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14 February 2014
Irish M&A has broken with tradition and taken a fancy to court-approved schemes of arrangement
Irish M&A deals had another bumper year in 2007. A total of 287 deals were agreed in 2007 worth a total of e23bn (£17.16bn). Acquisitions involving Irish plcs accounted for a significant proportion of these.
One noticeable trend has been the emergence of the court-approved scheme of arrangement as the preferred method of acquiring listed Irish plcs. Prior to this, and notwithstanding their prevalence in the UK, corporate Ireland shied away from voluntary exposure to the rigours of the Irish courts and instead opted for the tried and tested conventional takeover offer using statutory ‘squeeze-out’ provisions to compulsorily acquire minority dissenting shareholders.
However, 2007 saw the definite departure from the comfort zone of the conventional takeover offer.
Out with the old
This started in February 2007 with the e412m (£307.55m) acquisition of South Wharf by Becbay, the joint investment vehicle of Bernard McNamara, Quinlan Private and the Dublin Docklands Authority. South Wharf operated certain legacy glass manufacturing operations of Irish Glass, but more significantly owned a strategic 25-acre site bordering the docklands in the prestigious D4 district of Dublin.
After a competitive tender process, the scheme of arrangement was used not just to effect the sale of South Wharf with its valuable property to the successful bidder but also to spin out the glass manufacturing business into a separate company which was retained by the original South Wharf shareholders. This is an added flexibility that schemes of arrangement provide.
Both the sale to Becbay and the spinout of South Wharf’s non-property assets were structured under the scheme so that no stamp duty was payable on the transfers. This resulted in significant savings for the buyer. Had this been effected through a takeover offer, Becbay would have been facing a stamp duty bill of more than e4m (£2.97m).
In 2007 Ireland also provided an unlikely arena for two players in the German banking market. Depfa Bank, the German-listed bank headquartered in Dublin’s International Financial Services Centre, was purchased by property investment bank Hypo Real Estate for e5.5bn (£4.09bn). This was the largest-ever corporate acquisition to be conducted in Ireland and it was effected through a scheme of arrangement.
The scheme’s benefits
The trend in favour of schemes of arrangement has been driven by the implementation of the EU Takeover Bids Directive into Irish law in May 2006. A key change in this legislation was the increase in the squeeze-out threshold (the level of acceptances necessary to compulsorily acquire dissenting shareholders) for takeover bids for fully listed companies from 80 per cent to 90 per cent.
Since the implementation of this directive, all significant takeover offers have been implemented by scheme of arrangement with the exception of Ryanair’s bid for Aer Lingus which, because it was hostile, had to be a takeover offer. As in the UK, acquisitions through a scheme can only be effected where directors of the target support the proposed acquisition and are prepared to put the scheme to its shareholders. Therefore schemes cannot be used for hostile bids.
The introduction of the 90 per cent acceptance threshold provoked an immediate rethink in approach. Most Irish plcs will have a likely shareholder apathy level of at least 5 per cent to 7 per cent, making the achievement of the 90 per cent threshold far from certain. By comparison, a scheme of arrangement has the attraction of only requiring the positive vote of a majority in number representing at least 75 per cent in value of those voting in person or by proxy at the target shareholder meeting.
A further advantage of the scheme is that it guarantees delivery of 100 per cent of the target shares at the end of the process. This compares favourably with the conventional takeover offer, where even if 90 per cent is obtained, a small minority shareholder can seek relief of the Irish Courts to prevent their buyout, deferring 100 per cent control for some time.
A speedier process
The increased use of schemes of arrangement has been facilitated by the improved procedures in the Irish High Court and recently established Commercial Court system. Ireland now has judges who specialise in these cases, leading to a smoother, more predictable and expeditious process.
Changes proposed in the pending Irish Companies Consolidation Legislation (expected to come into force in 2009) propose the introduction of further measures that will shorten the court application process. In addition, the Irish Takeover Panel has expanded the Irish Takeover Rules specifically to address schemes of arrangement.
The timescale for effecting a scheme of arrangement is similar to that for a takeover offer and in some instances can be slightly quicker. Generally the process takes between two and three months from the date of initial court application.
There are some disadvantages to a scheme of arrangement. The key examination by the court takes place at the end of the process, with the risk that a very late-stage development can derail the process. A particular risk is that late in the process the court may determine that the shareholders have been misclassified for the purpose of class meetings, as the meetings to approve a scheme will require separate class meetings where shareholders are seen as having different interests in a legal sense. Unlike in the UK, this classification of shareholders cannot be cleared with the court at the outset.
Another disadvantage from a buyer’s perspective is that while in a conventional takeover offer the process is driven by the buyer, in a scheme of arrangement the process is controlled largely by the target company.
Schemes can be inflexible in a contested situation and this was illustrated in last year’s hard-fought, and ultimately unsuccessful, battle to acquire Irish Continental Group (ICG), the group that operates Irish Ferries. This transaction started in early 2007 with the announcement of a management buyout-led approach to acquire ICG at e18.50 (£13.75) per share through a scheme valuing ICG at e471.7m (£350.15m).
The independent directors subsequently switched their recommendation to a scheme proposal of e22 (£16.35) per share from a consortium vehicle, Moonduster. A hard-fought battle between the two bidders ensued, with each increasing their stakes in the company so that each effectively gained a veto over the other’s scheme proposal. Meanwhile, a third party emerged, acquiring a 29 per cent holding.
The Irish Takeover Panel ultimately called a halt to the proceedings and the offer period closed towards the end of 2007, leaving a stalemate position with three separate parties holding in aggregate approximately 75 per cent of ICG. This highlighted one key difference between the Irish Takeover Rules and the UK’s City Code on Takeovers and Mergers: the Irish rules have no equivalent to Rule 32.5 of the UK code, which empowers the UK panel to impose an auction process where there are stalemate rival bidders.
Schemes of arrangement look set to continue to be the preferred method for effecting non-hostile public takeovers. The expectation is that imminent amendments to Irish legislation will further simplify the scheme process and encourage this trend.
Myra Garrett is a partner at William Fry