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Report on Members' Schemes of Arrangement Discussion paper_Cover.qxd 16/12/09 3:46 PM Page 1 MEMBERS’ SCHEMES OF ARRANGEMENT MEMBERS’ SCHEMES OF ARRANGEMENT Report December 2009 December 2009 Corporations and Markets Advisory Committee www.camac.gov.au Corporations and Markets Advisory Committee Members’ schemes of arrangement Report December 2009 © Corporations and Markets Advisory Committee 2009 ISBN 978-0-9806747-0-5 (print version) ISBN 978-0-9806747-1-2 (on-line version) This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process without attribution. Disclaimer. This document summarises information and makes general statements about the law. However, it has not been prepared for the purpose of providing legal advice. In all cases, you should rely on your own legal advice to determine how the law may apply in particular circumstances. This report is available at: www.camac.gov.au A copy of this report can also be requested by: email: [email protected] fax: (02) 9911 2955 phone: (02) 9911 2950 or by writing to: Corporations and Markets Advisory Committee GPO Box 3967 SYDNEY NSW 2001 Members’ schemes of arrangement v Contents Contents 1 Introduction ......................................................................................1 1.1 Scope of review .....................................................................1 1.2 The review process ................................................................2 1.3 Terminology ..........................................................................4 1.4 Outline of report ....................................................................4 1.5 The Advisory Committee ......................................................6 2 Outline of scheme provisions ...........................................................9 2.1 Legislative history .................................................................9 2.2 Scope ...................................................................................10 2.3 Procedural steps...................................................................13 3 Change of control through schemes and other means.................23 3.1 Overview .............................................................................23 3.2 Change of control through schemes ....................................24 3.3 Choosing between a scheme and a bid ................................26 3.4 Comparison of scheme and bid protective provisions.........34 3.5 Comparison of scheme and bid approval mechanisms .........................................................................43 3.6 Share capital reduction ........................................................53 4 Information for shareholders ........................................................59 4.1 Scheme statement ................................................................59 4.2 Liability and defences for disclosure breaches....................63 4.3 Standard for expert’s opinion ..............................................64 4.4 Submissions.........................................................................65 4.5 Advisory Committee position..............................................70 5 Voting on schemes ..........................................................................75 5.1 Class voting .........................................................................75 5.2 Headcount test .....................................................................77 vi Members’ schemes of arrangement Contents 5.3 Submissions .........................................................................88 5.4 Advisory Committee position..............................................91 6 Regulatory and judicial supervision..............................................95 6.1 ASIC exemption and modification powers..........................95 6.2 Purpose and comparable protections tests ...........................96 6.3 Submissions .......................................................................103 6.4 Advisory Committee position............................................106 7 Coverage of schemes.....................................................................109 7.1 Option and convertible noteholders...................................109 7.2 Managed investment schemes............................................110 7.3 Mergers within corporate groups.......................................113 7.4 Schemes not supported by the company............................114 7.5 Submissions .......................................................................115 7.6 Advisory Committee position............................................118 8 Other matters ................................................................................121 8.1 ASIC registration requirements .........................................121 8.2 Alteration of the constitution .............................................122 8.3 Voting on a capital reduction as part of a scheme .............122 8.4 Third party encumbrances..................................................123 8.5 Share acquisitions under s 414...........................................125 8.6 Creditors’ schemes.............................................................125 8.7 Advisory Committee position............................................127 Members’ schemes of arrangement 1 Introduction 1 Introduction This chapter describes the scope of the review and the review process and outlines matters covered in the report. 1.1 Scope of review Members’ schemes of arrangement under Part 5.1 of the Corporations Act are a mechanism for achieving a binding arrangement with shareholders on structural change within a company or a corporate group. They can be used to achieve changes in capital structure, the rights of members or the relationship between corporate entities. They can be tailored to novel or complex corporate changes or be used for group reconstructions. Members’ schemes have also evolved in recent years as a means of achieving changes of corporate control. They are commonly used for this purpose, in non-hostile circumstances, in preference to a takeover bid under Chapter 6 of the Corporations Act. In the period from 1 January 2008 to 1 July 2009, there were 78 takeover bids in relation to listed entities (being 73 off-market and 5 on-market bids), compared with 58 members’ schemes.1 The use of schemes to change corporate control has received judicial and regulatory recognition. The Advisory Committee was asked by the former Government, in the context of a broader reference, to provide advice on a particular aspect of members’ schemes, namely the ‘headcount’ test for 1 Statistics provided by ASIC. Schemes may be preferred for larger change of control transactions. For instance, according to information provided by Blake Dawson, in the period January 2007 to May 2009, there were 11 members’ schemes involving funds over $1.5bn ($30.3bn in total), compared with 5 takeover bids involving funds over $1.5bn ($9.8bn in total). 2 Members’ schemes of arrangement Introduction shareholder approval.2 The Committee considered that it would be useful to consider this issue in the context of a broader review of whether the members’ scheme provisions operate in an effective and appropriate manner, and with appropriate safeguards, to facilitate corporate restructuring.3 The Committee had in mind the increasing and changing use of members’ schemes, including their use as a means to achieve change of corporate control, and the fact that the relevant provisions of the Corporations Act have remained largely unchanged over many years. While the Committee has previously considered schemes in various contexts,4 they have not been the subject of a general review. The report draws comparisons between the use of schemes, bids and share capital reductions to effect a change of control in a company. It discusses a range of issues and considers possible changes to the scheme provisions that would affect change of control schemes. However, the report does not go on to consider the treatment of change of control transactions under Chapters 6 and 6A of the Corporations Act, which, together with the role of the Takeovers Panel, are tailored for bids. While bids are referred to by way of comparison, the focus of this report is on schemes. 1.2 The review process Discussion paper CAMAC published a discussion paper in June 2008 and invited comment from interested parties. The paper provided background material on the use of members’ schemes for change of control and 2 In May 2007, the then Parliamentary Secretary to the Treasurer, the Hon. Chris Pearce, MP, referred to the Advisory Committee, amongst other matters, whether the headcount test in a members’ scheme, namely that the scheme be approved by a majority in number of members present and voting, should be removed. This reference arose from a submission from the Law Council of Australia, in the context of the then Government’s insolvency review, recommending abolition of the headcount test. The other matters in the May 2007 reference are dealt with in the Advisory Committee report Issues in external administration (November 2008). 3 The Advisory Committee can initiate its own reviews, as well as respond to matters referred to it by the Government: ASIC Act s 148. 4 Schemes have been considered in the CAMAC reports Compulsory Acquisitions (1996) paras 5.1-5.14, Corporate Groups (2000) Chapter 5 and Long-tail liabilities: the treatment of unascertained future personal injury claims (May 2008) Chapter 7. Members’ schemes
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