Takeovers by cancellation scheme – new Draft Regulations published
A draft of the Companies Act 2006 (Amendment of Part 17) Regulations 2015 has been published and laid before Parliament. As announced in the Chancellor’s Autumn Statement, the regulations will prevent the use of cancellation schemes of arrangement in certain circumstances in an effort to increase stamp duty revenues (see UK Corporate Update 18 December 2014).
The regulations will insert a new section 641(2A) into the Companies Act 2006. This prohibits a company from reducing its share capital as part of a scheme of arrangement where the purpose of the scheme is to acquire all the shares (or all the shares in one or more classes) of the company. Scheme of arrangement is defined as a compromise or arrangement sanctioned by the court under Part 26 (arrangements and reconstructions). (The draft regulations were originally laid before Parliament with scheme of arrangement defined by reference to section 900 of the Companies Act 2006. This did not work as section 900 schemes are not used in practice so the regulations were re-laid a couple of days later with the amended definition.)
The draft regulations contain a carve-out to permit a scheme which effects a restructuring to insert a new holding company into the group structure, provided that all or substantially all of the members of the company become members of the new holding company and their proportionate shareholdings remain substantially the same. Therefore cancellation schemes of arrangement will still be allowed in transactions such as demergers and redomiciles.
The draft regulations will come into force on the day after they are made but they do include a transitional provision for transactions where an announcement of a firm intention to make an offer has been made, or the terms of the offer have been agreed (in the case of a company that is not subject to the Takeover Code), before the regulations come into force. In these circumstances, the prohibition will not apply.
The draft regulations must now be approved by both Houses of Parliament, and we expect that they will come into force between mid February and the end of March.
It is worth noting that transfer schemes of arrangement will still be available for takeovers. With the exception of the stamp duty saving, transfer schemes bring all of the advantages over contractual offers associated with cancellation schemes. These include:
- a lower approval threshold (75% of votes as opposed to 90% of shares);
- a shorter time to get to 100% ownership and avoidance of the slow and cumbersome squeeze-out procedure under Section 979 of the Companies Act 2006;
- increased certainty as to outcome and timing;
- avoidance of many, particularly US, overseas securities law implications; and
- the ability to extend the timetable to accommodate lengthy regulatory (often anti-trust) clearances.
So whilst contractual offers may still be the preferred structure for some takeovers, the scheme route remains open and scheme takeovers will continue to bring many advantages.
Click here for the Companies Act 2006 (Amendment of Part 17) Regulations 2015.
Click here for the explanatory memorandum.
Click here for the draft information and impact note.