Scheme of Arrangement

A scheme of arrangement is a statutory procedure under which a company makes a binding compromise or arrangement with its shareholders, its creditors, or a class of either, with the approval of a court. Once the required majority has voted in favour and the court has sanctioned it, the scheme binds every member of the class, including those who voted against or did not vote. It is used to carry out takeovers, group reorganisations, demergers and the restructuring of debt.

The procedure originated in English company law and is now found in Part 26 of the UK Companies Act 2006. Closely similar procedures exist in Ireland, Australia, Hong Kong, Singapore, India, South Africa and several offshore jurisdictions. In the takeover context it is the main alternative to a contractual takeover offer, and it has become the usual route for recommended bids for UK public companies.

A scheme is proposed by the company itself, so in practice it needs the support of the board. The steps are:

1. Application to the court. The company asks the court for permission to call meetings of the affected classes. The court considers whether the classes have been correctly drawn.
2. Scheme document. A circular explaining the terms, their effect and the directors' interests is sent to those entitled to vote.
3. Class meetings. Each class votes separately. Approval requires a majority in number of those voting, representing at least 75 per cent in value of the class voting, in person or by proxy.
4. Sanction hearing. The court checks that the statute has been followed, that the class was fairly represented and that the scheme is one a reasonable member of the class could approve. Objectors may be heard.
5. Effectiveness. The scheme takes effect when the court order is delivered to the companies registrar.

Where shareholders vote, the meeting is a form of shareholder meeting convened by court order, and institutional holders usually vote through proxy voting.

In a takeover by scheme, the target's shares are transferred to the bidder, or cancelled and reissued to it, in return for cash, bidder shares or a mix. The attraction for the bidder is certainty. Approval by 75 per cent in value of the shares voted delivers 100 per cent ownership in one step. Under a contractual offer, by contrast, a bidder in the UK must reach acceptances of 90 per cent of the shares to which the offer relates before it can compulsorily buy out the remainder.

There are trade-offs. The target controls the timetable, so a scheme is rarely suitable for a hostile bid. Shares already held by the bidder cannot be voted in the same class. The timetable is fixed by court dates. Schemes for companies subject to the UK Takeover Code must also comply with its rules. The broader commercial setting is covered under mergers and acquisitions.

Creditor schemes allow a company in difficulty to change the terms of its debts, for example by extending maturities, reducing principal or swapping debt for shares, without the consent of every creditor. A scheme is not itself an insolvency process and can be used by solvent companies. Insurers have used schemes to close books of old liabilities. English schemes have been used by foreign companies with a sufficient connection to England, such as debt governed by English law.

A limitation is that a scheme cannot be imposed on a class that votes against it. In 2020 the UK added the restructuring plan under Part 26A of the Companies Act, which is modelled on the scheme but allows the court to bind a dissenting class in defined circumstances, known as cross-class cram-down. A scheme often sits alongside a negotiated loan restructuring, and affected noteholders may vote through a bondholder meeting process run by the clearing systems.

For holders of the target's securities, an effective scheme is a mandatory corporate action: positions are removed and the consideration is paid whether or not the holder voted. Where holders may choose between cash and shares, custodians collect elections before a deadline. Entitlement is fixed at a scheme record date, the shares are suspended and then cancelled from listing under the delisting process, and payment follows within a set period after the effective date. The operational steps are described under merger consideration processing, and share-based deals under stock-for-stock merger.

Critics note that turnout at scheme meetings can be low, so a deal may be approved by holders of well under 75 per cent of all shares. The "majority in number" test has been attacked as outdated where most investors hold through nominees, and as open to manipulation by splitting holdings. Court supervision adds cost, though it is also the main protection for minorities.

• The Takeover Panel
• Companies Act 2006, Part 26 (legislation.gov.uk)