Members' schemes of arrangement - overview of the court approval process

Key Points:

Preparation is key, as the court can sometimes have concerns if the supporting affidavit material contains a number of errors and/or is incomplete.

A members' scheme of arrangement involves an agreement which affects the rights and obligations of a company and its shareholders. It is a process commonly used in the Mergers & Acquisitions area to acquire all of the shares in a target company. The term "arrangement" is one that can cover a range of matters including:1

corporate reconstruction or reorganization, which may involve an amalgamation or merger of companies; de-mutualisations; the de-merger or break up of a company or a corporate group; and changes of control that are functionally equivalent, and therefore an alternative, to a takeover bid. This article provides an overview of the steps associated with the court approval process for a members' scheme of arrangement that seeks to effect a change of control (as an alternative to a takeover bid). It will also identify some practical tips that may be useful when involved with such an application.

The nature and purpose of a members' scheme

A members' scheme is a commonly used mechanism to effect structural change within a company or achieve change of corporate control of a target company. Schemes are an alternative to takeover bids under Chapter 6 of the Corporations Act 2001 and involve the drafting of an agreement that provides for all of the shares in the company being transferred for a set price or exchanged for shares in the acquiring company.

The primary advantages of using a members' scheme to achieve control of a target company are:

it avoids the need for numerous agreements between the parties that would otherwise be necessary to achieve the same outcome; it can provide greater certainty concerning both the timing and outcome of the proposal, subject to court approval; it has a lower threshold for approval than a takeover bid; and if approved by the statutory majorities and by the court, the scheme is binding on those members who voted against the scheme. The steps associated with the court approval process

The steps associated with the court approval process for a members' scheme of arrangement are identified in Part 5.1 of the Act, beginning at section 411. Those steps can be summarised as follows:2

A draft notice to convene a meeting of members and an explanatory statement in relation to the proposed scheme of arrangement is prepared - with notification to the Australian Securities and Investments Commission ("ASIC"); An application is made to the court to convene a meeting (or meetings if there is more than one class) of members. At this hearing (the "First Court Hearing") the court will assess whether the relevant threshold considerations have been met (eg., whether the scheme documents provide sufficient disclosure of material matters to members, whether ASIC has received sufficient notice, whether ASIC has any objections at that stage). If satisfied, the court will order that a meeting of the members affected by the scheme be convened (the "Court Ordered Meeting"); At the Court Ordered Meeting the "classes" of members will either vote for/against or abstain from voting on a resolution about the proposed scheme. For the scheme to proceed it must be approved by the requisite majorities of registered members set out in section 411(4)(a)(ii) of the Act (described in more detail below); If the scheme is approved by the requisite majorities at the Court Ordered Meeting, application is then made to the court to approve the scheme (the "Second Court Hearing"). If the court is satisfied that the voting and other procedural requirements have been met, the court may exercise its discretion to reject or approve the scheme (with or without alteration) or withhold approval until all conditions precedent to implementation have been fulfilled)3; and The court order is then lodged with ASIC (together with a copy of the company's constitution, unless dispensed with by the court order). Step 1 - The First Court Hearing

Preparation

To be able to proceed with an application at the First Court Hearing, the Applicant for the order approving the members' scheme (normally the target company) should address the following important matters in advance of the date set for hearing:

A draft explanatory statement about the proposed scheme that will accompany the notice of the Court Ordered Meeting to members should be prepared well in advance (the draft explanatory statement is discussed further below); If applicable, the proposed scheme should carefully assess any 'lock up' devices (such as any "break fees" payable in the event that the scheme does not proceed and 'no shop' and 'no talk arrangements' to prevent discussions or negotiations with third parties during the period of the agreement) involving the target company, and ensure that they are reasonable, prominently stated and do not inhibit the directors discharging their duties; The draft explanatory statement should be provided to ASIC well ahead of the date anticipated for the First Court Hearing. This is because ASIC must be provided with a reasonable opportunity to examine the terms of the explanatory statement and comment on it. A period of 14 days is the bare minimum time required by ASIC to allow it to examine the draft explanatory statement and the terms of the proposed scheme. If possible, greater time should be allowed. If ASIC has been afforded sufficient time, it will generally provide a written statement regarding its views in relation to the proposed scheme prior to the First Court Hearing. Before providing this statement to the court, ASIC may suggest amendments to the draft explanatory statement and make enquiries about the terms of the proposed scheme. Plenty of time should be built into the process if possible, to make sure this essential step can be completed properly; Whether there are any distinct "classes" within the members of the target company that need to be dealt with for the purposes of the Court Ordered Meeting. The most commonly used definition of a "class" in the context of a scheme of...