In Part 1 of this two-part blog series, we considered how the provisions of articles of association may help a company remove any dissenting minority shareholders by using (1) drag provisions; or (2) a compulsory purchase mechanism. In this part 2 of the blog series, we look at how the provisions of the Companies Act 2006 ("CA 2006") may help remove dissenting minority shareholders or those who have ignored an offer or are untraceable, by using (1) the "squeeze out" procedure; or (2) schemes of arrangement.
Where an offer by a bidder for the purchase of a company has been accepted by a substantial majority of shareholders (please see the thresholds below), but there remains a residual minority of shareholders who have not accepted the offer, the CA 2006 provides a "squeeze-out" mechanism to enable the buyer to acquire the minority shareholdings.
The "squeeze out" procedure is a compulsory acquisition procedure which forces the minority shareholders to sell their shares against their will. As such, high thresholds apply when exercising the rights and there are protective rules in respect of the price that must be paid for the target shares.
To implement the statutory "squeeze-out" right and acquire the minority shareholders' stake in a company, a buyer must: (1) structure the acquisition by way of a takeover offer; (2) offer to acquire all of the shares, or all of the shares of the relevant class, in the target company; and (3) following that offer, satisfy a dual test by acquiring (or unconditionally contracting to acquire) both:
- 90% in value of the shares to which the offer related; and
- 90% of the voting rights carried by those shares.
In practice, this dual test is likely to be satisfied if the first limb of the test is satisfied, as the percentage of total share capital with voting rights and the percentage of voting rights will usually be the same.
Any takeover offer must contain the same terms for all the shares to which the offer relates, or where there are shares of different classes, the terms of the offer must be the same in relation to all the shares of each class. Accordingly, where the target company has different classes of shares, it is possible to structure a takeover offer with different terms for each of the separate share classes.
Once the "squeeze-out" thresholds set out above are met by a potential buyer, that buyer may implement the "squeeze out" procedure by serving a statutory notice on the minority shareholders within 6 months of the date of the initial offer to buy the target company.
The CA 2006 contains detailed provisions regarding the service of statutory notices, completion of the buyout and the ability of any dissenting shareholder to apply to the court to prevent the buyer acquiring their shares, or to seek to change the terms on offer.
If a buyer satisfies all of the requisite tests to exercise the "squeeze-out" procedure, but chooses not to actually exercise the right, a minority shareholder may force that buyer to acquire their shares under a similar statutory "sell-out" procedure (i.e. effectively a statutory "tag-along", or sell-out right for the minority).
Scheme of arrangement
Another, albeit less used option, where there are dissenting minority shareholders to any proposed sale of a company is a statutory scheme of arrangement. Under this option, a company makes an arrangement with all or some of its shareholders to accept a buy-out proposal. A scheme of arrangement is binding on all shareholders provided that it is:
- approved by 75% of actively voting shareholders (importantly, this is not 75% of all of the shareholders of the company, but 75% of those shareholders who remain active and contactable by the company); and
- sanctioned by the court.
Essentially, a scheme of arrangement involves an application to the court to sanction the calling of a meeting of the minority target shareholders to approve the buy-out proposal.
Before the court sanctions the scheme, it first needs to be satisfied that:
- the statutory provisions have been complied with;
- the affected share class was fairly represented by those attending the meeting to approve the scheme and that the shareholder majority acted bona fide;
- the approval of the scheme is "reasonable".
A recent judgement to approve a scheme of arrangement in respect Cerus Endovascular Ltd ( 4 WLUK 323) provides a good example of the factors the court will consider in determining the reasonableness of a scheme.
The timing and cost implications of court involvement in this process mean that the "squeeze-out" procedure is more often used. Scheme of arrangements can be useful, however, where a buyer has been unable to reach the "squeeze-out" 90% threshold due to a large number of inactive shareholders.
This is a broad summary of the statutory "squeeze-out" and scheme of arrangement procedures. If you have any questions at all in relation to the matters discussed in this article, please do not hesitate to get in contact with your usual Brodies contact or one of the contacts listed below who will be happy to assist.