The unique procedural challenges posed by the Iberdrola/ScottishPower takeover, overcome through constructive engagement with the Commercial Court
Court-approved schemes of arrangement under s 425 of the Companies Act 1985 have become the generally preferred method of choice for implementing agreed takeovers of public companies in recent years.
Broadly, schemes effecting takeovers involve the convening by the court of one or more meetings of the shareholders whose shares in the target will be purchased by the offeror under the scheme. An extraordinary general meeting of the target is almost always also convened for the same date as the court-convened meeting, as changes to share capital and the articles of association of the target will require to be approved, conditional on the scheme taking effect. If the scheme is approved at the court-convened meeting by the requisite majorities (75% of the value of the shares voted and 50% by number of the shareholders voting), it is then considered by the court which, if it considers the scheme to be fair and reasonable, will approve it.
Schemes present significant advantages to the offeror when compared to a straightforward takeover offer. There will be a stamp duty saving on the purchase price if the scheme is a cancellation scheme (under which the “transfer” of the existing shares in the target is effected by their cancellation and reissue to the offeror). Furthermore, as described above, only 75% of the shares voted at the court meeting have to be voted in favour of the scheme for the offeror to acquire 100% of the share capital of the target, compared with the 90% of all of the issued shares in the target which would be required before the acquirer could compulsorily acquire the balance of 10% of the shares in a straightforward takeover offer. However, the involvement of the court and its procedure in the process presents a number of uncertainties and limitations which are not present in a straightforward takeover offer.
The recent takeover by Iberdrola SA of Scottish Power plc proceeded by way of a scheme of arrangement, which was approved by the Court of Session. Several issues arose in relation to the interaction of the requirements of the takeover and the court’s normal procedures which could have had a negative impact on a number of groups of stakeholders in ScottishPower. Happily, however, the attitude of the court, and the flexibility which it showed in modifying its procedures in this case, meant that the interests of these stakeholders were protected so far as possible.
A complex arrangement
The scheme of arrangement in the ScottishPower takeover was complex. There were three types of consideration which a shareholder could potentially receive. The basic entitlement of each shareholder was to a fixed amount of Iberdrola shares and cash. However, to allow shareholders to manage their capital gains tax liabilities, they could (within certain limitations) elect to take loan notes in place of all or part of their cash entitlement. A mix and match facility was also available, under which shareholders could elect to vary the proportion of cash and shares which they received as part of the scheme.
To minimise the capital gains tax paid by shareholders on the Iberdrola shares they would receive, it was necessary to split the shares in ScottishPower into three classes of shares immediately prior to them being cancelled under the scheme. Because of the operation of the mix and match facility and the loan note alternative, this resulted in different shareholders holding different numbers of the different classes of shares created on the split.
Since at least the 1940s, the procedure of the Court of Session in “cancellation schemes” had involved one final court hearing at which both the sanctioning of the scheme and the cancellation of the share capital that the scheme involved were dealt with. Had that procedure been adopted in the ScottishPower takeover, ScottishPower’s option holders would have been disadvantaged compared to ordinary shareholders. The option holders’ options were exercisable on the sanction of the scheme. However, because it is not possible to cancel shares which are not in existence at the time of the court hearing at which the order cancelling those shares is made (see Re Tip Europe (1987) 3 BCC 647), it would therefore not have been possible to include shares which they were to receive as a result of the exercise of their options in the mix and match facility.
It was felt by the parties that the resulting inequality in treatment of option holders, compared to holders of ordinary shares, would have been contrary to the general principle of the City Takeover Code that requires that similarly situated stakeholders should be afforded equivalent treatment if at all possible.
In England, the solution to this problem has for several years been to “split” the final hearing, so that the scheme is sanctioned by the court at one hearing and then, a few days later, there is a further hearing to approve the cancellation of the shares. In the period between the two hearings, shares are issued to option holders pursuant to the exercise of their options, which are made conditionally on the scheme being sanctioned at the first hearing. Such a procedure had never been adopted in Scotland.
A further aspect of the usual Court of Session procedure in connection with schemes of arrangement, which could have led to ScottishPower shareholders being disadvantaged, concerned the advertising period following the court-convened meetings. The usual period for lodging objections to the scheme with the court is 21 days following the advertisement of the petition appearing in newspapers, although this was extended to 42 days in one scheme where there was a significant foreign element in the scheme. These advertisements appear following the court-convened meeting of shareholders and before the final court hearing to consider the scheme.
With a significant proportion of the value of the consideration which ScottishPower shareholders would receive under the offer being in the form of Iberdrola shares, it was important to ensure that the exposure of ScottishPower shareholders to fluctuations in the Iberdrola share price was minimised so far as possible in the period following the ScottishPower shareholder meetings and the Iberdrola shareholder meetings (which took place the day before ScottishPower shareholder meetings) at which the takeover was approved, and the final court hearings. To do this it was important to restrict the advertising period to as short a time as possible.
Finally, because ScottishPower shareholders were to receive Iberdrola shares on the takeover coming into effect, it was important for them that the trading conditions for Iberdrola shares were as helpful as possible. As the first week in May included one Spanish national public holiday and a further public holiday in Madrid, the takeover needed to be completed in the last week of April to provide such conditions.
Involving the court
The normal practice would be for all of these issues to be dealt with at the first hearing following the presentation of the petition. However, given the tight timetable, the fact that the circular to shareholders was due to be posted two days following the first hearing, and the importance of achieving a high level of certainty in the process, a letter from ScottishPower’s solicitors was sent to the court well in advance of the presentation of the petition, explaining the position and seeking a meeting. Following receipt of the letter, an informal meeting was arranged with Lord Reed (the principal commercial judge in the Court of Session, and the judge who dealt with the scheme). At that meeting, the solicitors and counsel for ScottishPower and Iberdrola were able to discuss all of the issues in detail with the judge.
Lord Reed was willing to provide a provisional indication of the view which the court was likely to have on them when they were raised formally, subject to any points which might be raised by respondents to the petition or which might occur to the court itself. As regards the timetabling of the final hearings, the court was able to give an indication of the availability of the commercial court judges and was able to arrange the first of the final hearings during the vacation period, in order to avoid any problems created because of the Spanish public holidays.
Further, the court process proceeded as envisaged at the preliminary meeting. The period for lodging objections was shortened to 14 days. Even more significantly, the final hearing was “split” into two, with the scheme being sanctioned by the court four days before ScottishPower’s share capital (which crucially included the shares issued to option holders) was cancelled by the court, so allowing the scheme to become fully effective.
The approachability of the court, its flexibility in dealing with the issues and its willingness to modify its procedures to the benefit of the stakeholders was highly beneficial in the ScottishPower takeover. Lord Reed indicated at the final hearings that the court had found the early engagement with it by the parties to be useful and was something to be encouraged in the future, albeit that not every scheme would involve such innovations to the court’s existing procedures as the ScottishPower one did.
Paul Hally is a partner at Shepherd and Wedderburn LLP. Shepherd and Wedderburn LLP acted as Scottish advisers to Scottish Power plc in connection with its takeover by Iberdrola, SA. Counsel for Scottish Power plc were David Sellar QC and Jane Munro, advocate. Dickson Minto WS and Garry Borland, advocate, acted in Scotland for Iberdrola, SA. Linklaters LLP and Allen and Overy LLP acted as lead UK legal advisers to Scottish Power plc and Iberdrola, SA respectively.