Takeover Offer v Scheme of Arrangement: Structuring a friendly acquisition

Why are takeover offers and schemes of arrangement so important?

New Zealand takeover laws restrict the ability to obtain control of a listed New Zealand company, or an unlisted New Zealand company with 50 or more shareholders and 50 or more share parcels (a Code Company), except through a limited number of exceptions.

Acquiring control of a Code Company can be achieved by:

a takeover offer; or
a scheme of arrangement.

The choice of method can have a material impact on the likely success of the control transaction.

Choosing the most appropriate method to effect a control transaction requires an understanding of the main differences and the relative advantages and disadvantages for either method.

The main differences between a takeover offer and a scheme of arrangement

What is a takeover offer?

Under a takeover offer, the offeror makes an offer to all target shareholders of a Code Company to acquire (some or all of) their voting securities in return for payment of the offer price.

Target shareholders are free to decide whether or not to accept the offer. If the target shareholder accepts the offer, and the offer is successful (i.e. all of the offer conditions, including as to minimum acceptance, are satisfied), the offeror will acquire the target shareholders voting securities and pay them the offer price.

Under a takeover offer, the offeror... determines the offer price, the offer terms and conditions and the offer period

What is a scheme of arrangement?

A scheme of arrangement is a procedure that allows a Code Company to reorganise its share capital with the approval of its shareholders and the Court.

A scheme can be used to effect the same outcome as a takeover offer by transferring the majority or even all shares in the target to the offeror in return for consideration paid by the offeror to the target shareholders.

Who controls the process?

Under a takeover offer, the offeror makes the offer and largely controls the process. It is the offeror who determines the offer price and, subject to the rules in the Takeovers Code, the offer terms and conditions and the offer period.

As a takeover offer is driven by the offeror and does not require much target company consent or co-operation, it can be used for a ‘friendly’ or ‘hostile’ acquisition of a Code Company. It mostly involves engagement between the offeror and the shareholders.

Under a scheme of arrangement, the Code Company must seek the approval of its shareholders and the Court to propose the scheme, usually following an initial approach by the offeror. It is the target company that controls most of the scheme process, with some involvement from the offeror and the shareholders.

As a scheme requires the agreement and co-operation of the target company, it is suitable for a ‘friendly’ acquisition of a Code Company.

What documentation is required?

Under a takeover offer, target shareholders are provided separate offer related documents by each of the offeror and the target company.

The first document that is required to be sent by an offeror is a ‘takeover notice’. A takeover notice sets out the offeror’s intention to make an offer and contains the terms and conditions on which it is prepared to make an offer. When the offeror actually makes the offer, the terms of the offer and other prescribed disclosures are contained in an ‘offer document’ which is sent to target shareholders. The offer document generally contains all information known to the offeror that is material to a target shareholder’s decision whether to accept or reject the offer.

The target company responds to the offer in a ‘target company statement’. The target company statement contains the target directors’ recommendation, and usually an independent adviser’s report on the merits of the offer.

Under a scheme of arrangement, target shareholders are provided a single disclosure document usually called a ‘scheme booklet’ that is prepared by the target company (with the assistance of the offeror).

Broadly, the scheme booklet contains all of the information that is typically included in an offer document and target company statement, and usually includes an independent adviser’s report on the merits of the offer too.

A takeover offer... can be used for a ‘friendly’ or ‘hostile’ acquisition

What approvals are required?

Under a takeover offer, no approvals are required from target shareholders or the Court. Rather, target shareholders either accept or reject the offer on an individual basis.

Under a scheme of arrangement, approvals are required from both target shareholders and the Court.

The Court must first approve the despatch of the scheme booklet to shareholders and the convening of the meeting of target shareholders. Target shareholders must approve the scheme by resolution approved by 75% of the votes in each interest class[1] and a simple majority of all votes on issue (whether voted or not). If target shareholders approve the scheme, the target company will then return to Court for a second time to seek Court orders approving the scheme.

