The Hindu Business Line : UK Takeover Code silent on parallel schemes of arrangement

The Corus saga continues to hog attention. Analysts have been dissecting different scenarios, ranging from the best to the worst. And Corus shareholders wait and watch which of the two, viz. CSN (Cia Siderurgica Nacional) and Tata, would emerge victorious from the bidding arena. Meanwhile, Business Line contacted Mr Roy Montague-Jones, of the UK-based law firm Richards Butler LLP (www.richardsbutler.com) , for clarity on a few fundamental corporate law concepts. Here, he answers a few questions, from a UK perspective.

In takeovers, what is the difference between offer and scheme of arrangement?

A takeover offer is basically an offer by an offeror company for a UK target company, made to the shareholders of the target company. It is then up to the shareholders in the target company to decide whether or not to accept. The timetable for any takeover offer and provisions concerning the conditions to which a takeover offer may be subject are set out in the UK Takeover Code.

A scheme of arrangement in the context of a takeover is basically an arrangement proposed by the target company to its shareholders under which, if agreed to by an appropriate vote of the shareholders of the target company (75 per cent of the votes representing a majority in number of the shareholders) and sanctioned by the High Court, will result in the shareholders of the target company exchanging their shares for whatever the offeror is offering (cash, loan notes, shares, GDRs, or a combination of these).

In one case the shareholders accept, and in the other they vote?

Yes. Individual shareholders have a vote in the context of a scheme; they do not `accept' the offer. If sufficient shareholders vote in favour of the scheme, and it is sanctioned by the High Court, the scheme becomes effective and the offeror will acquire all the shares in the target, including the shares of shareholders who did not vote in favour of the scheme.

How does the court come into the picture?

The court comes into the picture because, under the English company law, in order for a scheme of arrangement to become effective and bind the company and all shareholders in the company, it must be sanctioned by the High Court. Schemes of arrangement have uses in other contexts as well, such as in insolvency situations, but that is a whole different subject area.

Don't shareholders have the right to sell their shares to the highest bidder?

Yes, shareholders do have the right to sell their shares to the highest bidder. In a takeover offer situation, this is effectively what they will be doing when they accept. Alternatively, they are free to sell their shares in the market during the course of the bid.

And the offeror may even buy from the market?

The offeror might wish to buy in the market. However, market purchases during an offer period can have consequences for the terms of the offer under the UK Takeover Code, both in terms of the price offered for the target and the form of the consideration.

Certain market purchases can lead to the requirement for the bidder to offer cash if the offeror is offering only loan notes or other securities. A third party (e.g. a hedge fund) might want to build up a strategic stake in the target company during the offer period.

Your views on the latest Corus document, the stock exchange announcement? Especially, the paragraph about the JPMorgan advise to the Board.

The Corus announcement made on December 12 shows that the Board, supported by its financial advisors, is recommending a further adjournment of the meetings called to consider the Tata Steel revised offer. It is highly unusual for two schemes of arrangement to be proposed in the context of a competitive situation for a UK target.

However, it seems clear, now that a bidding battle has broken out, that the Corus Board is in no hurry to bring things to a head, but wants to allow sufficient time to see whether Tata Steel will further increase its offer beyond £5 per share and, if it does, whether CSN will again trump the price offered by Tata Steel.

How long can this battle of bids go on?

The UK Takeover Code lays down a clear timetable for the making and revising of offers, including offers made in a competitive situation. However, the present situation, with parallel schemes of arrangement is not specifically dealt with.

The UK Takeover Code is designed principally to ensure that shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover. At some point, the Takeover Panel may step in and impose a timetable on the parties so as to bring matters to a head but, at the moment, it seems to be very much in the interests of Corus shareholders to bide their time and wait to see which of these two bidders will end up offering the highest price.

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