9) Schemes of Arrangement Flashcards
(42 cards)
1
Q
Where are the scheme document content requirements?
A
- 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.
2
Q
What meeting needs to be held to approve the scheme?
A
- 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
3
Q
What level of support does a scheme require at a court meeting?
A
- S899(1)
- Majority in numbers representing 75% IN VALUE of members / class of members
- Present and voting either in person or by proxy.
4
Q
What is the purpose of the partnership assurance GM?
A
- Approve other company business relating to the implementation of the scheme
- And the approval of amendment to the Partnership Assurance articles of association.
5
Q
What is the principle established in Re Hellenic and what are the practical implications of this?
A
- 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
6
Q
Is a scheme of arrangement binding on those who vote AGAINST it at meetings?
A
- Yes is binding on them
- S899(3) CA
7
Q
Explain in bullet points why it is so important to determine classes of shareholders in the context of a scheme of arrangement?
A
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.
8
Q
Which votes are required for a court meeting being required for independently voting in favour of the scheme?
A
- Majority in number of shareholders in that class
- 75% in value in each class
9
Q
What happens if in a scheme of arrangement, the court decides that separate class SHOULD have been constituted?
A
- 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.
10
Q
Who is included in the same class? Write out the definition perfectly. which case gave this definition also?
A
- 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
11
Q
Does different classes of shares mean that there are different classes for the purpose of s899 procedure?
A
- 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.
12
Q
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?
A
- 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
13
Q
What sort of takeovers are schemes of arrangement suitable for and why?
A
- 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)
14
Q
What are the 5 considerations to make when comparing a scheme of arrangement versus a contractual offer takeover?
A
- Minority shareholders risk
- Stake building benefits
- Flexibility: can it be run as a hostile bid
- Flexibility: easy to revise in competitive situation
- Target shareholder support required?
- Can retail investors prevent takeover
15
Q
What is the risk of the target having minority shareholders after a scheme of arrangement?
A
- 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
16
Q
What is the risk of the target having minority shareholders after an OFFER?
A
- 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.
17
Q
What are the benefits of bidder stakebuilding in a scheme of arrangement?
*learn this perfectly and write out full paragraph - understand it all *
A
- 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
18
Q
What are the benefits of bidder stakebuilding for an offer?
A
- 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.
19
Q
Explain the flexibility of a scheme of arrangement - is it possible to run as a hostile bid?
A
- V. difficult, but not impossible to run as hostile bid
- Usually scheme requires target board’s cooperation to convene meetings.
20
Q
Explain the flexibility of a scheme of arrangement - is easy to revise in a competitive bid situation?
A
- 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
21
Q
Explain the flexibility of an offer - is it possible to run as a hostile bid?
A
- 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.
22
Q
Explain the flexibility of an offer - is easy to revise in a competitive bid situation?
A
- (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
23
Q
Explain the extent to which target shareholder support is required for a scheme of arrangement?
A
- S899(1) requirements
- And then apply this to the facts in the exam
24
Q
Explain the extent to which target shareholder support is required for an offer?
A
- 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
25
what are the different structures that could be adopted by the bidder?
scheme or contractual offer
26
what are the 4 options of consideration that can be used?
cash
shares
loan notes
mixed
27
what are the 3 advantages of cash consideration?
- 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
28
what are the 2 disadvantages of cash consideration?
- Market capitalisation? Need to consider if they have sufficient reserves
May need to raise DF / EF to be able to pay in cash
29
what are the 3 advantages of shares as consideration?
- 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
30
what are the 4 disadvantages of shares as consideration?
- 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.
31
what are the characteristics of loan notes as consideration?
□ 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
32
what are the advantages of loan notes consideration?
- Tax liability: can be redeemed over several years to use a shareholders CGT annual exemptions
- Usually non transferable so not require prospectus
33
what are the disadvantages of loan notes consideration?
- 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
34
what is mixed consideration?
□ 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.
35
what is the one advantage of mixed consideration?
- Popular to shareholders
36
what is the one disadvantage to mixed consideration?
- Bidder needs to finance alternative options.
37
what are the other regulatory issues that must be considered?
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.
38
which 3 things will the offer board consider if they are going to recommend a bid or not?
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.
39
How would I amend an acceptance condition drafted for a contractual offer?
- 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.
40
What are the options for a company once the minimum acceptance conditions have been met before day 60?
• 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).
41
What is the power of the offeror once they have reached 75% acceptances?
- 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!
42
Give an explanation of why the offeror might decide do declare an offer unconditional as to acceptances below 90%?
- 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.
