The scheme of arrangement is a versatile and flexible merger, acquisition or restructuring tool frequently deployed by clients of the corporate department of Appleby, Jersey. Our team in Jersey recently advised Kennedy Wilson Europe Real Estate PLC on its takeover by members’ scheme of arrangement by Kennedy-Wilson Holdings, Inc. The team is advising on a number of other transactions using both member and creditor schemes.
The pan Crown Dependency M&A teams have seen substantial transactional activity from US and Asian clients motivated by the relative weakness of the pound and Brexit related concerns. Regulated consolidation and ring fencing considerations have also stimulated the markets. With the Crown Dependencies financial services markets largely unaffected by geo-political issues we expect to see this trend continue.
Schemes of Arrangement under Companies (Jersey) Law 1991
Whilst a scheme can still be used for a more traditional compromise of creditor claims or members rights, provisions allow for the court-directed procedure to produce outcomes such as the sale or disposal of the business, a merger or demerger, takeovers and a restructuring of capital, debt or other obligations. The statutory framework for schemes of arrangement under Jersey law follows closely the English framework and English cases will be highly persuasive.
Pursuant to Part 18A of the Companies (Jersey) Law 1991 (the Companies Law) the Royal Court of Jersey may sanction an arrangement between a company and its creditors or members. An “arrangement” is interpreted widely and can cover any transaction between a company and its creditors or members. Sanction of such an arrangement would require approval of a majority of number of creditors or members present at the court convened meeting of creditors representing three quarters in value of the creditors or members (or class in each case). These voting thresholds mirror the UK position.
Both creditor and member schemes of arrangements have three main procedural stages: the directions hearing, the court sanctioned meeting(s) of creditors and/or members and the sanctions hearing. The first stage of the process is the directions hearing the purpose of which is to determine the procedure that will govern and constitute the meetings of the relevant classes of creditors and/or members. If the court is satisfied the scheme of arrangement is one that could properly be put to the relevant class(es) of creditors or members, the Royal Court will make an order convening a meeting, or meetings, of the relevant class(es) of creditors or members to consider the scheme. The scheme must be approved by the majorities referred to above. The final stage in the process is the sanctions hearing where the Royal Court of Jersey will, amongst other things, assess the merits and fairness of the proposed scheme using well established principles and determine whether to sanction the scheme.
One of the main advantages of a creditors’ scheme is the avoidance of formal insolvency. In Jersey, where rescue options and alternatives to formal insolvency procedures are limited, it is no surprise that the scheme is rising in popularity as a restructuring tool. In what has already been dubbed “the year of the CVA” in the UK, it is possible we will see more creditors being bound via utilisation of a scheme in a different jurisdiction.
Large corporate structures with entities domiciled in different jurisdictions will require a Jersey scheme to compromise the creditor claims of any Jersey entities within its group. There is no statutory route under Jersey law to provide for recognition of a foreign order, or other foreign proceedings, that may seek to extend to, or provide for, the compromise of creditor claims of a Jersey company.
One of the key advantages to pursuing a takeover by a members’ scheme of arrangement as opposed to invoking the squeeze out provisions under Article 117 of the Companies Law is the lower threshold of shareholder support required to approve the takeover. A members’ scheme of arrangement requires approval by a majority in number present at the court convened shareholder meeting representing three quarters of the voting rights whereas the squeeze provisions require acceptances of 90% of members. In reality, this means that a takeover structured by a members’ scheme of arrangement can proceed with a comparatively much smaller percentage of member support so long as the class of members is deemed to be fairly represented and there is no evidence of a majority of members coercing the minority.
Members’ schemes of arrangement have been a popular method of taking private public companies in Jersey in recent months with the takeover of London Stock Exchange listed Kennedy Wilson Europe Real Estate PLC (referred to above) and AIM listed Taliesin Property Fund, both sanctioned by the Royal Court of Jersey in the last six months.
Channel Islands companies have been increasingly used as holding vehicles, both public and private, for UK-incorporated and international operating or trading companies. Reports of corporate uncertainty being at a two-year low and the Brexit transition deal have, apparently, boosted business optimism. For these businesses, particularly internationally focused companies, schemes of arrangement could be a valuable mechanism for expansion.
For those businesses with a close eye on existing and upcoming political and regulatory uncertainties, seeking a flexible restructuring option and, in some circumstances, the need to avoid formal insolvency, however, schemes of arrangement may be the restructuring tool of choice.
Whilst it is a formal, court led process with clearly defined procedural stages, the scheme offers the flexibility to be structured to suit the needs of the business. This is the case whether such a scheme is creditor-led or member-led. With change afoot and whether this drives opportunism or “right-sizing”, we anticipate seeing a rise in the utilisation of the Jersey scheme of arrangement.
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