A scheme of arrangement is a compromise or arrangement between a company and its members or its creditors (or any class thereof) that – with the sanction of the court - is binding on all affected members or creditors. Schemes can be used in various types of transactions, including acquisitions, reorganisations, and in the restructuring of complex debt arrangements.
The basic elements of a scheme are:
- application to the court to convene a meeting of the relevant
members;
- publication of an explanatory statement and notice to the
affected members to convene the meeting;
- approval of the scheme by the relevant members in general
meeting;
- sanction of the scheme by the court; and
- filing of the court order (with scheme attached) with the Bermuda Registrar of Companies.
The first hearing is on an Originating Summons whereby the company seeks directions from the court regarding the convening of a members' meeting to consider and vote upon the scheme. It is generally expected that a court would, on application, order the company to convene the general meeting. However, it will at this hearing consider, among other matters, the constitution of the members in question, and whether any expressed opposition to the scheme would prevent the necessary majority from being obtained (Re Savoy Hotel Limited [1981] Ch 351.)
As said by Kawaley J in the Bermuda case of Re APP China Group, Ltd. [2003] no. 381, "The court's role, then, on the hearing of a sanction petition (and indeed, in directing the summoning of the scheme meeting), is more akin to that of a football referee, than to a football player. It is not for a referee in a match where a goal is validly scored to disallow the goal because, if he had been the goalkeeper, he would have prevented a goal from being scored, or, because he supports the team against which the goal was scored. Equally, it is not for the court to decline to sanction a scheme because it would have found it unpalatable as a scheme creditor and would have voted against it. If the statutory requirements have been met, and the guiding principles set out in the case law have been adhered to, it is not open to the court to decline to sanction the scheme on what may be called 'merits' grounds."
Section 99 of the Bermuda Companies Act 1981 (the "Act") provides for the convening of meetings of members, or any class of members, of a company (or, where appropriate, its creditors) at the direction of the court for the purpose of considering and, if thought fit, approving a scheme of arrangement between the company and its members or any class of members, or creditors. The court requires that notice of the meeting must be given to members at their registered address, or otherwise in the manner prescribed by the company's bye-laws.
By statute, a scheme must be approved in general meeting by a
majority in number of members representing three-fourths in value
of the members, present in person or represented by proxy.
Following the court ordered meeting, the second hearing is on a
Petition whereby the company seeks the necessary court sanctioning
of the scheme. Notice of the sanction hearing must be provided to
all shareholders. At the sanction hearing the court considers the
procedural and substantive fairness of the scheme. In determining
whether or not to sanction the scheme, in the absence of a
challenge to the scheme, the court will generally be guided, but
not bound, by the views of the majority of the class expressed at
the scheme meeting and will be reluctant to differ from those
views.
The function of the court in exercising its discretion as to whether it should sanction a scheme has been considered in English cases under the equivalent section to section 99 of the Act, namely section 425 of the UK Companies Act 1985. Astbury J in Re Anglo-Continental Supply Co. Ltd [1922] 2 Ch 723, set down various duties of the court in making a determination about whether to sanction a scheme, such as:
- the approval of the scheme is reasonable (see below for
discussion of reasonableness);
- each class was fairly represented by those attending the
meeting and that the statutory majority acted bona fide;
and
- the statutory provisions have been complied with including correct notice having been given of the court convened meeting; dispatch of the explanatory statement; and passing of the resolution to approve the scheme by the relevant majority in number and value of the class in question.
Under section 99 of the Act, the court is required to make an affirmative determination that the scheme is fair and reasonable, both procedurally and substantively, to the holders of the shares or creditors of the company subject to the scheme, before it can sanction the scheme. In Re: Alabama, New Orleans, Texas and Pacific Junction Railways Company [1891] 1CH˙213 CA., and at page 247, Fry LJ said:
... the court ... must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it.
In Re Dorman, Long and Company Limited [1934] Ch 635, Maugham J, at page 657, having reviewed earlier authorities as to the function of the court, formulated the court's duty as follows:
In my opinion, then...what I have to see is whether the proposal is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.
In Re National Bank Ltd. [1966] 1 WLR 819, Plowman J said, at page 829:
Under section 206 (the forerunner of section 425 of the Companies Act 1985) an arrangement can only be sanctioned if the question of its fairness has first of all been submitted to the court.
Once the court sanctions the scheme, the Order is delivered to the Bermuda Registrar of Companies for registration. The date of filing is the effective date of the scheme.
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.
