Cancellation schemes of arrangement: takeover schemes out, restructurings unaffected

Background: removing the stamp duty benefit for takeovers effected by cancellation scheme of arrangement

The Chancellor’s 2014 Autumn Statement set out proposals to equalise the stamp duty treatment of takeovers effected by way of offer and scheme of arrangement. The latter, if structured as a cancellation scheme, avoids stamp duty by cancelling the target shares by way of reduction of capital and immediately reissuing new shares in the target to the purchaser, thereby avoiding any transfer of shares to which stamp duty can attach.

The Treasury’s understandable motivation is to stop the use of cancellation schemes to avoid the payment of stamp duty.

The draft regulations

The Government has now published draft regulations to prohibit cancellation schemes on takeovers. The regulations will amend the Companies Act 2006 to prohibit a company from reducing its share capital under section 641(1) as part of a scheme by virtue of which a person (either alone or acting together with its associates) would acquire all the shares, or all the shares of a particular class, in the company.

The draft regulations will come into force on the day after they are made. This will be subject to a transitional provision under which the prohibition will not apply to takeovers where an announcement concerning a firm intention to make an offer has been made (or the terms of the offer have been agreed in the case of a company that is not subject to the Takeover Code) before the regulations come into force. The implementation date is not currently known, although the Government has indicated it wants to introduce the regulations as quickly as possible in order to avoid companies accelerating deals in order to benefit from the existing regime.

Carve out for restructurings

The prohibition will not apply where the scheme amounts to a restructuring that inserts a new holding company, provided that all or substantially all of the members of the company undertaking the scheme become members of the new holding company and their proportionate shareholdings remain substantially the same. Such schemes are used in a variety of situations including demergers and redomiciles, and whilst they were never the target for the Treasury’s ire, a clear carve out for these is very welcome.

The end for schemes on takeovers?

We do not, by any means, anticipate this will mean the end of the use of schemes on takeovers generally. The adoption of a scheme structure is generally not driven by the stamp duty saving (although this can, at 0.5% of the consideration payable, be significant on many takeovers); the principal benefit of a scheme is to reduce the threshold required to enable the purchaser to compulsorily acquire the entire issued share capital of the target. Instead, we will see the re-emergence of transfer schemes where the Court orders the transfer of the target’s entire issued share capital to the purchaser once the scheme consent threshold (a majority in number of voting target shareholders between them holding not less than 75% in value of the shares voting on the scheme) has been met. This contrasts with the 90% acceptance threshold at which the statutory squeeze out is triggered on takeover offers.

Companies listed on AIM (and certain other growth markets) currently
benefit from an exemption from stamp duty on the transfer of their shares.
Provided the company remains quoted until after the effective date of the
scheme, this exemption should remain available on transfer schemes, negating any impact of the cancellation scheme prohibition on bids for these companies.

Source: The draft Companies Act 2006 (Amendment of Part 17) Regulations 2015