Key features of a scheme of arrangement
Under a scheme of arrangement, a target company seeks the approval of its shareholders and the Court for the compulsory transfer of all target shares to a bidder in return for consideration paid by the bidder to the target shareholders.
Under a scheme, the target (with the assistance of the bidder) prepares a disclosure document known as a 'scheme booklet'. The scheme booklet generally contains all information known to the target and the bidder that is material to a target shareholder's decision as to how to vote on the proposed scheme.
Broadly speaking, the scheme booklet contains all of the information that is typically included in both a bidder's statement and a target's statement, and an independent expert report valuing the target shares.
The target lodges a draft of the scheme booklet with ASIC for review, following which the target seeks the Court's approval to mail the scheme booklet to all target shareholders and to convene a meeting of target shareholders to vote on the scheme.
For the scheme to be approved, a resolution in favour must be passed at meetings of each class of target shareholders by both:
- 75% of the votes cast on the resolution; and
- more than 50% in number of the target shareholders voting on the resolution (in person or by proxy).
The bidder and its associates usually refrain from voting on the resolution to approve the scheme.
If target shareholders approve the scheme, the target will then seek Court orders approving the scheme, following which the scheme is implemented by the transfer of all target shares to the bidder in return for payment of the consideration.
Other key features of a scheme of arrangement include:
- a scheme has an 'all or nothing' outcome, meaning that the bidder has certainty that it will either reach 100% ownership if the scheme is approved or not acquire any target shares under the scheme if it is not approved;
- the voting approval thresholds for a scheme are generally considered lower thresholds than the 90% of all securities required to reach compulsory acquisition (and therefore 100% ownership) following an on-market or off-market takeover bid;
- as a scheme is a target-driven process requiring the co-operation of the target, it is only suitable for a 'friendly' acquisition of a target company;
- a scheme can be used to acquire a listed or unlisted target company, but cannot be used to acquire a managed investment scheme;
- a scheme is subject to fewer prescriptive rules than a takeover bid, allowing greater flexibility to include ancillary features such as asset transfers and capital reductions, or to treat different target shareholders differently (but this gives rise to separate classes in voting to approve the scheme and is uncommon);
- a scheme can be subject to conditions, and whilst the same rules regarding conditions prohibited in off-market takeover bids do not strictly apply to schemes, it is uncommon to see conditions in schemes that rely on the bidder's subjective opinion or that can be controlled solely by the bidder;
- a scheme has a different timetable to a takeover bid, but overall there is little difference in the timing to reach 100% ownership, with a scheme offering a more certain timetable;
- it is more difficult to make changes to the terms of a scheme (such as increasing the consideration in response to a rival offer) than under a takeover bid. Changes in terms generally require to Court approval, an adjournment of scheme meeting, and supplementary disclosures;
- if the bidder already holds a large percentage of target shares, this may be a disadvantage under a scheme because those shares will not be voted to approve the scheme and therefore enlarge the effective vote of all other target shareholders on the scheme resolution, potentially making it more difficult to pass by the requisite majorities; and
- ASIC is indifferent as to whether a takeover is effected through a scheme or a takeover bid, but ASIC has an enhanced role in a scheme as the Court may not approve the scheme unless ASIC has given the Court a statement that ASIC does not object to the scheme.
Those features mean that schemes of arrangement are becoming increasingly more popular in recent years as the preferred way in which 'takeovers' of Australian listed companies are effected.
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