Scheme of Arrangement: A Comprehensive Guide

A Scheme of Arrangement is a powerful tool for companies to restructure their debts and obligations. It involves a binding agreement between a company and its creditors to modify the terms of its debts.

This process is governed by the Companies Act, which outlines the procedures and requirements for a Scheme of Arrangement. A company must obtain approval from its creditors and the court to implement the scheme.

The court's approval is crucial, as it ensures that the scheme is fair and reasonable. The court will consider factors such as the company's financial position, the impact on creditors, and the benefits of the scheme.

In some cases, a Scheme of Arrangement can be used to avoid liquidation or bankruptcy. By restructuring its debts, a company can continue to operate and provide value to its stakeholders.

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A scheme of arrangement is a court-sanctioned agreement between a company and other parties, used in a wide range of circumstances including restructurings, takeovers, and mergers.

It's a flexible and long-established procedure that involves a compromise or arrangement between a company and its members or creditors. A scheme can be proposed by a company or its administrators.

To implement a scheme, two court applications are required: one to convene meetings to approve the scheme, and one to sanction the scheme.

If approved, the scheme will be binding on all creditors and shareholders, including those within each class voting against the scheme.

The statutory voting majorities required for a scheme to be implemented are calculated by reference to those creditors and shareholders in each class exercising their voting rights in relation to the scheme.

Here are the statutory voting majorities required:

A scheme of arrangement is also used in Australia, where it's a shareholder and court-approved statutory arrangement between a company and its shareholders.

This type of scheme is frequently used to effect an acquisition of 100% of the shares in a target company, particularly in friendly deals.

The scheme structure can be used to reconstruct a company's share capital, assets, or liabilities, and can also be used to effect a compromise between a company and its creditors.

The implementation process of a scheme of arrangement is a crucial step that involves several key milestones. The scheme becomes binding on the target company and all its shareholders once the Court's orders are lodged with ASIC.

The Court's approval at the second court hearing is a significant step towards implementation. If the Court approves the scheme, the target will seek to implement it by transferring all target shares to the bidder in return for payment of the scheme consideration.

This transfer of shares is facilitated by a single master share transfer form, making the process efficient and streamlined.

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The initial approach is a crucial step in the scheme process. The first step typically involves the bidder approaching the target with an indicative offer to propose a scheme under which the bidder would acquire 100% of the target.

This approach is often a formal one, and it's essential to get it right to set the tone for the rest of the process. The bidder will usually make a formal offer to acquire 100% of the target.

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Implementing a scheme involves several key steps. The scheme implementation agreement is a crucial document that outlines the terms of the scheme and commits the bidder and target to the scheme transaction.

The target's board of directors will typically recommend that target shareholders vote in favour of the scheme in the absence of a superior proposal. This recommendation is usually included in the scheme announcement, which is made to the ASX and publicly released.

The scheme implementation agreement will also contain deal protection mechanisms, such as 'no shop', 'no talk' and 'no due diligence' obligations on the target. These mechanisms aim to prevent the target from generating rival bidders.

A break fee is also commonly included in the scheme implementation agreement. This fee is payable by the target to the bidder if a third party is successful in obtaining control of the target or if the target directors change their recommendation to vote in favour of the scheme in certain circumstances.

The break fee is typically not exceeding 1% of the equity value of the target. This fee is designed to compensate the bidder for any losses incurred as a result of the target's breach of the agreement.

The scheme is implemented by the transfer of all target shares to the bidder in return for payment of the scheme consideration. This transfer usually takes place after the Court has approved the scheme at the second court hearing.

Here's a summary of the key steps involved in implementing a scheme:

A scheme of arrangement is a complex process, but understanding the key rules and considerations can make it more manageable.

The rules governing a scheme of arrangement under Part 5.1 of the Corporations Act are not as prescriptive as those for a takeover bid, but they still need to be carefully considered.

The court has consistently confirmed that each class of creditors should be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.

The context under which the scheme is being proposed is a key consideration, and in some cases, the court may treat secured creditors with differing priorities as a single class.

Schemes offer the benefit of seeking orders under section 411(16) of the Corporations Act to restrain proceedings in any action or other civil proceeding except with leave of the court.

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This order can be crucial in insulating the company from creditor action during the court and creditor meeting processes, especially since insolvency is not a prerequisite for a company to file a scheme.

The applicant debtor company bears a significant evidentiary burden when seeking court approval, but recent court decisions have indicated a shift towards a more streamlined approach to supporting evidence.

Jackman J's decision in a members' scheme of arrangement case has articulated a set of evidentiary principles that parties can follow to reduce the burden of supporting evidence.

