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Growth in use of takeover schemes continues Back  
Takeover schemes have finally become part of the landscape for takeovers in Ireland, illustrated by the use of such a scheme in the First Active takeover by Royal Bank of Scotland. While such schemes may not be suitable for many takeovers, they potentially can offer significant advantages to acquirers, Barry Devereux writes.
It was not so long ago that when reference was made in Ireland to schemes in the context of takeovers you could safely bet that it was not a reference to schemes of arrangement under section 201 of the Companies Act, 1963, which have been traditionally associated in Ireland with the reconstruction of insolvent companies. However, that is all changing. The use of a scheme as a vehicle for agreed takeovers has been common in the UK for many years and it is now gaining some currency in Ireland as a useful alternative in certain circumstances to conventional takeover offers.

The acquisitions of Warner Chilcott plc by Galen Holdings plc (2000) and of Saville Systems plc by ADC Telecommunications Inc (1999), and the merger of Parthus and Ceva in 2002, were implemented by way of a scheme rather than a takeover offer. The recent takeover of First Active by RBS by means of a scheme marked another important stage in this development.

The scheme route can offer significant advantages over a conventional takeover offer. These include lower majority thresholds for approval and potential stamp duty savings. However, it provides less flexibility than a conventional offer, which may be important if thee terms of a deal need to be changed, and also requires the co-operation of the target company, rendering it redundant in a hostile situation.

Conventional takeover offers
A takeover offer involves an offer by the acquirer to each shareholder in the target to acquire his or her shares. The offer is usually conditional on receipt of acceptances in respect of at least 80 per cent of the shares which are the subject of the offer, because the acquirer will then be entitled to acquire the remaining shares compulsorily.

Takeovers by scheme
The scheme provides a different approach to the acquisition as it does not involve an offer to each of the target’s shareholders. Instead, it comprises a proposal put forward by a target company to its own shareholders which, if successful, would result in 100 per cent of the share capital of the target being acquired by a third party. The target board will ask the target shareholders to vote on the proposal in a specially convened general meeting or meetings. The scheme must be approved by:
• A majority in number
• Representing 75 per cent in value of the shareholders of each relevant class actually voting at a general meeting. If the scheme is approved, and subsequently confirmed by the High Court, it becomes binding on all of the target’s shareholders, regardless of whether or not they voted on the scheme.

Structure of takeover schemes
In takeover schemes, the entire issued share capital of the target is usually cancelled and the reserve created by that cancellation is applied to issue new fully paid shares (equivalent in number and value to those cancelled) to the acquirer, resulting in the acquirer owning 100 per cent of the share capital of the target. The acquirer will then either pay cash or issue new shares in the acquirer (or a combination of cash and shares) to the former target shareholders in return for the cancellation of their shares in the target.

Shareholder approvals level
Careful consideration must be given to a target’s shareholder profile in deciding whether a scheme might be appropriate. Where the acquirer is not confident of securing, by a takeover offer, the 80 per cent acceptances necessary to enable it to acquire compulsorily the shares of the non-accepting shareholders, it may nonetheless believe that it would be able to muster the support of a majority in number, representing 75 per cent in value, of the shareholders of each class who vote at the general meeting or meetings. In a scheme, shareholder apathy may favour the acquirer, as only the shareholders who vote, and the shares that are voted, are counted for the purpose of the above percentages. If a large number of shareholders do not vote, a relatively small percentage of shares voted in favour may be sufficient to carry the scheme. On the other hand, the position of a dissenting shareholder with a holding of, say, 5 per cent of the target’s shares may be enhanced in a scheme, as a small attendance of, say, less than 20 per cent at the general meeting would enable that member to block the scheme. In the First Active takeover, the shareholder profile appears to have been the principal reason why a scheme was used as, due to the earlier demutualisation and flotation, the share register was dominated by shareholders holding small amounts of shares.

Stamp duty advantage
A takeover scheme will not attract any stamp duty on the acquisition of target shares (normally levied at 1 per cent) as there is no transfer of those shares but instead a cancellation of them and an issue of new shares to the acquirer. This can result in a significant saving to the acquirer. In addition, no capital duty is payable on the issue of the new shares in the target to the acquirer.

A crucial aspect of a scheme is that it must be approved by each ‘class’ of shareholder. This means that a separate class general meeting should, in principle, be held not only of each formal class of shareholders (e.g. ordinary shareholders, preference shareholders) but also of each group which has identifiably different interests in the scheme from those of the formal class to which they belong. The acquirer, if a shareholder of the target (as was the case in the RBS/First Active deal), will invariably have a different interest in the scheme from any other shareholder and should not be included in the same class as other shareholders. It may also be inappropriate to include management shareholders of the target in the same class as the other shareholders if their interests in the scheme differ from those of other shareholders (because, for example, they have entered into new service contracts with the acquirer).

The court procedures
Once agreement on the terms of a scheme has been reached between the acquirer and the target board the scheme, to be effective, must be approved at special general meeting(s) of the target shareholders and by the High Court. The main role of the court in supervising a scheme of arrangement is to ensure that the arrangements are procedurally and substantively fair to those whose interests are affected.

The court has to be satisfied, amongst other matters, that a reasonable target shareholder would support the scheme. On the fairness issue, the court will generally be influenced by the fact that a majority of the voting shareholders have approved the scheme.
The Irish Takeover Panel also has a supervisory role over takeovers, whether by offer or scheme.

As a scheme requires the High Court’s prior approval, it is not possible to project as accurate a timetable for a takeover scheme as it is for a takeover offer. However, fairly confident estimates of dates on which court applications are likely to be heard can be made, particularly with the recent establishment of the Commercial Court. Certainty of control and acquisition of 100 per cent ownership occur simultaneously in a scheme and experience has shown that a takeover scheme is likely to be completed within 3 to 4 months from its announcement. This compares favourably with the timetable for a recommended offer where, while it may be possible for the acquirer to achieve control more quickly, it may be 5 months before all of the target’s shareholding is acquired.
While takeover schemes may not be suitable for many takeovers it is clear they have finally become part of the landscape for takeovers in Ireland and potentially can offer significant advantages to acquirers. However, it remains to be seen how the implementation of the EU Takeover Directive will impact upon their use in takeovers, particularly having regard to the minimum 90 per cent squeeze-out provision, which is an integral part of the Directive.

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