Schemes of arrangement under section 809 of the UK Companies Act 2006 have become a preferred way of purchasing corporations. The purchase price sometimes consists of cash or stock of the acquiring corporation, a mixture of both, or a choice between the two.
It often turns out that some of the stock of the target corporation is held by persons in the
It has always been trite law that an acquisition by way of a scheme of arrangement does not constitute a tender offer because a scheme of arrangement involves a shareholder vote, whereas a tender offer, by definition, does not. Accordingly, the
If the purchase price involves the exchange of stock, then the new stock to be issued to the target stockholders in the exchange must either be registered pursuant to the prospectus requirements of section five of the US Securities Act or an exemption must be found. Such an exemption is available under section 3(a)(10) of the US Securities Act provided that the
Shares issued in the exchange pursuant to the section 3(a)(10) exemption may be resold without restriction by any former target shareholder in the
The securities laws of the states in which target stockholders reside must also be considered. Generally, most state security laws follow the federal section 3(a)(10) exemption or have similar exemptions, but some, like
Another situation in which the acquiror might want to use the vendor placement alternative is where the issue of new shares would result, at any time when the acquiror has more than 500 shareholders of record worldwide, in there being 300 or more shareholders of acquiror resident in the
Special attention should be given to the way the scheme treats US employees who hold incentive stock options (ISOs) of the target. ISOs allow their holders to defer the payment of tax on the spread between the exercise price of the shares and the value of the shares to the date of their sale. In addition to the deferral, ISOs give the option holder the advantage of being taxed on the spread at capital gains rates, which are substantially lower than income tax rates, provided the option holder has held the shares for two years from the date of the option grant and one year from the date of exercise. If the option holders are included in the scheme and are given new shares in exchange for the target shares issuable upon the exercise of the options, the options may lose their ISO status and the spread would be taxed at income tax rates. Since this may be viewed by the employees as an impairment of their rights, it would be advisable to request their written consent to the loss of the ISO status.
In addition, in the event that the value of new shares received in the exchange is more than the value of the target shares issuable under the stock option plan, the board of directors of the target company should make an upward adjustment to the exercise price or to the number of shares underlying the options so as to equalise the value. If this adjustment is not made, employees may be subject to a punitive additional 20% income tax rate.
One should not lose sight of the Hart Scott Rodino filing requirements, which may be triggered if the size of the transaction is greater than $63.1m (£31.8m) and other size of the party thresholds are met. If a Hart Scott Rodino filing is required, the expiration of the waiting period should be made a condition to closing.
Finally, consideration should be given to whether the scheme of arrangement document should contain a
Raphael Grunfeld is a partner at Carter Ledyard & Milburn in
