Schemes of arrangement favoured for UK acquisitions

Schemes of arrangement are typically used for takeovers which are recommended by the board of directors of a target company. A takeover can be implemented through a scheme of arrangement under which the High Court, using a statutory procedure, gives effect to the takeover.

According to LexisNexis' market tracker trend report on UK public mergers and acquisitions activity in 2019, there were a total of 66 firm offers involving UK public companies last year, up from 42 in 2018, with 71% of the offers being structured by schemes of arrangement. Discounting five hostile takeovers, 94% of the remaining firm offers in 2019 were structured as schemes, the report said.

Adam Cain of Pinsent Masons, the law firm behind Out-Law and contributor to the report, said: "Schemes of arrangement remained the deal structure of choice in 2019. This reinforces the strong view amongst market participants that there are numerous benefits to using a scheme, such as the greater certainty of obtaining 100% control of the target company. We predict that this will continue in 2020 due to the scheme’s predictability, its flexibility, and the commercial attitude of English and Welsh judges."

"Market conditions have provided opportunities for private equity bidders that have simply been too good to ignore," said Julian Stanier of Pinsent Masons. "The drop in the value of sterling has made UK targets increasingly attractive, particularly to US bidders. With the wider political uncertainty temporarily lifted following the recent General Election, we see the trend of P2Ps continuing."

The report also highlighted two cases in which bidders had provided legally binding post-offer undertakings to the UK's Takeover Panel. In the case of the takeover offer for Cobham by Advent International, a series of five year long commitments were made, including undertakings to retain the Cobham name, maintain physical headquarters in the UK for three of the company's divisions, including aviation, and maintain existing research and development spend across the UK Cobham group.

"Whilst relatively infrequent and requiring detailed negotiation between the Panel and the parties to the offer, post-offer undertakings may in time become a more prominent feature of the UK public M&A landscape to ensure transactions such as the Cobham acquisition proceed, particularly when considered against the current backdrop of wider public sensitivity about the potential economic and national security implications of certain large public takeovers in strategically significant sectors," Stanier said.

Adam Cain of Pinsent Masons said 2019 saw a continuation in the "noticeable increase in the level of shareholder activism" that the UK public M&A market has witnessed over the past five years. Examples cited in the LexisNexis report included calls made by shareholders urging boards to seek merger partners in the cases of Just Eat and Merlin Entertainments. The report also said there had been cases of vocal opposition to takeover bids, calls for government intervention on takeovers, a legal challenge to a scheme of arrangement, and cases of 'bumpitrage' which is where investors buy additional shares in a company in a bid to demonstrate that the value of bids made for the company are too low.

"A wider number of market participants are engaging in investor activism, with the weak pound, Brexit uncertainty and the wider domestic political uncertainty in 2019 providing favourable conditions for activist shareholders to articulate their strategies," Cain said. "The UK now represents perhaps the most fertile territory for activists outside of the US market."