May 9, 2022
Cross-Border: Overview of U.K. “Schemes of Arrangement”
The most common structure for acquiring a U.K. public company in a friendly transaction is a “scheme of arrangement,” in which the target company seeks a court order permitting it to put a deal up to a shareholder vote. If a sufficient majority of each shareholder “class” approves the transaction and the conditions to it are satisfied, the scheme will be sanctioned by the court and the deal will close. In addition to being the structure of choice for public company deals with U.K. targets, a scheme of arrangement also provides a way to acquire a private company without the need for all of thee target’s shareholders to sign-off on deal documents.
This Cooley blog provides an overview of how these transactions work and addresses a number of questions about their mechanics. This excerpt discusses what a “class” of shareholders means when dealing with a scheme of arrangement:
In the context of a scheme, a class is essentially a grouping of shareholders. This is not the same as the classes of shares in a company’s share capital (i.e., common stock vs. preferred stock) – a company may have several issued share classes, but the shareholders can all form a single class for the purposes of the scheme. The key here is to assess what rights are being given up and what rights are being granted in return, and whether the treatment differs amongst shareholders to such an extent that it would be impossible for them to have a common interest and consider the scheme together in a single class.
For example, if all common stock shareholders receive the same consideration, then they are all likely to be deemed members of the same class. If, however, some shareholders receive a different mix of consideration or another benefit as a result of the transaction (such as a transaction bonus, repayment of shareholder debt, etc.), they may be deemed to form a separate class and be excluded from the class vote of the other common stock shareholders. Similarly, if the proceeds are flowing through a liquidation waterfall without any element of discretion being applied by the target, you may be able to take the position that the shareholders’ interests are sufficiently aligned, and they can form a single class.
The memo also addresses the vote required to approve a scheme, the use of stock as consideration, and the process and timing of the transaction.
– John Jenkins