The government introduced draft legislation in January 2015 to prevent the use of reductions of capital by target companies using takeover schemes of arrangement. In other words, no more takeover cancellation schemes.
The move was unveiled in the Chancellor's 2014 autumn statement and is intended to close the tax loophole created by using cancellation schemes of arrangement as a means to avoid the stamp duty generally payable on transfers of shares. The policy impetus is that all takeovers should be on an equal footing for tax purposes, especially given the increasing use of cancellation schemes of arrangement in relation to takeovers of UK public companies.
The good news is that the legislation does not prevent takeovers by transfer schemes or by contractual offer, nor will it have retrospective effect. If before the draft legislation comes into force an announcement concerning a firm intention to make an offer is made or terms are agreed where a company is not subject to the Takeover Code, a cancellation scheme may still be used.
However, the government has signalled that it wishes the new regulations to take effect as soon as possible.
There is an exception where the scheme amounts to a restructuring that inserts a new holding company, provided that all or substantially all of the members of the company undertaking the scheme become members of the new holding company and their proportionate shareholdings remain substantially the same. This exception allows a scheme of arrangement and/or capital reduction as part of transactions to effect intra-group restructurings, de-mergers, capital return or debt rescheduling.
Overall, the government view is that the measures won't discourage takeovers or mergers that would otherwise have gone ahead. The stamp duty liability on share transfers, it points out, is small in proportion to the overall value of the larger transactions which are generally effected by cancellation schemes of arrangement. The continued availability of transfer schemes or contractual offers still allow for takeovers to be effected using the most appropriate method for each transaction. The government considers that familiarisation costs for parties to get to grips with the new legislation will be small and one-off.
Cancellation schemes of arrangement were a popular takeover mechanism and featured in many UK transactions in 2014. Transfer schemes may still be attractive depending on the nature of the deal. Beyond the elimination of cancellation schemes and the stamp duty savings they offered the other advantages of transfer schemes remain, and in any event no stamp duty has been payable on transfer of shares of AIM companies since 28 April 2014. The advantages include certainty of acquisition, potential availability of merger relief, a shorter timeframe to acquire 100 per cent of the target and useful provisions for dealing with US and untraceable shareholders.
Takeover cancellation schemes have had their day it seems, but this legislation is by no means the end for regular transfer schemes.