Acquiring listed companies by scheme of arrangement

Under Australian law there are two main methods of obtaining control of a listed company: takeover bid and scheme of arrangement. For large transactions, schemes have increasingly become the preferred method of acquisition. Advantages of a scheme, as compared with a takeover bid, include that a scheme:

• requires a lower threshold of target shareholder approval in order to attain 100% ownership;
• has more flexibility in terms of the structure of the consideration that can be offered to shareholders;
• is an “all or nothing” structure, giving certainty of outcome; and
• has a more certain timeframe.

A recent example of an acquisition by way of scheme of arrangement was the acquisition of Arrow Energy – valued at A$3.5 billion (US$3.5 billion) – by a joint venture company owned by PetroChina and Royal Dutch Shell. As part of this transaction, Arrow Energy demerged its international assets into a new ASX-listed entity, Dart Energy.

Overview

A scheme of arrangement is a court-approved arrangement between the target and its shareholders for the transfer or cancellation of their shares in exchange for consideration (usually in the form of cash, shares or a combination of both) from the acquirer. It involves:

• an initial court hearing to order a shareholder meeting;
• a shareholder meeting where the scheme must be approved by 75% of votes cast, and a majority of persons voting; and
• a second court hearing to approve the scheme.

Once the scheme is approved at the second court hearing, it will bind all shareholders of the target, whether or not they voted in favour of it.

Although it may be an acquirer who initiates the transaction, a key feature of a scheme of arrangement is that it is formally proposed by the target. The process is managed by the target, not the acquirer. While this gives an acquirer less control than in a takeover bid, it also means that the transaction will have the clear support of the target, and target directors and management will generally work toward ensuring its success. The process generally takes three to four months from announcement.

The implementation agreement

The acquirer and target enter into a scheme implementation agreement (SIA) which sets out each party’s agreement to do all things necessary to propose and implement the scheme.

The SIA also addresses the consideration to be offered to target shareholders, the conditions precedent (e.g. Australian foreign investment approval) and other procedural requirements which must be met or waived, and how the target must conduct its business between signing of the SIA and closing of the transaction.

For foreign acquirers, approval by the Australian Foreign Investment Review Board is generally required where the target company has a value of A$231 million or more. Direct investment by a foreign government or a related entity will require approval irrespective of the value of the target. The Australian government encourages foreign investment where it is consistent with Australia’s national interests.

Court and shareholder approval

To obtain shareholder approval, the target must send a scheme booklet to its shareholders which includes all the information that is material to a shareholder’s decision whether to vote in favour of the scheme. The scheme booklet requires drafting input from the acquirer; in particular it must set out the acquirer’s intentions for the target’s business and employees. This explanatory statement is commonly accompanied by an independent expert’s report, which considers whether the proposed scheme is in the best interest of target shareholders.

The scheme of arrangement process is supervised by an Australian court, and generally involves two court hearings.

At the first court hearing, the target asks the court to order the convening of a meeting of target shareholders to approve the scheme, and order that the scheme booklet be sent to target shareholders. The target is required to bring all relevant matters relating to the scheme to the attention of the court – this usually involves key aspects of the scheme booklet. To make an order convening the shareholder meeting, the court must satisfy itself that the scheme is of such a nature that, if the scheme is approved by target shareholders, the court would be likely to approve it at the second hearing.

The target shareholder meeting to consider the scheme will then be held. The acquirer and its associates cannot vote at the scheme meeting. If target shareholder approval is obtained, the target will ask the court to approve the scheme.

While courts have rarely refused to approve a scheme of arrangement that has been endorsed by target shareholders, the court does have a discretion whether to approve the scheme. In exercising this discretion, the court will consider whether, among other things, all procedural requirements have been met, the scheme was approved on the basis of adequate information by shareholders acting in good faith and the proposal is fair and reasonable and an intelligent honest shareholder might approve it.

Regulatory oversight

Australia’s securities law regulator, the Australian Securities and Investments Commission (ASIC), also plays an important role in schemes of arrangement. ASIC must be given at least 14 days to review the scheme booklet prior to the first court hearing.

Court approval of a scheme of arrangement at the second court hearing is easier to achieve if ASIC issues a “no objection statement”. ASIC is likely to issue such a statement if all material information relating to the scheme has been disclosed to it and it is comfortable that shareholders are not adversely affected by the acquisition being implemented by scheme of arrangement rather than by takeover bid.

Michael Sheng is a partner in the Shanghai office, and Marie McDonald is a partner in the Melbourne office, of Blake Dawson