The Government has published The Companies Act 2006 (Amendment of Part 17) Regulations 2015 (SI/2015 Draft) which will prohibit a company from reducing its share capital as part of a scheme of arrangement where the purpose is to implement certain takeovers or mergers.
In the context of takeovers, there are two main types of schemes of arrangement: a ‘transfer’ scheme which sees the transfer of shares in the target company to new owners; and a ‘cancellation’ (also referred to as a ‘capital reduction’) scheme which is effected through a reduction of the target company’s share capital and the issue of new shares to the new owners. Implementation of a ‘transfer’ scheme requires payment of stamp tax on shares at 0.5% of the consideration paid for the shares, but no such liability flows from the implementation of a ‘cancellation’ scheme as taxation of the issue of new shares is prohibited by the EU Capital Duties Directive (2008/7/EC).
The Government wishes to put legislation in place as soon as possible so as to limit the scope for companies to bring forward takeovers in order to circumvent the legislation. ‘Cancellation’ schemes will, however, still be permitted for other purposes such as debt restructuring and intragroup reorganisations.
A copy of the draft SI is available on the Government website.
Many larger UK takeover bids for Main Market listed target companies have for many years been effected by way of ‘cancellation’ schemes. The market will be watching closely to see whether schemes (albeit, in the future, ‘transfer’ schemes) remain a popular structure for effecting a takeover bid.