More and more Large M&A deals are being conducted through schemes of arrangement. Why are they such a popular vehicle and what advantages do they have over traditional takeover offers?
Takeover deals aren’t run like they used to be. In the past, when a company spotted a merger or acquisition opportunity, they would simply make an offer to buy out the existing shareholders of the company in question. These days, most mergers and acquisitions (M&A) are managed by the target company itself rather than the one doing the acquiring.
It may sound counter-intuitive, but the process – known as a scheme of arrangement – has proved to have several advantages over an old-fashioned takeover offer, not least in the degree of certainty it offers the bidding party.
This is largely because the proportion of shareholders needed to approve a deal is lower than with a traditional takeover, and it’s easier to buy out any intractable shareowners opposed to the move. As a result, schemes have become the preferred method for large M&A deals in the Channel Islands and beyond.
“For public company M&A deals, where you’ve got a large shareholder base, you are generally going to be looking at either a scheme of arrangement or a takeover offer,” says Jon Woolrich, Jersey-based Partner at law firm Mourant. “Schemes tend to be more popular, in part because of the lower consent threshold required to obtain 100% control of the target.”
Global deals
The deals being done in the Channel Islands these days are often of global significance. Two of the biggest recent examples have taken place in Jersey, including the £46bn takeover of Shire by Japan’s Takeda Pharmaceutical and the $22.5bn (£17.8bn) merger between mining companies Barrick Gold and Randgold Resources.
Guernsey has also seen some major deals, such as the £5.6bn acquisition of Friends Life by Aviva in 2015 and the £1.45bn deal by Jura Acquisition to buy the John Laing Infrastructure Fund.
Guernsey and Jersey laws for schemes closely follow the UK system, with the jurisdiction being determined by where the target company is located. The UK has a longer history of such deals, but in the Channel Islands the case law is gradually being developed, making the process increasingly smooth, say lawyers.
“The scheme process is pretty much the same in Guernsey and Jersey,” says Simon Dinning, Global Head of Corporate Legal Services at Ogier. “While English case law is not binding on the courts in Jersey and Guernsey, it is certainly persuasive. The English courts see a much higher volume of schemes and so develop precedent quickly, but our courts are also now well versed in schemes and have a number of decisions to rely on.”
How they work
In essence, the process involves the target company first applying to the courts to operate a scheme. The company then holds a shareholders meeting to see if they approve the deal. If a majority at the meeting give their consent (including 75% of shareholders by value), then the deal returns to the court for final approval.
After that’s granted, the acquiring company can buy up all the shares, regardless of whether an individual shareholder voted for or against the deal.
The benefits of this are clear when you compare it with a traditional takeover offer, which requires 90% approval from all shareholders (not just those who cast a vote) before any minority hold-outs can be swept up.
“The main reason schemes are used is that they provide a lot more deal certainty compared with traditional takeover offers,” says Tony Lane, a Guernsey-based Partner in the corporate law team of Carey Olsen.
“With a takeover offer, 90% is quite a high threshold and if you’ve got a large group of non-responsive shareholders, then you’re going to struggle to get to 90%. With a scheme, it is much more likely that the bidder will get the necessary shareholder approval.”
Pricier option
While a scheme offers greater certainty, it can be pricier to organise, not least because of the cost of court proceedings. “It’s quite an expensive process and also has a fairly protracted timetable attached,” says Dinning. “While the cost may not be material for large multinationals, it can be prohibitive for smaller companies.
“Typically, we see schemes used on high-value M&A transactions where the parties involved value the certainty provided by a scheme and for whom the costs are not an obstacle.”
Indeed, most of the deals that have gone through the Jersey and Guernsey courts in recent years have been valued in the hundreds of millions, if not billions, of pounds.
Despite all the benefits, however, there are some aspects of schemes that mean they are not always appropriate. For one thing, a scheme is an ‘all or nothing’ approach. If the bidder fails to reach the 75%/majority thresholds, then the deal will collapse and they walk away with nothing. But a traditional takeover offer will at least deliver the shares of those who agreed to sell.
“A scheme either succeeds or fails depending on whether the bidder obtains the required shareholder approval and court approval,” says Lane. “If it fails, the bidder doesn’t acquire the shares of the people who voted in favour; it just completely fails. And if it succeeds, everyone is bound, regardless of whether they voted or not or whether they voted in favour or not.”
So, if the aim is to gain control of a company, but not necessarily to own all of its shares, then a takeover offer may suffice. “A takeover offer is faster if you’re happy acquiring less than 100% of the company. If you simply want to get majority control, you can do that through a takeover offer very quickly, whereas a scheme has the benefit of being the quicker route to 100%,” says Darren Bacon, a Partner in Mourant’s Guernsey office.
Mutual interest
In addition, a scheme only really works when there is a mutual interest from both sides in pushing the deal through. Although it is theoretically possible to conduct a hostile scheme, in reality it would be hard to do, given the central role the target company plays in arranging meetings of its shareholders.
“In terms of a takeover being done via a scheme of arrangement, the target company and the acquirer are working together. It’s a collaborative process and involves engagement with the shareholders,” says Anthony Williams, Head of Dispute Resolution at Appleby in Guernsey. “The court ultimately still has a discretion to sanction a scheme and will be concerned to ensure members’ rights and interests have been adequately considered.”
One final consideration is that – in rare circumstances – the court may decide not to endorse a scheme. To date, there has only been one example in the Channel Islands of a deal being blocked, when a scheme involving a share buyback by the majority shareholder in real estate investment company Puma Brandenburg was successfully opposed in early 2017.
“We acted for a minority shareholder in successful opposition to the Puma Brandenburg scheme. The court refused to sanction the scheme on a number of grounds, including that it purported to overlook a number of statutory requirements,” explains Mourant’s Bacon.
“So, there are technicalities and requirements to go through, and of course the directors have got to show that they’re acting in the interest of the company.”
The specifics of that case differ from most of the deals that have passed through Channel Islands’ courts in recent years though, and there is little reason to suppose that schemes of arrangement won’t continue to be the preferred option for large M&A deals in the years ahead.
“There’s now a helpful body of case law dealing with schemes, there’s much more certainty around how they operate, and the courts and lawyers are increasingly familiar with how these schemes work. So I continue to see them being a popular way of effecting takeovers,” says Williams.