Schemes of arrangement are a well-known and familiar tool for many within M&A. They are often used to implement acquisitions of public or widely held companies or restructurings of financial indebtedness, frequently as part of an acquisition through a debt-for-equity transaction. What is less well-known is how schemes of arrangement can potentially be used to manage a target company’s liabilities beyond financial indebtedness particularly in an increasingly litigious and regulated world.
What is a scheme of arrangement?
A long-standing feature of company law, a scheme of arrangement allows a company to impose a compromise or arrangement on its shareholders and/ or creditors, provided the scheme of arrangement is sanctioned by the court and approved by shareholders and/or creditors (depending on who is affected by the scheme) accounting for 75% in value and 50% in number.
Using schemes to manage significant liabilities
Companies facing significant liabilities owing to a large group of creditors — a wave of asbestos-related claims or PPI mis-selling claims, for example — could use a scheme of arrangement to manage existing and future litigation. Liability management schemes, as they are known, establish a framework to manage claims against a business, providing certainty and finality for all parties.
Liability management schemes usually include a moratorium on bringing proceedings against the company, a process for creditors and claimants to submit their claims, a formula for calculating compensation for accepted claims, and a bar date after which future claims are no longer accepted. After a scheme is approved and voted through, the scheme is moved away from the company and overseen by an independent supervisor. Companies that have pursued liability management schemes in recent years include the card payment protection providers CPP and Affinion.
In establishing a process for managing potentially large liabilities, schemes can ultimately pave the way for M&A. They can be considered by both buyers and sellers of target companies with significant liabilities. For sellers, a scheme could be used to manage a known, but potentially unquantifiable, liability prior to a sale to increase the valuation of a target company that otherwise shows strong underlying performance. Whereas acquirers could, for example, consider making an acquisition conditional on the implementation of a scheme.
There are potential challenges to enforcing schemes of arrangement. They are subject to challenge by creditors, and the court will need to be satisfied that the scheme is “fair” and that the affected group of claimants was fairly represented by those who voted on the scheme. The support of industry regulators may also be an important factor in showing the scheme was fair. Planning the process in advance, including timetable and announcements, will be important.