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    Corporate Finance Law and Policy

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    Corporate Finance Law and Policy

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    12 views19 pages

    Gullifer Payne 15

    Uploaded by

    WengKeongKok
    Corporate Finance Law and Policy

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 19
    Corporate Finance Law Principles and Policy Louise Gullifer Jennifer Payne 728 Takeovers ship with the target sh holders. The choices made in the UK in relation to both of these tsues are resoundingly the arget directors ace sidelined icant constraint on their ability to frustrate the bid. Although takeover regulation doesnot operat in the period before the bd iim 2 combination of general company lav securities law andthe influence and roe of ional sha ractcepre-biddefeasive messes are ‘very wncommon in the UK. ‘takeover cegulation operates to require that wrbidder treats ata significant cot (of the UK regime alo as im As discussed at 1633 takeover regime “The decisions adopted bythe UK in reat of other regimes, suchas Delaware, where discctrs are effectively ications forthe other stakeholders inthe target ove there is tle attention given to these groups the UK takeover cegime 15 Schemes of Arrangement 15.1 Introduction Schemes of arrangement ate a valuable too! for manipulating « company’s capita. A Scheme of arrangement involves a compromise or eraagement between its editors ois members? Schemes of arrange ‘ways, Nothing inthe Companies Act 2006 presribes ‘eory a acheme can be a compromise or arrangement betwen tors or members about anything they can propery agee amongst themselves. A company can therefore use scheme to effect almost any kind of internal reorganisation, meiper OF 12 the necesary approval have been obta creditor, since, in genera tential allowing a single dissenting creditor to block a reorganisation o other arrangerment between the orapeny ‘nds creditors. Creditors and members meet in lastest vote on whether to approve the Scheme, however, and itis ony the msjority within s clas tht can impose its views on the fy ofthat cass A broader form of'ramdov ofa whole cls, where the scheme isimplemented despite the opposition of «whole las of member or creditor. isnot pot. ble using a scheme alone. The fc that scheme can be imposed on distenting members snd creditors necessitates some minority protection, nd 85 o vote on the scheme, andthe fnvolement of the court at both te class meeting stage and then in determining whether to sanction the scheme. These procedural requirements add complex 4 scheme. Depite these duadvantages, honeves, scheme 730 Schemes of Arrangement utilised as a 15.2 The Mechanics of a Scheme of Arrangement ‘Therearethree main stops involved in implementinga scheme of arangement First com- rangement is proposed between the company and its members or creditors? let court uncer section 896 ofthe Companies Act 200 fran order that, meeting, or meetings, be surmoned. Second, meetings ofthe members or ereitors are ‘Third the scheme must poss have bee approve by the ofthese present tthe meeting meting abd i) toca tht he view propos at the meting or meeting eter beciae ot ete in our ofthe propels seccive impart 15.2.1 Application tothe Court for Meetings to be Summoned ‘Once the proposed scheme hasbeen formulated, an application must be made yor on behalf of, the company forthe court to ore ‘Mechanics ofa Scheme of Arrangement 731 has wide discretion o order these mec not concerned ‘option forthe cour, ifthe weong c sanction the scheme. This practice was Chadwick LJ in Re Hak esuranceCo Led" 8 rs designed to produce substantive considera on the applicant company to identify the cortet clas > any potential problems atthe inital application. Al eleva cre be notified of the scheme, unless there are very goed reasons fr not. creditors only object tthe lter sanctioning hearing, the court wil expect them {00d reason why the issue was not cased atthe eae stage. The postion in relation to ‘lasses of members is not cele with inthis Practice Statement, ut the ertcsms eased bythe Company Law Review and by Chadwick L in Hat Insurance apply equally to that jon, and therefore the principles set outin the Practice Statement shoul also ap to the composition of classes of members. og the meetings must be accompanied by a statement ict of the arrangement and, in particu, stating any material interests of ou EWC Compa Law Review Seng Gee Sun Copan La ors Copper enn: Copii he cs et he metng haat oss fee er meet, frre no oer 732 Schemes of rangement sision on the scheme had the information been disclosed t acount the lve of sophistication ofthe would have changed tel “The courte also prepared in determining whether the 15.2.2 Meeting(s) of the Members or Creditors 15.2.2.1 Who Needs to Consider the Scheme? nly necessary forthe proposed scheme tobe considered and ected by it In both re Jega rather than the beneficial owner of the economic: scheme. In