Among the forthcoming measures announced by the chancellor in his Autumn Statement on 3 December were plans to prevent avoidance of stamp duty by prohibiting the use of a certain deal structure in company takeovers.
UK public company takeovers can generally be carried out by way of a traditional general offer or by way of a scheme of arrangement. A scheme of arrangement is a statutory procedure by which a company can, with the approval of the High Court, come to an arrangement with its shareholders regarding a reorganisation of its share capital, which will become binding on all the shareholders (or all the shareholders of a particular class of shares). Takeovers effected by way of a scheme of arrangement will broadly take the form of either a “reduction scheme”, under which the shares in the target company not already owned by the bidder are cancelled and the resultant reserve is used to pay up new shares issued by the target to the bidder who pays an agreed price to target’s shareholders, or a ‘transfer scheme’, under which the shares in the target company are transferred to the bidder and consideration for the transfer is paid to the target’s shareholders. “Hybrid schemes” may be employed where some shares in the target company are cancelled and some transferred. Schemes have been increasingly popular and currently represent the preferred structure for most large recommended takeovers in the UK since they enable a bidder to obtain 100 per cent of the target provided it has the approval of 75 per cent or more of the target’s shareholders. As the scheme requires cooperation of the target company’s board, however, it is generally not appropriate for hostile takeovers. In a traditional offer, the bidder must obtain acceptances from 90 per cent of shares to which the offer relates before it can use the statutory “squeeze out” procedure under the Companies Act to acquire any residual minority shareholders. Generally, the scheme is therefore seen as a quicker and easier route to obtain 100 per cent of the target. Read more about mergers and acquisitions:
The considerable added attraction of a reduction scheme is that does not involve a transfer of the target’s shares and therefore does not attract stamp duty, whereas stamp duty will be chargeable at 0.5 per cent of the consideration paid for the transfer of shares under a transfer scheme and is payable by the bidder. Scant detail was provided in the Autumn Statement, but it was made clear that the government will, by early 2015, bring forward amendments to section 641 of the Companies Act (which sets out the circumstances in which a company may reduce its share capital) to prohibit reduction schemes in order to protect the stamp tax base. The real impact of the government’s proposals will be felt on the main market and could potentially result in reduction of the amount a bidder is willing to pay and therefore lower returns for shareholders. By way of example, a £1bn takeover of a main list company would add £5m of stamp duty to the bidder’s costs. In relation to target companies that are admitted to trading on recognised growth markets (AIM, ISDX), the abolition in April 2014 of stamp taxes on purchases of shares means that takeovers of those companies are not subject to stamp duty. Taking into account the other significant benefits of using schemes, the added stamp duty cost (or non-availability of the saving), it is unlikely to curtail the use of schemes altogether or cause any appreciable reduction in M&A activity. Transfer schemes will still be available but there may well be a shift back to the traditional contractual offer. Given the proposals are to introduce changes to the Companies Act rather than the stamp taxes legislation, it is difficult to envisage that takeovers currently in progress will be adversely affected or that the changes to the law would have retroactive effect. In any event, bidders can, with the consent of the Takeover Panel, switch from a scheme to a contractual offer during the takeover process. However, switching from reduction scheme to a transfer scheme would have added complications, including revising scheme documents, obtaining consent of the court and Takeover Panel and potentially resetting the transaction timetable. Cautious bidders may simply choose to pre-empt the rule changes by ruling out the use of a reduction scheme and opting for a transfer scheme or contractual offer. Bidders planning takeovers in 2015 and their advisers will be keeping a very close eye on the proposals and their timing. Draft legislation is expected to be released early in the New Year. Nicholas Jennings is an associate at law firm Faegre Baker Daniels. Image: Shutterstock
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