On March 4 2015 the Companies Act 2006 (Amendment of Part 17) Regulations 2015 came into force, introducing a prohibition on the use of cancellation schemes to effect public takeovers.
Public takeovers and schemes of arrangement
Public takeovers in the United Kingdom are made by way of either a contractual takeover offer or a court-approved scheme of arrangement under Sections 895 and 896 of the Companies Act 2006. Two types of scheme have typically been used (alternatively or in combination in a mixed scheme) to effect a UK public takeover:
- a transfer scheme, which effects the transfer of the target's shares from all shareholders to the bidder through the appointment of a third party to execute all necessary documents on behalf of such shareholders; and
- a cancellation scheme, which involves the cancellation of all of the target's shares by way of a reduction of capital, the application of the reserve arising from such cancellation in paying up a number of new shares in the target and the issue and allotment of such new shares to the bidder.
Historically, one important advantage of a cancellation scheme over a transfer scheme (and over a takeover by contractual offer) was that no stamp duty (currently payable at the rate of 0.5%) was payable, as a cancellation scheme does not involve a transfer or agreement for the transfer of shares from the target shareholders to the bidder. In 2014, 65% or 31 of the 48 takeovers announced involving Alternative Investment Market (AIM) traded and Main Market listed companies were structured as cancellation schemes.
This advantage of a cancellation scheme was generally irrelevant where the target was admitted to a recognised growth market (eg, the AIM and the high-growth segment of the Main Market), as stamp duty was – from April 28 2014 – usually not chargeable on the transfer of shares in such companies. In 2014, only 54% or 13 of the 24 takeovers announced involving AIM-traded companies were structured as cancellation schemes.
Regulations prohibiting use of cancellation schemes
Following comments made by the chancellor of the exchequer in his December 2014 Autumn Statement and the publication of draft regulations earlier this year, with effect from March 4 2015, there has been a general prohibition on the use of cancellation schemes in UK public takeovers. The government stated that the purpose of the regulations is to "ensure that stamp tax on shares is payable regardless of the mechanism used to effect it".
The final regulations amended Section 641 of the Companies Act to prevent the use of the reduction-of-capital procedure under the Companies Act as part of a scheme of arrangement to acquire all of the shares (or all of the shares of one or more classes) in a company.
The final regulations included certain transitional provisions on the application of the prohibition. Specifically, they do not apply to schemes relating to:
- a public announcement of a firm intention to make an offer for a target pursuant to the Takeover Code (ie, a Rule 2.7 announcement) published before March 4 2015; or
- an offer whose terms have been agreed between the target and the bidder before March 4 2015, where such offer is not subject to the Takeover Code.
The final regulations also contain a carve-out for transactions which insert a new holding company into the relevant group structure. Specifically, such transactions must result in all or substantially all shareholders of the relevant company becoming shareholders of the new holding company. Such shareholders will also have to hold proportions of the equity share capital of the holding company in the same or substantially the same proportions as they hold the equity share capital of the relevant company.
The prohibition in the final regulations relates only to cancellation schemes. Transfer schemes are still available for UK public takeovers.
It seems unlikely that contractual takeover offers will become the preferred structure for takeovers (as opposed to the transfer scheme approach). While a scheme no longer offers the chance to save on stamp duty, a transfer scheme still has a number of potential advantages over a contractual takeover offer, including:
- ease and certainty of acquiring 100% of the target;
- a shorter timetable for acquisition;
- no prospectus requirement for a share-for-share exchange, provided that the relevant thresholds are not exceeded; and
- fewer overseas securities requirements.
Initial indications since the changes on March 4 2015 are that bidders still prefer transfer schemes over contractual offers – five of the six takeovers announced in March and April 2015 were structured as transfer schemes.
It remains to be seen whether a bidder will, in appropriate circumstances, be able to structure a public takeover which falls within the 'new holding company' carve-out and thus utilise a cancellation scheme for such transaction.
For further information on this topic please contact Will Pearce, William Tong or Jonathan Cooklin at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email ([email protected], [email protected] or [email protected]). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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