the case of a member’ scheme, therefore, of members, and as reacds right tac ‘A company fg or arrangement This prin company to consult with, or obtain the approval of, nafeted by the scheme. This may be econsitents are not compromised ‘or otherwise lected bythe scheme. Some cases suggest that his may, alternatively, be the case where the constituents have no economic intrest in the compan. In Re Tea Corpor fon La a scheme was proposed forthe sal of assets of a hopelessly insolvent company, “The court directed that meetings be held, consisting ofthe debenture holders, the unse- cated creditors, the preference shareholder ‘ordinary shareholders. The fs three {groups voted in favour ofthe scheme, bat the fourth didnot. TheFaet that the company was Insolvent, and the assets ofthe company were insuficient to generate 2 return tthe of terest inthe company. Accordingly, pte their dissent. to junior creditors in 7 Mechanics ofa Scheme of rangement 733 busines of the group bel jeve that reorganisation, The new group would be princi p would nat retain an intrest No new ight forthe mez seems on the basis thet Aepsived them of something valuable. Cr. sof the mezzanine lenders were left unchanged bythe schemes, nthe sense that they ha the same claims against the seme ties before and afer the scheme thei ighs were not being varied a discharged. There is no suggestion that a scheme can be effected without the consent of any affected class “The argument of the mezzanine lenders was howeves, that heeft of thes paticular the transfer of assets othe new entity eft them out ofthe pcture—tha i, that the court should decline to sanction the scheme on the basis that twas unfit them, “This, then was nota question of whether the mezzanine lenders sh the scheme a the coart-approved meetings stage, but rather a question forthe exercise of ‘the courts discretion tthe sanctioning tage. On any of the valuation mesures looked a and in terest inthe company when is best undertod in this by the scheme then 15.2.2.2 Separate Class Meetings: General (Once it as been determined which groups are interested inthe scheme, and therefore whose consents required the next question i whether those groupe should meetand vote to approve the scheme at single meeting, o separate mesting. 3 Seeman’ cos p04 BWA C138 2 Se Cap Narain fe pie mt ccna 734 Schemas of Arrangement 15.221 The General Test at the mercy of veto by anyone ofthe separate meetings that are held. The fewer meetings {hat ate hed, the more schemes will be approved, but this hes potential consequence for the protection of minorities. In recent yeas there has been shift of emphasis in applying ‘Bowen L'stest away from overzealous distnctonsvrhich give minorities stong eto rights [As Nourse} has commented: fone ges too picky about potential diferent asses, one aly as many clases as there are members of a particular group.” 1 composition ofc st out in Sovereign Life. That, ‘the context ofthe question ‘with whom isthe compromise ineach ae the answe bat guerion wil depend upon aa hu which are tobe hthe eee eb ay ‘rangement to those whore righ eto bereased or vored the test formulated by Bower in ode to determine wih tata da "mut be confined to thos persons whos 125 to make imposible for thet const together ines? tobe dance therefore promprs a sift should be protected, overea ch provide shouldbe avoide. The approach suggested by Chadwick 1) haben cr subsequently been applied by the courts. 99212085735 pe Bowen toda Mochanies ofa Scheme of Arrangement 735 1522.22 Members and Crditre Indetermining whether separate c “ the courts have focused on the rights of ndivials, rather than thelr interests. The attitude ofthe courts on this se has changed, and narrowed, over ine, Re Hellenic and General Tt Lid eoncemed a scheme designed to effect «change of contol ofa company at an alternative toa takeover. The cour ordinary shareholders into two dass. Tempe ‘owned subsidiary of shares in the target wer identical polly owned subsidiary hada co shareholders did not. Should meet separately members with different intrest rather than differen rights should form separa Shareholders with the same igh repect ofthe shares which hey ol ny be sje tan in te mumber of ierent interes and may therefore eninge own psa intrest en pee jndgmen willy unwerlabe, and highly undesia ‘of this approach, however, is that ewer ca less chance ofa veo ity protection at this sage mea sanctioning it becomes more important. 