Takeovers Panel “approval” is not required for a takeover offer or a scheme. However, under a scheme, the draft scheme booklet is generally lodged with the Takeovers Panel for review, aiming to obtain a no-objection statement. However, merely obtaining a no-objection statement from the Takeovers Panel does not necessarily mean the Court will approve a scheme.

What does success look like?

Success under a takeover offer can span a range of outcomes:

An offeror seeking 100% ownership of a Code Company will need to hold at least 90% of the Code Company’s voting rights before it can compulsorily acquire the remaining voting rights from target shareholders who have chosen not to accept the offer. As such, the 90% ownership threshold is typically considered to be the de facto success threshold for an offeror seeking a 100% outcome.
An offeror seeking ‘control’ rather than 100% ownership may be content to receive aggregate acceptances of its offer that give it ownership of 50% or more of all voting rights in the Code Company.

Success under a scheme of arrangement is typically 100% ownership. A scheme is attractive to an offeror seeking 100% ownership of a Code Company as it delivers an ‘all or nothing’ outcome – if the scheme is approved the offeror has certainty that it will reach 100% ownership of the target.

What can the terms be?

Under both a takeover offer and a scheme of arrangement, the consideration may consist of cash or shares in another company (or a combination of both or other financial products).

Both a takeover offer and a scheme can be subject to conditions, although some conditions are prohibited in takeover offers and uncommon in schemes such as conditions that rely on the offeror’s subjective opinion or that can be controlled solely by the offeror.

Under a takeover offer, the offer must be on the same terms, including the same offer price, for all securities belonging to the same class. A scheme allows flexibility to treat different target shareholders differently, but this may give rise to separate classes in voting to approve the scheme.
Generally, a scheme is subject to fewer prescriptive rules than a takeover offer, allowing greater flexibility regarding timing and the ability to include ancillary features such as asset transfers and capital reductions.

Schemes of arrangement have become more common than takeover offers to acquire control

How long does it take?

Under a takeover offer, the offer period must generally run for 30 days and a maximum of 90 days but may be extended in certain circumstances (e.g. if there are delays in obtaining regulatory consents).

Under a scheme of arrangement, there are usually no extensions to the transaction timetable and compulsory acquisition is not necessary. The Court and shareholder approval process follows their own timing milestones. The scheme process is likely to be about three months from the date of the offeror’s first approach to the target company but will ultimately depend on the complexity of the proposed scheme and whether objections are expected.

Advantages and disadvantages of schemes of arrangement compared to takeover offers

In the New Zealand market in recent years, schemes of arrangement have become more common than takeover offers to acquire control.

The popularity of schemes is due to a number of key advantages that schemes offer offerors and target companies compared to takeover offers. Those advantages include:

the certainty of obtaining 100% ownership if the scheme is approved;
the ‘majority in number and 75% in value’ shareholder approval thresholds for a scheme are generally considered lower thresholds than the 90% of all voting rights required to commence compulsory acquisition following a takeover offer; and
the flexibility to incorporate certain terms in a scheme that would not be permitted under a takeover offer.

However, schemes are subject to a number of disadvantages compared to takeover offers. Some of those disadvantages are set out below:

it is more difficult and time consuming to make changes to the terms of a scheme (such as increasing the consideration in response to a competing proposal) than is the case for a takeover offer (e.g. changes of terms in a scheme generally require returning to Court to seek permission, an adjournment of the scheme meeting, and supplementary disclosures);
in a takeover offer, a pre-bid stake in the target company held by the offeror may be advantageous as it may deter third parties from entering the contest for control. However, a pre-bid stake may be a disadvantage under a scheme because those shares will not be voted in the same class as other target shareholders to approve the scheme, therefore enlarging the effect of all other target shareholders’ vote on the scheme resolution; and
the need to seek Court approval and Takeovers Panel involvement in the scheme process, which may introduce some execution risk that is not applicable to the same extent in takeover offers.