Revised policy on exemptions for Companies Act schemes of arrangement
Published 1 April 2007
The Panel has published a revised policy on the use of its exemption powers relating to schemes of arrangement under Part XV of the Companies Act 1993.
The Panel adopted the revised policy after considering submissions on a draft policy (4 April 2006) and a discussion paper Schemes of Arrangement and Amalgamations Involving Code Companies (19 June 2006).
The full text of the revised policy is on the Panel’s website. However the Panel’s general approach to schemes of arrangement when considering applications for exemption is explained below. The differences between the revised policy and the earlier policy published on 1 July 2003 are highlighted.
The Panel’s approach to schemes of arrangement involving Code companies
Companies can use the provisions of the Companies Act relating to schemes of arrangement to effect mergers with, or acquisitions of, other companies. In some situations a scheme is the most appropriate way to structure a transaction.
If a scheme results in a person becoming the holder or controller or more than 20% of the voting rights in a Code company, the parties to the proposed scheme must comply with the Code as well as Part XV of the Companies Act.
It is appropriate that parties who increase their control in a Code company comply with the Code. The Code gives shareholders of Code companies special protections and rights which should be available regardless of the type of transaction used to effect a change of control.
Some forms of scheme are caught by the fundamental rule but the structure does not fit the exceptions in rule 7 of the Code. In these situations the Panel may grant an exemption to enable the transaction to proceed in a manner consistent with the principles of the Code. This is discussed in more detail below.
Schemes involving Code companies can be structured to avoid the Code. The Panel considers that it is not the intent of the Code that the rights and protections of shareholders, in relation to a change of ownership or control of Code companies, should be determined by the form of the transaction used to effect the change of ownership or control. It will seek to be heard by the High Court on these schemes. The Panel’s detailed views on the use of schemes to avoid the Code are stated in recommendations to the Minister of Commerce on schemes of arrangement and amalgamations involving Code companies (25 August 2006).
Revised policy on exemptions for schemes
The Panel’s policy on exemptions for schemes is aimed at schemes which cannot proceed without some form of exemption. The policy is not aimed at schemes which can proceed without an exemption.
The policy on exemptions for schemes has been changed in two respects.
Circumstances where exemptions may be granted
The Panel will focus on how the Code applies to the particular scheme of arrangement that the parties want to use, when it considers an application for exemption. It will consider any proposed exemption in accordance with the Panel’s guidance note the Takeovers Panel’s Exemption Power (January 2005). The guidance note states that, when deciding whether an exemption is appropriate, the Panel will consider whether compliance with the Code is possible and whether compliance would create an inappropriate, unreasonable or unintended result.
Conditions of exemptions for schemes of arrangement
The conditions of any exemption for a scheme will preserve as far as possible the rights and protections contained in the Code. They will focus on:
- the level of shareholder approval required for a transaction to proceed;
- who is entitled to vote on the relevant resolution; and
- the information given to shareholders about the proposed transactions.
When imposing conditions the Panel will focus on the same issues that it will address in submissions to the High Court on applications for the approval of proposed schemes.
The Panel’s general approach is that schemes should be approved by shareholders representing:
- at least 75% of the votes cast at a meeting at which all shareholders can vote, provided that the resolution represents more than 50% of the total voting rights in the Code company; and
- at least 75% of the votes cast at the meeting of independent shareholders. Independent shareholders are shareholders who were not involved in formulating the proposal.
The approach to approval thresholds recognises that:
- the support of a significant majority of shareholders should be required where a change of control is being imposed upon all shareholders; and
- shareholders involved in formulating and/or promoting a scheme, and their associates, should not dominate or determine the outcome of a shareholder vote. Independent shareholders should have a real opportunity to take part in the decision on whether or not to proceed with a scheme.
The exception to this approach is where a transaction does not involve a merger of shareholder interests, i.e. when the scheme provides for the shareholders of the merging companies to become shareholders of the same company. Where a scheme involves shareholders of one participating company exiting for cash, the Panel considers the appropriate shareholder approval threshold for the transaction to proceed is a resolution which represents 90% of the total voting rights in that company. This reflects the compulsory acquisition threshold in the Code.
The conditions of any exemption will also require that shareholders are given sufficient information about the scheme to decide the merits of the proposal. The conditions will require that shareholders are given at least:
- information equivalent to information required to be provided under a Code offer; and
- a report on the merits of the scheme by a Panel-approved independent adviser.
The Panel will decide in each case whether:
- one adviser will be appointed to report on the merits of the transaction from the perspective of the shareholders of each of the companies taking part in the proposed scheme; or
- different advisers for the shareholders of each company involved will be required.
In many situations one independent adviser would be appropriate.
Applications for exemption
The Panel will seek to be heard by the High Court on schemes of arrangement involving Code companies when initial orders are being made. If parties to a scheme are granted an exemption, the conditions of that exemption may mean that the Panel does not need to seek to be heard by the Court.
Applicants for exemptions for schemes should tell the Panel their intentions early in the planning process and well before an initial application is made to the Court.