15.22.23 Selecting the Correct Compartir cue as been of particular importance 736 Schemes of Arrangement Chadwick stated in Hawk Insurance that where a company is insolvent the Point for determining separate classes wil be the rights of those creditors on winding is analy, some groups, such at secured credo, and prefered creditors, should where subordinted creditors have an interest inthe company ina diferent way from oer creditors. they rate class. Further division may alsobe necessary the eategory of secure creditors, ferent differing securities A creditor whose c ng und the question arose as to whether they should the same clas fr the purposes af voting ona proposed scheme these creditors should be 3s Should be treated as being inthe same clas a8 other insecure creditors, since the all had an acerved claim against the company which they an immediate right to sue fr in full Those with contingent aims, however, had 20 such immediate right and the structure ofthe scheme was each that those whose claims Jad not yet accrued would have those claims scaled down to proportions smaller than 100 per cent. Although thet creditors would rank equally on involvency as they wete all cured creditors, these differences, in Arden Ts opinion, meant that they should not all be treated as one clas for scheme purposes. The Court of Appeal in Hawk Insurance Sisagreed approach. Chadwick 1 held tha all the unsecured creditors, includ ing. therefore, those with contingent rights and those with vested rights could be tected 8381 single clas for thi purpose. All unsecured creditors he the sae right ona wining ‘up namely to submit their clams in the winding up, and to have those claims accepted oF riected. The ony difference was that those with contingent claims held des valu, and therfore thse debts would be subject to an es View this didnot mean that they shouldbe testa as separate cl ‘Wherea comp the eights ofthe creitre comparatoes forthe parpote of determining creditor c ‘ance Co Led for example, Le in tha case was 2 ke ishand Commer Holdings 93) 192 BC 4S» rh on Comore l- (ano) Ewer (a). 5: Re Sonn Marine Ge Inurane 7 Mechanics ofa Scheme of Aragemsent 137 ‘The situation in relation to debt restractarings of financially distressed compenies remains somewhat unclear Sich companies may be seh ow insovent, bu ‘nomial viable an argument could be made of creditors ina winding up. However, the app i any tat he scheme ges to those whose ight are eing released vale Only Aitferen rights, and not different interests, shoud be taken into acount whe separsting shares into clases. This tet does not req idewtzal weatmentof members before they ‘can be egrded as forming single class, Rather, the fcusis on the extent to which the rele vant rights are diss wether its impossible forte relevant members to consult together in their common interest. ‘Where schemes invlte companies with separate clasts of shares in issue, for example ordinary and preference shares, these diferent clases may contute diferent clases for scheme purposes, although las for scheme purposes does not necesarily mean a clas 1 define inthe articles ofthe company. Ofte, shares that at in dfeen classes inthe articles wl comprise different clases for scheme purposes, bat this will not always be the ‘ase, andthe exact dass composition will depend on the particle cram caldoes not necessarily mess tht they shoal be treated ar one Scheme Ifthe scheme ite proposes to tet different groups of members within a parti the scheme in order o be able tom approve the scheme, < Seeger Gu [30] EWE (Ch ee Teoria p04] EMEC 46h rc {Emcee Province ace es al 98) etn nama La 0 ie woe eon plea alc hes igh be eed ob inure Ll 20011 SELES 798 Schemes of Arrangement Applying the Re Hawk Insurance test to members isnot always straightforward. O ion that has arisen in takeover schemes is whe bidder should be weated diterentyto other shareholders. Dita [BER ple suggests that while the giving of irrevocable undertakings will ot affect the ability of those target shareholders to vote atthe clas meeting where they have the same right the other shareholders, nevertheless tis isan issue tht can be consicered a the court snctioning tage that has arisen in practic, again nthe contextof takeover schemes, the bidder or the bidder's subsidiaries if they hold shares in the target co ‘elude its own shares from the scheme or decline ovo rvened member meeting which considers the scheme The question arse, however as to what wold bap ot do so. Would the shares ofthe bid er be past ofthe sme clas sll the other shares nthe target company forthe purposes of considering ad spproving the schemet I could be argued that an epplicaion of Re BTR " the other is difficult to see hw the bidder coud genuinely sharcholders with a view to ther common interest in such 2 reach, then ard to the bidder's separate «oul, opin, simply exclude the vo the dase 15.224 Separate Mestings for Creditors ‘The tem creditor isnot define for scheme purposes by the Companies Act 2006 Instead, ‘courts have developed the aw on this ioe They have defined ‘nlc aa Neer 210 eh oa Ci e981 Ch, Mechanic of SchamseofArangernt 739 ependent onthe happening of some Future ere imis to this concept, however. In Re L on), for ‘hat, when payable, cons respectof adebt “The starting point fo he will consider the rights that are beng varied or released under the propose scheme dary new eight the scheme proposes to provide to replace those semoved or varied The corec com ‘or must be applied inorder to determine the diffrence that the proposed scheme would make to the rights of te