English Law Schemes Of Arrangement: Class Composition

Focus on the AB InBev and SABMiller merger

Having received the sanction of antitrust regulators in Europe, the U.S., China and South Africa, the planned merger of brewing giants AB InBev and SABMiller was scrutinised this week by the High Court in London on a topic very familiar to those acquainted with English law restructurings: class composition. The outcome of the hearing, that not all members of SABMiller should be considered to be in the same class for scheme voting purposes, raises some interesting questions around class composition because of the unusual circumstances of the proposed merger.

Background

The merger, valued at a British record of £79 billion, is set to be carried out by an English law scheme of arrangement. Similar to their use in the restructuring market, schemes are frequently used in mergers because of their ability to force dissenting members to sell their shares whether or not they vote in favour of a scheme, thereby offering certainty of acquisition of 100% of the target for the bidder.

The issue of class composition is very important: in order for any proposed scheme to be approved, each separate class of members1 must vote in favour by a majority in number representing 75% in value of the members or class of members voting. Non-consenting classes cannot be affected by the scheme and thus dissenters wishing to thwart a takeover may try to claim they (or another member or group of members) constitute a different class, thereby splitting the vote and making the voting threshold harder to reach.

Class test

Class composition is dealt with at a court directions hearing which takes place before the members' vote. At such a hearing, the court will direct the terms of a meeting of the members and (importantly in the present case) consider how members are to be divided (if at all) by class.

So how are classes determined by the courts? The basic rule is that a class is confined to those whose rights against the scheme company are "not so dissimilar as to make it impossible for them to consult together with a view to their common interest".2

Courts apply this rule to the specific circumstances of each case. Being subject to fairly wide legal interpretation, the broad consequence of the rule is that rights of members need not be identical and the concept of class can be quite loosely applied: the test has been used to disregard variations in rights ranging from interest rates and maturities to lock-up agreements and...