THERE NEEDS to be a more rational debate on schemes of arrangement and how they affect “change-of-control” transactions, according to Freehills mergers and acquisitions partner Tony Damian.
A new book written by Damian and Freehills senior associate Andrew Rich traces the various perceptions of schemes, which have been criticised for the last 25 years, Damian said.
“It’s time to end the unwarranted criticism and to accept the proper place of schemes of arrangement in the Australian corporate landscape,” he said.
Schemes, Takeovers and Himalayan Peaks examines the legislative response as well as the legal challenges to the use of schemes since they were first used in this country in the late 1970s.
There have been calls from some quarters to end the use of schemes of arrangement to affect change of control transactions of listed companies, Damian said.
The Australian Shareholders’ Association (ASA) has been one of the main critics of schemes, along with a number of institutional investors. The criticism reached a high point in 2003 with the MIM/Xstrata and HBOS/BankWest schemes.
Recently, the ASA called for a change to the law, requesting that mergers by way of schemes are eradicated.
Commentators in the press have also jumped on the bandwagon, Damian said in an interview with Lawyers Weekly. “The book is there to reintroduce and address this very emotional debate.”
“It is said that schemes are done on the cheap. The evidence simply doesn’t support that view. Schemes facilitate auctions. Imagine suggesting to the shareholders of [Australian Leisure & Hospitality (ALH)] that the proposed Newbridge scheme was a bad thing.”
Critics say that schemes also deprive shareholders of value and do not adequately protect small shareholders.
But schemes facilitate a competitive market for listed companies, according to the authors, and are particularly well suited to negotiated or “friendly” deals. Providing this alternative acquisition method also allows companies to take part, the authors argue they lead to better value for shareholders.
They propose wide-ranging reforms to the scheme procedure to ensure schemes are supported appropriately in the future.
“There is a clear case for reform — the Corporations Act should leave no room for doubt that schemes are a true alternative to takeovers in effecting control transactions,” Damian said.
Acknowledging that schemes and takeovers are different, Damian said, however, that both help to ensure the market for corporate control is kept competitive.
“We should be encouraging control transactions that deliver value to shareholders and that keep the pressure on management teams to perform,” he said. “Securing the future of schemes is one way of doing that.”
There has been support for this defence of schemes, Damian said, and it has become clear “that not everyone is on the anti-scheme bandwagon”.
Damian expects to take the matter of reform up with the Government, arguing it has a responsibility to ensure that the statutory infrastructure for those undertaking corporate deals is solid.
Damian said the Himalayan Peaks reference, in the book’s title referred to a court case in the early 1990s in which someone said a transaction should have been done by takeover. But the judge said that just because takeovers are there doesn’t mean they should necessarily be used. It is not Mount Everest, the judge said.
So the reference, said Damian, suggests there are other mountains to climb.