creditors. This wil depend on whether the company is solvent or insolvent tive is for the eompany if the scheme does not go ahead” It wll generally be the case chat creditors with diferent levels of eeiorty will consute diferent clases Whether distinctions ate classes will depend, to some extent, onthe application ofthe correct contpetor. This issue is likely to be especially important in relation to the lower-ranked retary as ‘othe danger of being could lead to an increase nthe number groups and could 1s often of more impor- editors generally have greater frecdom 'o bargain 3 was) from those of tobe more uniform. The issue Nevertheless, itis not fora range of rights that are other ceditors™ Ther 2 Sc Re Aaa Sew Ores, es Fintona Ge “nnn (Bp) (20) EEA sate thas er as “be 740. Schemes of Arrangement :sightforward one When the Cork Commitee examined schemes of noted the dficuties associated with determining diferent classes As ae tee didnot recommend that separate clas metings ‘company voluntary arngements right a here ag torshave provided irevocable undertakings require thei aims tobe regarded as forming 8 separate cls. irrevocable undertakings are sometimes sought rom cred Scheme meeting in order to provide some comfort for the company regirding the likely outcome ofthe meeting. In geneva, the fact tata creditor fs given an irrevocable ‘undertaking ofthis Kind is regarded as affecting the interests ofthe creditor and not that creditor’ rights and, cor nat give ise to the formation of a separate class c David Richards] stated thatthe position would be dif the agreement to vote in favour of the scheme, the creditor 19 other eeitos ofthat clas In practice, the courts have Sometimes held that separate clases are not needed even were consideration isofered i 5 ain Re Set Pai SpA Richards J reconsidered his ear ‘would not consider the simple fac that in fvour of the scheme as being dina separate cass Even sancsioning hearing. erig fen ces of dn pray clei in te rice inary bee ome eye isch ntied ‘Mechanics of «Scheme of Arrange 152.25 Approval atthe Class Meetings The company needs to obtain the approval ofall members or creditors or clases there, that willbe afectedby the scheme. There sno quot and the vote is on a required atthe me creditors or members prevent 18m for creditors and those that do not turn vp tothe meeting, are therefore excluded forthe Purposes of calculating the majority. 1522511 The Majority in Valite Requirement The majority in shares a nominal in person or by proxy h der vote with other majo sometimes a question lanly where schemes ae being ated as an iscussed inthe context of takeover schemes neeesary to work out in advance the anu in respect of which each creditor wil be allowed to vote, Tis wil depet the value ofthe debe?® 1522.52 The Majrityin Number Requirement ‘headcount ‘ierlevant elsewhere in the Com requirement seems 1 be tos to prevent the major older or creditor) riding roughshod ‘over the views ofthe remaining 3 creditors. However, result ins scheme Being blacked even where the holders ofthe ove shares in a company have vote in feyourin other words inthe hand of small shareholders ou of proportion tthe company. pany lan Rew Seine Gran, Madr ipa Lew {GaN O85 November Sed pw 742 Schemes of Arangeme shoul be tested dif of shares voted rather than the numberof shareholders. protections suchas the duties of directors when proposing the scheme, a fact ha the court has o san dat 15.2.3, The major requirem: ‘Appeal rocognised that th use of hare Similar issues can assign res 8 debt (or pat of them) can potently be inorder to boost the headcount” scheme, such Canada and India, in number requirement Others th incorporate the headcount test do 0 only for crecitor schemes not for member schemes,” or give the court discretion to approve scheme where the majority in valve ets met but ‘hemaorty in number test isnot In 2 umber of othe jurisdictions there have been dis ‘cussions about whether this test should he amended or abolished" Thete ate good argu ‘mente fr rem jority in number requirement in England, a recommended by ‘he Company Law Review. Nevertheless, this tert remain in place for English schemes of rangement forthe present ime, yrs bal nt er Scan see BAS) Toere 2 Ac oan Copan Once 38 0 7 Meskanics ofa Scheme of Arragement 743 152.3 The Sanction of the Court ‘the scheme in the separate css mectings, app eto scheme ® This application can be opposed by members and the scheme ® The Companies Act 2006 contrne no details of those Wwinen deciding whether to eencion the Tn recent yea ‘se of English schemes, sualy where the company is finan to use the scheme to reoxganise its debts While itis clear th within the definition of'a company’ for scheme purposes” the ‘ditional judge-made requirement, and will nly thee Scheme in England canbe demonstrate. aulicint connection may a factors, such os where there are assets within the rents withthe company are governed by English law and contain an En

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