After the scheme is approved by target shareholders, the target company returns to court for a second court hearing to finalize the approval.

The court may refuse to approve the scheme if it's not satisfied that the scheme has not been proposed to avoid the requirements of Chapter 6, or if ASIC hasn't issued a no-objection statement.

The court will only approve the scheme if it's satisfied that the scheme meets these conditions, and ASIC has given the court a statement that they don't object to the scheme.

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If the court approves the scheme, it will become binding on the target company and all its shareholders, including those who voted against the scheme or didn't vote at all.

The scheme is implemented by transferring all target shares to the bidder in return for payment of the scheme consideration.

The first court hearing is a crucial step in the court approval process. The target must apply to the court for orders to approve the despatch of the scheme booklet and the convening of the scheme shareholders' meeting(s).

ASIC must be given at least 14 days' notice of the court hearing. This allows them to examine the proposed scheme and scheme booklet, and make submissions on those.

The court will not make orders unless ASIC has had a reasonable opportunity to review the scheme. This ensures that all parties have a fair say in the process.

Each class of target shareholders must vote separately on the scheme, if there is more than one class.

The second court hearing is a crucial step in the scheme approval process. It usually occurs within a day or two after the scheme meeting.

The court has the discretion to refuse to approve the scheme, but they're normally reluctant to do so unless there are very limited circumstances, such as where the scheme offends public policy.

In order for the court to approve the scheme, they must be satisfied that it was not proposed to avoid the requirements of Chapter 6.

ASIC must also issue a no-objection statement for the court to approve the scheme. The target company will seek confirmation from ASIC that this statement will be provided to the court in advance of the second court hearing.

The court's approval of the scheme becomes binding on the target company and all its shareholders when the court's orders are lodged with ASIC, usually by the next business day.

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Court approval is a crucial step in implementing a takeover scheme, and it involves a second court hearing. The target company must seek court orders approving the scheme, which can only happen if ASIC has given the court a statement that they don't object to the scheme.

If the court approves the scheme, it becomes binding on the target company and all its shareholders, including those who voted against it or didn't vote at all. This usually happens the next business day after the court's orders are lodged with ASIC.

The court's approval is the final step in the implementation of the scheme. Following this, the scheme is implemented by transferring all target shares to the bidder in exchange for the scheme consideration. The transfer is done using a single master share transfer form.

Delisting of the target company from the ASX typically occurs soon after the implementation of the scheme.

Shareholder approval is a crucial step in the scheme of arrangement process. A resolution in favour of the scheme must be passed at the scheme meeting by each class of target shareholders by both 75% of the votes cast on the resolution and more than 50% in number of the target shareholders voting on the resolution.

The scheme booklet, which contains all material information about the proposed scheme, is mailed to all target shareholders and they vote on whether to approve the scheme at the scheme meeting. The target shareholders who vote against the scheme or don't vote at all are still bound by the scheme once it's approved.

To approve the scheme, the target must hold a shareholder vote and receive a resolution in favour from each class of target shareholders. The target will then seek Court orders approving the scheme, but the Court may not approve the scheme unless ASIC has given the Court a statement that ASIC does not object to the scheme.

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The shareholder approval process is a crucial step in the takeover process. It's where the target company seeks approval from its shareholders to proceed with the proposed scheme.

The first step is to prepare a disclosure document called a 'scheme booklet'. This booklet contains all the necessary information for shareholders to make an informed decision.

The scheme booklet will include an independent expert report valuing the target shares and opining on whether the scheme is in the 'best interests' of target shareholders. This report is a key factor in the approval process.

The target company lodges a draft of the scheme booklet with ASIC for review, which takes at least 14 days. This ensures that the information is accurate and compliant with regulations.

For the scheme to be approved, a resolution in favour must be passed at the scheme meeting by each class of target shareholders. The resolution requires a majority of both the votes cast and the number of shareholders voting.

Here are the specific requirements for approval:

The target company will then hold the shareholder vote on whether to approve the scheme at the 'scheme meeting'. This is a critical step in the takeover process, and it's essential to ensure that all shareholders are fully informed.

There is no specific liability regime for scheme booklet disclosures, unlike takeover bids.

The general misleading or deceptive conduct provisions in the Corporations Act apply to scheme booklets.

If a statement or omission in the scheme booklet is misleading or deceptive, the person who suffered loss or damage can recover the loss or damage from the person who breached the obligation.

Any person involved in a breach of the misleading and deceptive conduct provisions will bear liability, including the bidder for bidder-provided information.

The target company has primary liability for a scheme booklet.

Directors of the target company and bidder company can reduce their liability exposure by establishing a due diligence and verification system similar to that devised for takeover bid documents.

