THE use of schemes of arrangement has attracted substantial criticism this year, particularly in relation to the takeovers of BankWest and MIM.
In both cases, institutional investors complained they were getting a poor deal and that the major shareholders – HBOS and Xstrata respectively – were abusing the spirit of the takeover laws.
But what attracts less attention is the number of takeovers using schemes of arrangement that proceed smoothly and without controversy.
In Western Australia there has been no shortage of examples.
Gallery Gold and Spinifex, which have complementary gold production and exploration interests in Africa, are merging via a scheme of arrangement.
Earlier this year, Canada’s LionOre used a scheme to effect its acquisition of local company Dalrymple Resources.
Other examples include Abelle’s acquisition of Aurora, Evans & Tate’s acquisition of Cranswick Premium Wines, and the merger of Foundation Healthcare and Lifecare Health.
According to Marcello Cardaci, corporate partner of law firm Blakiston & Crabb, in comparison to traditional on-market takeover bids, schemes offer a number of advantages for bidders
Schemes provide greater flexibility in the structuring of the deal and they are usually carried out with the consent of the target company, which generally funds the cost of the action.
Importantly, they require lower shareholder approval.
A scheme requires approval by 75 per cent of the votes cast at a meeting and 50 per cent of the members voting at a meeting, whereas a formal takeover requires 90 per cent acceptance before the bidder can move to compulsory acquisition of minority interests.
Schemes can, at times, eliminate the chance of a rival bidder emerging with a competing higher offer.
They also provide greater certainty for a bidder.
A takeover by way of a scheme is ‘all or nothing’. If it wins approval from each class of security holder and the courts, the bidder is assured of moving to full ownership.
In contrast, a bidder using an on-market takeover may be left with a high proportion of shares but not enough to compulsorily acquire the minorities.
In some cases, a bidder may end up with too many shares.
A case in point is South Africa’s Harmony Gold, which early this year launched a bid for shares in local gold producer Abelle.
Harmony wanted to secure control of Abelle by acquiring a majority shareholding yet also wanted a wide spread of minority shareholders to support Abelle’s listing on the Australian Stock Exchange.
Its bid was too successful and Harmony has ended up with about 84 per cent of Abelle.
Mr Cardaci said the downside of schemes included the need to gain the cooperation of the target company.
Also, changing the terms of the offer or extending the time period is difficult once a scheme is initiated.
This may be a problem if a competing bid emerges, as occurred when St Barbara sought to merge with Taipan via a scheme.
Troy Resources launched a competing bid, leading to a protracted and hotly contested battle.
It was resolved only when St Barbara withdrew the scheme and launched an on-market takeover.
Mr Cardaci believes schemes have an appropriate role to play.
“In the current legislative environment, the use of schemes is a legitimate mechanism to effect a takeover,” he said.
“ASIC has clearly stated that it does not have a preference for either form of takeover as long as the quality of information being provided to shareholders is the same and it is in keeping with the Corporation Act requirements.”
While schemes of arrangement normally win shareholder approval, that is not always the case.
In light of the controversy over the use of schemes in takeovers, Blakiston & Crabb is hosting a seminar next week to discuss the issues.
The seminar will have four speakers, providing insights into the legal, regulatory and taxation aspects of schemes of arrangement.
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