The rise and rise of schemes of arrangement
19 March 2007
Schemes of arrangement (shareholder-approved mergers) have always been part of the UK public M&A scene.
There was a time, however, when they were relatively arcane and pretty unusual. And yet nowadays schemes have become the preferred way of proceeding for many offerors, so much so that the Takeover Panel is intending to consult on changes to the Takeover Code to make it more tailored to fit the mechanics of schemes. So why did the scheme go from ugly duckling to swan?A scheme of arrangement will give the offeror 100 per cent of the target, or nothing. If an acquiror uses an offer and then, unless they proceed very carefully, insists on a 90 per cent acceptance condition and does not waive it, they cannot be sure of getting 100 per cent of the target. This is because it can be very difficult to acquire 90 per cent of a target through market purchases and acceptances of an offer.
If an offer is declared unconditional at a lower level, there will always be a chance that the hoped for acceptances do not arrive, or that a hedge fund or activist fund manager will intervene and end up with a stake in the target that cannot be acquired compulsorily. Certainly in a public-to-private leveraged buyout this makes lending banks very nervous and may dilute the returns of the private equity house. Hence one of the key reasons why schemes of arrangement are increasingly the weapon of choice for public-to-private takeovers.
It is often said that the threshold for getting a scheme of arrangement through is lower than an offer. Seventy five per cent of the shares actually voted is required to approve the transaction, as opposed to 90 per cent of all shares in an offer (if a squeeze-out is the goal).
This may be true, but given that every company will have a passive register, it is also true that 'anti' votes have a magnified effect: the bidder needs to get three votes in favour for every one that is actually cast against. In other words, the threshold will be lower if there is apathy, but things become tricky when there is actual opposition to the scheme. An offer will always be quickest if a bidder is prepared to have a minority post-deal and is prepared to declare it unconditional as to acceptances at 50 per cent.
Shares in which the offeror is interested cannot be voted in favour of the scheme. The position is slightly different under an offer, where any shares purchased by the offeror after the offer has been made can be counted towards satisfying the 90 per cent level required for squeeze-out. Of course, there are further considerations here in making market purchases, such as the maximum price that can be paid and limits on the size of the stake.
Schemes of arrangement save stamp duty at 0.5 per cent on the total cost of the offer, which is no small matter.
Also in favour of a scheme has been recent clarification of the fact that two competing offerors can now both use schemes of arrangement (the recent Tata/CNS/Corus debacle) and that an offeror that starts out with a scheme can 'flip' to an offer if a scheme becomes too cumbersome.
So, with all these things going for a scheme, in many cases the most significant disadvantage will be that it involves putting so much more of the responsibility for the execution of the deal in the hands of the lawyers.