Courts expect target companies and bidder entities to have established and implemented such systems.

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A scheme of arrangement typically takes around four months to implement from the date of the bidder's first approach to target, but can be up to six months or longer if significant due diligence is conducted before the scheme is announced or substantial regulatory approvals are required.

The effective date of a scheme is the day it takes effect, which is upon lodgement of the court order with ASIC. There is a period of up to 2 weeks between the effective date and the implementation date, allowing time for the target to prepare for the provision of scheme consideration.

During this time, the target will close its register, determine which shareholders are registered as at the record date, and prepare for the transfer of shares or provision of scheme consideration.

Here's a breakdown of the key dates:

It's also worth noting that the Courts are generally closed from mid-December until early February, which may delay the first or second court hearings.

After the scheme implementation agreement is signed, the parties complete preparation of the explanatory memorandum, also known as the scheme booklet.

The scheme booklet must contain information about the scheme, the target directors' recommendation, and other disclosures, essentially the same information that would be in a bidder's statement and a target's statement if the transaction were effected via a takeover bid instead.

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A scheme booklet must include information supplied by both the bidder and target, which is why the target needs to ensure the scheme implementation agreement obliges the bidder to provide the requisite information.

It's common practice for a scheme booklet to include an independent expert's report, commissioned by the target, which states whether the scheme is in the best interests of target shareholders.

Here are the requirements for the scheme booklet:

ASIC must be given a reasonable opportunity to review and effectively approve the scheme booklet, usually requiring a review period of at least 14 days.

The meeting to vote on the scheme is usually held about 28 days after the scheme booklet is sent out. This meeting is a crucial step in the process.

The scheme must be approved by a majority of the target shareholders in the relevant class who have cast votes on the resolution. The court has the power to waive this requirement if necessary.

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To be approved, the scheme must also be supported by 75% or more of the votes cast on the resolution by target shareholders in the relevant class. This is a high threshold that must be met.

If the bidder or its associates hold any target shares, they must usually refrain from voting or vote in a separate class. This is a common practice in such situations.

The requirement for approval by each class of shareholders is outlined in the following table:

The scheme booklet is a crucial document that must be prepared and sent to shareholders in advance of the scheme vote. It contains information about the scheme, the target directors' recommendation, and other disclosures.

A scheme booklet must contain the same information that would be in a bidder's statement and a target's statement if the transaction were effected via a takeover bid instead. This includes information supplied by both the bidder and target.

The target must ensure the scheme implementation agreement obliges the bidder to provide the requisite information, making it a collaborative effort. It's expected by ASIC and the court for the scheme booklet to include or be accompanied by an independent expert's report commissioned by the target.

The independent expert's report states whether, in the expert's opinion, the scheme is in the best interests of target shareholders. A statutory requirement exists for the target to commission an independent expert's report where the bidder's voting power in the target is 30% or more, or a director of the bidder is also a director of the target.

ASIC must be given a reasonable opportunity to review and effectively approve the scheme booklet, usually requiring a review period of at least 14 days.

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In India, a scheme of arrangement is governed by Section 230 to 232 of the Companies Act, 2013, which allows for the compromise or arrangement between a company and its creditors or shareholders.

A scheme of arrangement in India typically requires the approval of the National Company Law Tribunal (NCLT), which has the power to approve or reject the scheme.

In the UK, a scheme of arrangement is governed by Part 26 of the Companies Act 2006, which allows for the compromise or arrangement between a company and its creditors or shareholders, and requires the approval of the court.

The UK's scheme of arrangement process typically involves a court-sanctioned meeting of the company's members and creditors to consider and vote on the proposed scheme.

In Australia, a scheme of arrangement is governed by Section 411 to 414 of the Corporations Act 2001, which allows for the compromise or arrangement between a company and its creditors or shareholders, and requires the approval of the court or a majority of the company's members.

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In some countries, the court requires a significant majority of shareholders or creditors to vote in favour of a scheme, with a minimum of 75% required.

The court's approval process is slightly different for code companies, where a 75% headcount test is not applicable.

The court will only approve a scheme for code companies if it believes that shareholders won't be negatively impacted by the change, or if the Takeovers Panel presents a no-objection statement.

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In the United Kingdom, the Companies Act 2006, Part 26 (sections 895–901) and Part 27 (special rules for public companies) govern schemes of arrangement.

To effect a scheme, a 'compromise or arrangement' must be proposed between the company and its shareholders or creditors.

An application must be submitted to court requesting an order for a meeting, which will then be held to seek approval of the proposed scheme.

If the scheme is approved, the court must sanction it and the court order will be filed with the Registrar of Companies.

Here are the key requirements for a scheme of arrangement in the UK: