To scheme or not to scheme, that is the question. Schemes of arrangement are now often the preferred structure for executing friendly takeovers. A current review of scheme law is unlikely to reduce the attractions of this structure, which offers target shareholders a single decision point to approve or reject an often complex takeover proposal.
One positive outcome of the review may be to bring the disclosure regime for schemes into line with that for takeover bids. Takeovers can be executed using bids or schemes. In the last five years schemes have risen by nearly 50 per cent to represent 43 per cent of listed entity takeovers over $20 million in Australia (Minter Ellison research). Excluding hostile bids, where schemes can’t be used, the scheme proportion of friendly bids is even higher.
One of the strongest reasons for the popularity of schemes is that the target’s shareholders are presented with a single opportunity to say yes or no, by shareholder vote, to a merger proposal.
There is less shadowboxing and tactical manoeuvring under a scheme than a takeover bid. If shareholders say yes to the scheme, the bidder and its lenders know that it will have the benefits of full ownership. For less sophisticated shareholders — who may not understand all the nuances of takeover machinations — the simple vote for or against is particularly attractive.
A scheme is a transaction sponsored and largely conducted by the target. It is a high-commitment structure from the target’s perspective, but this empowers the target directors to extract a strong price from the bidder, and the bidder is less likely to need to keep something in reserve for the tactical contortions of a takeover bid. For a bidder, knowing that the target’s directors are prepared to lead the transaction implementation provides extra comfort.
Westpac’s bid for St.George, and the privatisation of Macquarie Capital Alliance Group (MCAG), are both being conducted by schemes — although arguably for different reasons. MCAG securities comprised stapled shares in an Australian company, units in an Australian trust, and shares in a Bermudian company, a structure which had real tax and other benefits for MCAG securityholders.
A consortium of investors used three interconditional schemes — one Bermudian and two Australian — to acquire MCAG. Securityholders voted once and overwhelmingly to support the proposal, and the bidder moved in one step to 100 per cent ownership of the three MCAG entities. The schemes provided a clean and, from a securityholder’s point of view, simple process which gave the bidder and target securityholders a complete solution.
Similarly Westpac in framing its single yes or no offer for St.George has given any competitors for St.George a price to beat if they launch a counterbid, but has not created an expectation that it has merely opened an auction process.
Recently the government has directed the Corporations and Markets Advisory Committee (CAMAC) to review members’ schemes of arrangements. From its Discussion Paper, it seems likely that CAMAC’s stance will be facilitative, enhancing schemes. That is to be welcomed.
However, the rising tide of class actions for alleged defective disclosure is one area in which scheme law should be changed. Liability provisions for schemes are less developed than for bids. This makes it harder for shareholders who consider that a scheme document is defective to seek redress against anyone other than the scheme company.
Due diligence defence provisions for dealing with defects in takeover documents do not exist for scheme documents. This means that it is less clear whether company officers who have exercised due diligence will be able to successfully defend a claim against them.
Neither shareholders nor company officers should have a different risk profile depending on whether a takeover occurs by bid or scheme. Schemes can provide a single, simple decision point for shareholders, even where the underlying corporate structure is complicated.
CAMAC’s review is unlikely to reduce their attractiveness. Expect schemes to remain an efficient structure for many friendly takeovers.
James Philips is a partner at Minter Ellison
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