Nigel Boardman of Slaughter and May discusses the advantages and disadvantages of the two principle methods of takeovers under English law.
There can be no doubt that, as result of the current economic climate, the quantity of public takeovers has declined. However, this period of low activity presents an ideal opportunity to revisit the procedures, and associated benefits, of the main vehicles for conducting a takeover.
There are two principal methods of implementing a public takeover of an English company: first, by means of a takeover offer (“offer”) under section 974 of the UK Companies Act 2006 (“CA 2006”); and, secondly, by means of a scheme of arrangement (“scheme”) under part 26 CA 2006. While both are subject to the city code on takeovers and mergers (“the code”), the two processes differ in some fundamental respects; most notably, the former is a proposal by the bidding company to the shareholders of the target company, while the latter is a proposal by the target company to its shareholders and/or creditors.
In the first six months of 2011, the scheme remained the more popular deal structure, continuing the trend of recent years; of the seven main market deals which occurred during the period, five were structured as a scheme, while only two of the eight AIM deals were structured as an offer. This article explores, in the first instance, the principal differences in procedure between the two methods, before comparing their respective advantages and disadvantages.
In contrast with the offer process, which is led by the bidder, the scheme process is controlled by the target company. This feature has important repercussions for the utility of the scheme as a method of takeover. In particular, a scheme must be approved by those holding 75 per cent of the voting rights in the company, and thus its success depends largely on the cooperation of the target company’s board and its shareholders, making it an unrealistic vehicle for a hostile bid.
However, that is not to say that the use of a scheme in a contested situation is impossible. The panel on takeovers and mergers (“the panel”) plainly anticipates the possibility of using a scheme in such circumstances; appendix 7 to the code, which sets out how the code applies to schemes, requires a bidder to consult the panel if it is considering announcing an offer or possible offer which it is proposed will be implemented by means of a scheme without obtaining the support of the board of the target company.
Furthermore, HgCapital LLP’s offer for Goldshield Group plc (“Goldshield”), announced on 25 September 2009, provides at least one precedent of the attempted use of a scheme in a hostile bid. However, the success of such an approach was not tested, the offer having been ultimately recommended by Goldshield.
For the purposes of both methods, a document setting out the relevant information concerning the bid is required. Significantly, since the implementation of the new code on 19 September 2011, the financial and other information of both the bidder and the target company must be disclosed in detail (although the disclosure may take place on a website identified in the offer/scheme document). For a scheme, this document also serves as an explanatory statement, which, in accordance with section 897 CA 2006, sets out the proposals embodied in the scheme, as well as notices of the court hearing and, where necessary, of a general meeting of the target company.
In other respects, the two processes differ in respect of documentation requirements. While an FSA-approved prospectus is required in any offer including shares (or other transferable securities) as consideration, there is no such requirement for a scheme, even on a share-for-share exchange, unless the shares identified as consideration amount to 10 per cent or more of the relevant classes already admitted to trading. However, the position is different for a scheme if there is an alternative form of consideration, such as a cash alternative or a “mix and match” election, in which case the UK Listing Authority requires a prospectus.
To be successful, an offer requires acceptances in respect of a sufficient quantity of shares to result in the bidder (and any person acting in concert with it) holding more than 50 per cent of the voting rights.
By contrast, a majority in number, representing 75 per cent in value of the members or class of members (as the case may be), present and voting either in person or by proxy at the shareholders’ meeting, must approve the scheme. Unlike an offer, those shares already owned by the bidder are not part of the class which is eligible to approve the scheme. A scheme also requires the additional sanction of the court.
In a deal structured as an offer, it is possible for the bidder to obtain control of the target company 21 days after sending the offer document (although, in a hostile bid, a full 60-day timetable is likely, and the timetable will recommence in the event of a competing offer). This is significantly quicker than the minimum eight-week period necessary to complete a scheme after sending the scheme document.
A scheme may also encounter additional delays for two reasons. First, as a result of the requirement to obtain the court’s permission to convene the necessary shareholders’ meeting, a hiatus between the announcement of the bid and the sending of the scheme document to the shareholders is almost inevitable; the position is otherwise in respect of an offer, the relevant document for which can be dispatched on the same day as the bid is announced. Secondly, on account of the inflexibility of the process, in the event that there is a need to revise the scheme after sending the scheme document, it will (in most cases) be necessary to obtain the court’s permission to send new documents to the target company’s shareholders, restart the timetable from the date of sending out the documentation, and hold a new meeting of the target’s shareholders.
KEY ADVANTAGES AND DISADVANTAGES
To an extent, the respective advantages and disadvantages of each method of takeover are clear from the various characteristics of each process identified above. However, the following areas of distinction are particularly worthy of consideration.
Effect of different levels of approval
The lower level of shareholder approval required for the implementation of an offer is only superficially advantageous. In a scheme, once the seemingly severe threshold of 75 per cent has been achieved, the bidder acquires the entirety of the shares in the target company. The position is otherwise where the bid is structured as an offer; in such circumstances, the bidder may only obtain all the shares in the target company if more than 90 per cent of shareholders accept the offer, enabling the bidder to rely on the “squeeze-out” provisions contained in section 979 CA 2006 to buy out the remaining minority shareholders.
If less than 90 per cent of shareholders accept the offer, the bidder is left with minority shareholders, the adverse consequences of which are numerous. By way of example, minority shareholders may prevent the target company from re-registering as a private company, with the result that, inter alia, the target will remain subject to the prohibition on financial assistance under section 678 CA 2006.
Furthermore, merger relief and merger accounting are not available to a bidder if it fails to obtain more than 90 per cent of the shares in the target company. The lack of merger relief may impact on the level of the target company’s pre-acquisition profits which can be treated as distributable.
Overseas, lost and untraceable shareholders
Unless lost and untraceable shareholders hold more than 25 per cent of the voting rights in the target company, such shareholders are unlikely to pose any difficulties for a scheme. Provided that the requisite level of approval for a scheme has been achieved, the scheme becomes effective, regardless of whether or not the lost and untraceable shareholders have participated in any stage of the deal.
By contrast, in order to include lost and untraceable shareholders in the 90 per cent level of acceptances needed to engage the “squeeze-out” provisions, an application to court is required.
Furthermore, where there are overseas shareholders, a scheme, unlike an offer, should not engage the exchange and tender offer rules of the US securities and exchange commission, on account of the fact that it is typically seen as a “shareholder vote” on a reconstruction of the target company, rather than an individual investment decision.
The court hearing and shareholders’ meeting, which are necessary stages in a scheme, provide the ideal forum in which opposition to the bid can be voiced publicly. Such opposition may thwart the scheme, either by rousing other shareholders to oppose the deal or by persuading the court to withhold its sanction.
The only opportunity to voice public opposition to an offer is at the general meeting of the bidder, which is itself only necessary in certain circumstances.
An offer and a “transfer” scheme, pursuant to which a person is appointed by the court to effect the transfer of shares from the target company’s shareholders to the bidder, will incur a stamp duty cost amounting to 0.5 per cent of the target company’s value. However, there is no stamp duty if the target company is acquired by means of a cancellation scheme.
While a comprehensive knowledge of the procedural differences between an offer and a scheme, and the associated advantages and disadvantages, may seem to be of little value in the current economic climate, familiarity with the two processes will serve as a useful tool in the face of a resurgence in takeover activity.