Schemes of Arrangement: the new black in the New Zealand takeovers world
June 2016 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
In August 2015, Scott Technology Limited, an NZX listed company, announced that JBS Australia Pty Ltd would be acquiring a 50.1 percent stake in Scott. The acquisition would be structured as a scheme of arrangement, the first transaction of its kind in New Zealand under the new scheme of arrangement laws. Previously, the New Zealand Takeovers Panel would not permit transactions affecting control of ‘code companies’ (defined in the New Zealand Takeovers Code, including listed and widely held companies) without following the procedure set out in the Code. The Panel’s primary concern was that protections afforded to shareholders under the Code would be circumvented. However, the proliferation of schemes of arrangement in other financial markets such as Australia and the UK led to the New Zealand position being reconsidered.
In September 2014, the rules on schemes of arrangement were amended to permit their use as an alternative to the Code, provided that shareholders’ rights are not adversely affected by the use of the scheme instead of a Code process. This article will examine why a scheme of arrangement can be a more effective structure for bidders to effect a takeover of a code company than under the Code.
A scheme of arrangement is a creature of statute whereby in the context of a takeover, court orders are sought to reorganise the target’s capital structure. Instead of dealing with shareholders of the target under a conventional takeover offer, the bidder and the target work together to develop a takeover offer that target shareholders will vote on. Normally, the target and the bidder work together to prepare the offer documentation, apply for initial court orders, convene a meeting of shareholders and finally apply for binding court orders. The Panel retains a role in this process, and if it is satisfied that shareholders will receive sufficient information about the scheme on par with a Code process, they will likely provide a ‘no-objection statement’. The Panel does not look at the merits of the scheme itself.
Before the court can rule on the scheme, it must be approved at a shareholders’ meeting. There are two thresholds required to approve the scheme – 75 percent of the votes cast in each ‘interest class’, and a simple majority of all voting rights in the target company (whether the shares are voted or not). Broadly, separate interest classes are formed if shareholders have rights against the company so dissimilar that they cannot sensibly consult together about a common interest, or if they are granted different rights under the proposed scheme. As each interest class must reach the 75 percent threshold for votes cast to approve the scheme, effectively each interest class has a veto over the scheme.
Once approved by shareholders, the court will implement the scheme if it is satisfied that shareholders will not be adversely affected by the use of a scheme rather than the Code process. In granting its approval, the court will not express a view on the merits of the scheme.
Schemes versus Takeovers Code
Bidders now have the option to structure takeovers as a scheme or as an offer under the Code. While this decision will always depend on the bidder’s strategy and unique circumstances, there is clear preference in similar jurisdictions, like Australia, for bidders to use schemes instead of the more rigid takeover regime. Schemes are preferred due to their lower voting thresholds and structural flexibility.
Schemes have lower shareholder approval thresholds than the Code, which means a take-private transaction is more likely to succeed when structured as a scheme. The Code requires that bidders reach 90 percent acceptances before the remaining shares can be compulsorily acquired and the full takeover completed. This means shareholders with a 10.1 percent stake are able to block Code offers. However, those same minority shareholders can be bought out under a scheme, due to the lower shareholder voting thresholds outlined earlier. The Panel in New Zealand has been explicit in saying that they do not consider using a scheme as opposed to a Code regulated process ‘avoidance’, even if the only reason for the election is to take advantage of the lower voting threshold.
Flexibility is another key feature of schemes. A scheme allows multiple transactions to be rolled into a single process to save time, money and reduce complexity. For example, the JBS/Scott scheme referred to above had four separate components, with money flowing in different directions, through the scheme: the acquisition of shares by JBS from current Scott shareholders, a capital injection to Scott through an issue of new shares to JBS, a rights offer to existing Scott shareholders that wished to reinvest in the target soon to be controlled by JBS, and a potential further issue of shares to ensure JBS will reach 50.1 percent on completion of the scheme considering its multiple prongs. It would not have been possible to complete such a transaction in one step under the Code.
Unlike the Code, schemes permit a bidder to offer varying amounts of consideration for shares in the same class, although this risks creating a separate interest class. Theoretically, a bidder could offer minimal consideration or even impose liabilities on certain shareholders, while paying fair value to others. New Zealand courts have not considered such a situation yet, but our view is that they are likely to follow a ‘fairness’ approach followed by the Australian courts.
But there are also some less desirable aspects for bidders opting to use a scheme instead of the Code. The scheme proposal is one negotiated between the target and the bidder, and therefore there is little protection available against competing bidders. Lock-up agreements are not that practical in the scheme process as voting agreements cannot exceed 20 percent of the voting rights in the target, and again risk the creation of a separate interest class. Hostile takeovers are not feasible under a scheme due to the role of the target’s board and executives in preparing the transaction documents.
The success of JBS’s scheme of arrangement has caused the New Zealand market to appreciate the value of this alternative to the Code. A number of NZX listed companies have followed JBS’s lead and will give shareholders an opportunity to vote on schemes in the upcoming months, including Allnex Belgium’s proposed takeover of Nuplex Industries and Michael Hill International’s proposed takeover to change its primary exchange from NZX to ASX. A new trend is emerging where schemes play an increasingly important role in New Zealand’s equity capital market.
Silvana Schenone is a partner, Igor Drinkovic is a senior solicitor and Olly Wilson is a solicitor, at Minter Ellison Rudd Watts. Ms Schenone can be contacted on +64 9 353 9986 or by email: email@example.com. Mr Drinkovic can be contacted on +64 9 353 9734 or by email: firstname.lastname@example.org. Mr Wilson can be contacted on +64 9 353 9832 or by email: email@example.com.
© Financier Worldwide
Silvana Schenone, Igor Drinkovic and Olly Wilson
Minter Ellison Rudd Watts