Today’s release of the final Corporations and Markets Advisory Committee (CAMAC) Report has put the debate over the use of schemes of arrangement squarely back on the agenda.
Freehills’ M&A partner, Tony Damian, strongly supports the reforms contained in the CAMAC Report regarding the use of schemes of arrangement to effect change of control transactions.
‘It’s time for the government to now act on CAMAC’s proposals. It’s time to put an end to the unnecessary and unacceptable deal risk that sits across all schemes,’ Damian said.
‘If enacted, these reforms will ensure that schemes continue to play their useful role in the Australian mergers and acquisitions landscape.’
Schemes of arrangement are, along with takeover bids, the most common way of effecting a change of control of a listed company.
Damian is co-author of the leading book on transactions via scheme of arrangement, Schemes, Takeovers and Himalayan Peaks. The reform proposals in that book are referred to extensively in the CAMAC report.
‘The usual criticisms of schemes are plainly incorrect. It’s simply not true to say that schemes are done on the cheap, or that target boards are too afraid to ever reject a scheme proposal.
‘Naturally, some institutional shareholders wish to be able to have a veto over every deal. But that is not good for an efficient market for corporate control,’ said Damian.
Recent transactions structured as scheme of arrangement include Eldorado Gold Corporation’s $2.4 billion acquisition of Sino Gold, on which Damian advised Eldorado Gold.
CAMAC reform proposals
CAMAC’s key recommendations1 are:
- Repeal of takeover avoidance provision – the Corporations Act provides that a scheme cannot be approved if it was proposed for the purpose of avoiding the takeover provisions. This provision has been used on many occasions by objectors who have tried to spoil a scheme.
- Director liability – in IPOs and in takeovers, directors who issued the relevant documents have due diligence defences to liability. There is no equivalent defence for scheme booklets. CAMAC has recommended a review of this position to address the different treatment across functionally similar documents.
- Extension of schemes to listed managed investment schemes – this would mean the scheme procedure could be used for deals involving property and infrastructure trusts.
- Head count test – CAMAC has recommended the removal of the anachronistic head count test that requires a majority of shareholders by number to approve a scheme, in addition to the approval threshold of 75 per cent of votes cast. This provision is prone to share splitting.
- Size of scheme booklets – CAMAC has supported a number of principles, including incorporation of documents by reference, to try and reduce the size of scheme booklets.
- Court powers – CAMAC has recommended giving the court a range of powers to deal with the current inflexibility of the scheme process and provisions.
More about schemes of arrangement
Schemes of arrangement:
- require court approval, shareholder approval and the approval of the target board (schemes can only be used in friendly deals – in a hostile deal, a takeover bid must be used)
- are popular, though in friendly deals, the takeover bid is still the preferred structure
- have approval thresholds that are different but not necessarily lower than in a takeover. In a scheme, 75 per cent of the votes cast along with a majority of shareholders by number are needed to approve the scheme. In a takeover, 90 per cent of all shares must be acquired before a bidder can move to compulsory acquisition.
Schemes, Takeovers and Himalayan Peaks, authored by Tony Damian and Andrew Rich, is now in its second edition and can be purchased by emailing law.parsons@usyd.edu.au
Endnotes
- The full CAMAC Report can be found here.
More information
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