangement v Takeovers
- useful only in agreed transactions
- all or nothing propositions
- approval thresholds
- inflexibility of Court process but flexibility of timing
- flexibility of arrangements contemplated by scheme
- break fees can be negotiated as it is in a friendly transaction.
- often used when there are a number of bidders
- if the bidder already has a large stake in the target, the voting requirements may be easier
- where compulsory acquisition is not essential, at least in the short term
- where variations to the bid will probably need to be made.
A scheme of arrangement can be used in corporate restructures as well as takeovers and is therefore a useful tool in the current economic conditions. It can be tailored to novel or complex corporate structures or be used for major group reconstructions.
While some forms of corporate restructuring can be achieved by special resolution of the members, other forms of corporate restructuring are outside the specific statutory provisions and beyond the power of the members in a general meeting. Where this is the case, section 411 permits a scheme of arrangement to be used to reorganise the company in a manner which will be binding on a dissenting minority of members.
A scheme may also be used to transfer the undertaking, assets and liabilities of a company to a new company on the terms that shares in the old company will be cancelled and shares in the new company will be allotted to former holders in proportion to their former holdings.
Alternatively a scheme can be used to bring about an amalgamation by which several companies transfer their respective assets to a new company or to an existing company in return for the transferee company allotting its shares or debentures to the members or debenture holders of each transfer or company.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.