The takeover by Spanish company Iberdrola of Scottish Power plc presented unique procedural challenges to Scotland’s Commercial Court in the Court of Session, which were overcome through early constructive engagement with the court.
Court-approved schemes of arrangement under s 425 of the Companies Act 1985 have become the preferred choice for implementing agreed takeovers of public companies in recent years.
Schemes effecting takeovers usually involve the convening by the court of meetings of the shareholders whose shares in the target will be purchased. An extraordinary general meeting of the target is almost always convened, to approve changes to share capital and articles of association. If the scheme is approved at the court convened meeting by the requisite majorities (75% of the value of the shares and 50% of shareholders voting), it is then considered by the court.
Scheme benefits
Schemes present significant advantages to the offeror when compared to a straightforward takeover. There will be a stamp duty saving 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). 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 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 flexible attitude of the court meant that the interests of 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 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, 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.
Procedural complications
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 that the resulting inequality in treatment of option holders would have been contrary to the City Takeover Code which 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.
Involving the court
The normal practice would be for this issue to be dealt with at the first hearing following the presentation of the petition. However, given the tight timetable, 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 the matter when it was raised formally, subject to any points which might be raised by respondents to the petition or which might occur to the court itself.
The court process proceeded as envisaged at the preliminary meeting. 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.
In addition to the above a high level of co-ordination and co-operation between advisers and the court permitted notice periods to be shortened and court diaries organised 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 shareholder meetings and achieve a listing of the Iberdrola shares prior to the first week in May which included various holidays in Spain.
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 specialising in corporate finance with UK law firm Shepherd and Wedderburn.
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