Listed Company Acquisitions: To Scheme or Not to Scheme?
by Rodd Levy, Tony Damian and Neil Pathak
Recent M&A activity in Australia shows an increase in the use of schemes of arrangement to effect the acquisition of listed companies. This article looks at the key advantages of schemes and at recent deals where the use of schemes has been questioned.Certainty: A scheme is an 'all or nothing' proposition with an outcome known by
Advantages of schemes
Schemes of arrangement have a number of advantages for the acquirer over a Chapter 6 takeover bid, including the following.
a set date. Either shareholders and the court approve the scheme, in which case, the acquirer will obtain 100 per cent of the target or the scheme is not approved and the bidder gets nothing.
Thresholds to reach 100 per cent: Under a scheme, in order to obtain 100 per cent of the target, a bidder needs a majority of shareholders by number present and voting at a general meeting who represent 75 per cent by value of the shares present and voting to approve the scheme. By contrast, under a takeover bid, the holders of at least 90 per cent of shares must take positive action to accept the bid before the outstanding minorities can be compulsorily acquired.
Structural flexibility: With a scheme, a number of different ends may be achieved in the one transaction. For example, part of a company could be demerged to existing shareholders while the other part is transferred to an acquirer or the scheme may involve a buy back and a return of franking credits. Complex mergers with many interdependencies are well suited to the scheme procedure.
To be balanced against these advantages are the disadvantages of the scheme procedure. Schemes are more procedurally rigid than takeovers. Unlike a takeover, a scheme will require court approval and the approval of target shareholders in general meeting. Changing the terms of a scheme mid way through the process (because for example a rival bidder has emerged) is likely to require the parties to go back to court.
Schemes have been used to effect friendly acquisitions for several decades. They have been particularly popular in the financial sector, with major transactions like Commonwealth Bank's acquisition of Colonial Group, the St George Bank / Advance Bank merger and the proposed acquisition by HBOS of the BankWest minorities, all using the scheme procedure.
Unlawful avoidance of the takeover provisions?
A potential restriction on using a scheme is the possibility of the scheme being challenged by the court or Australian Securities and Investments Commission (ASIC) on the basis that the scheme is being used to avoid the requirements of the takeover provisions of the Corporations Act. The issue of takeover avoidance has arisen in a number of recent deals, including at last month's court hearing in relation to the proposed acquisition of MIM Holdings Limited by Xstrata plc. Under section 411(17) of the Corporations Act a court must not approve a scheme of arrangement unless:
it is satisfied the scheme has not been proposed for the purpose of avoiding the takeovers provisions in Chapter 6 of the Corporations Act, or
ASIC produces a statement to the court that it has no objection to the scheme.
ASIC's policy is that it does not prefer one acquisition structure over the other. However, ASIC will be concerned to ensure that the disclosure in the scheme booklet is comparable to that of a takeover. It will also have an interest in actions taken under the scheme that would be prohibited under a takeover.
A number of cases have held that, if ASIC produces a certificate to the court, it is not open to the court to reject the scheme on the basis of takeover avoidance.
Recent deals have involved challenges to schemes on the grounds of takeover avoidance.
Justice Finkelstein of the Federal Court in the David Mitchell scheme in 2002 gave notice to the company at the court hearing to convene the shareholders meeting that, if a significant number of shareholders voted against the scheme, the court would require the 'Chapter 6 avoidance' point argued at the court hearing to approve the scheme. At that hearing, ASIC provided a 'no objection' letter to the Court, effectively ending the Court's ability to further explore the point.
ASIC argued the 'Chapter 6 avoidance' point at the court hearing to convene the shareholder meetings in the Ranger Minerals merger last year. ASIC was concerned that the acquiring company, Perilya, had acquired a pre-bid stake of 19.28 per cent of Ranger Minerals at a price above that which it was offering under the scheme of arrangement. ASIC argued that the use of the scheme allowed the bidder to circumvent the minimum bid price rule that applies to takeovers. Perilya and Ranger argued that the scheme had been proposed before the acquisition in question had taken place or indeed been contemplated.
They also argued that the scheme had been proposed because Perilya needed certainty that it would acquire 100 per cent of Ranger and have access to Ranger's cash holdings by a specified date in order to meet other commitments. On the facts of the case, the court found that there was no reason to find that the scheme had been proposed to avoid Chapter 6 and convened the shareholder meetings.
Most recently the issue arose in the proposed acquisition of MIM Holdings by Xstrata. The court was asked to convene a shareholder meeting of MIM. A fund manager holding approximately 2.5 per cent of MIM Holdings argued in court that the acquisition should proceed by a takeover under Chapter 6. The court did not consider that the Chapter 6 avoidance point should stop the scheme 'in its tracks'. The court referred to evidence that the scheme was proposed because it was the only way in which Xstrata could fund the $4.9 billion necessary to complete the transaction – the lenders to Xstrata requiring a high degree of certainty as to the outcome and as to timing. The court also noted that if ASIC produces a certificate of 'no objection', it would not be open to the court to reject the scheme on this point.
The scheme procedure has proved resilient despite a number of challenges. The comments of Justice Finkelstein in the David Mitchell deal and the apparent desire of ASIC to pursue the 'Chapter 6 avoidance' argument in an appropriate case are, however, a reminder that bidders who wish
to proceed by scheme of arrangement rather than a takeover bid should carefully consider section 411(17) issues.