Scheme of arrangement
Also known as: Court-sanctioned scheme, Plan of arrangement
A takeover run through a court: it delivers the whole company or nothing, and the classes decide who has a veto.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
There are two ways to buy every share in a listed company. You can ask each shareholder one by one, and buy from whoever says yes. Or you can hold a vote, and if enough people say yes, a court can make the answer apply to everybody.
The second way is a scheme of arrangement. It is a court procedure, and the odd thing about it is that the company itself applies, not the buyer. The company proposes to its own shareholders that they all sell on the same terms.
What the buyer gets is certainty. There is no partial result. Either the vote passes and the court agrees, and the buyer owns all of it — or nothing happens at all. That is worth a lot when you are borrowing money to pay for something.
What the court checks is not the price. It checks the process: were shareholders sorted into fair groups, were they told enough, and was the vote run properly. Whether the price was good is for the shareholders to decide.
- 1
Structuring2–4 wks
The classes of shareholder are defined, which decides who votes together and therefore who has a veto.
- 2
Scheme document4–6 wks
The document is drafted, reviewed by the regulator and posted to every shareholder.
- 3
Court convening1–2 wks
The court is asked to allow the meetings to be held on the proposed class basis.
- 4
The meetings1 day
Shareholders vote, and the statutory thresholds are tested in each class separately.
- 5
Sanction hearing2–4 wks
The court checks the process and, if satisfied, makes the scheme binding on every shareholder.
Class composition — The court decides. Classes drawn wrongly are the one procedural error that sends everybody back to the beginning.
The statutory majorities — Each class of shareholders decides. A majority in number as well as a large majority in value: a handful of institutions cannot carry it alone.
Sanction — The court decides. The court does not decide whether the price is right, only whether the process was fair and the class was properly informed.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The target company | Sell side | Proposes the scheme to its own shareholders — technically the company, not the bidder, is the applicant. |
| The bidder | Buy side | Provides the money and the terms, and takes the whole company or nothing. |
| The court | Neither | Decides whether the classes were fair and the shareholders properly informed, not whether the price is right. |
| The shareholders, by class | Sell side | Vote separately in each class, so a small class can block a deal a large one wants. |
| The scheme lawyers | Both | Draw the class boundaries, which is the most consequential drafting decision in the transaction. |
- Desk
- Mergers & Acquisitions
- Applicant
- The target company itself, not the bidder
- Decided by
- Each class of shareholders, then a court
- Typical thresholds
- A majority in number and a large majority in value
- Outcome
- Binds every shareholder, including those who voted no
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricebarely applies
- Financingbarely applies
- Approvaldecides it
- Diligencebarely applies
- Executiondecides it
What decides it here. By the time a scheme is launched the price is agreed, so what is left is procedure: whether the classes were drawn in a way the court will accept, whether every class returns its statutory majorities, and whether the document told shareholders enough. Get the classes wrong and months of work start again.
3 · IntermediateHow it runs in practice
Classes: the most consequential drafting in the deal
Shareholders vote in classes, and each class must return the statutory majorities separately. A class is a group whose rights are similar enough that they can sensibly consult together. Drawing them is a legal judgement made before the vote, and the court is asked to bless it in advance.
Get it wrong in either direction and the deal is in trouble. Too many classes and a small group gets a veto it should not have. Too few and a group with genuinely different interests is outvoted, which is exactly the objection a dissenting shareholder will take to the sanction hearing.
The two thresholds, and why the first one surprises people
- A majority in number — more than half of the shareholders who vote, counted as people, not as shares.
- A large majority in value — typically three quarters of the shares voted.
The first is the unusual one. It means many small holders can outvote a few large ones, and it is the reason bidders watch retail turnout. It is also the reason share-splitting to manufacture votes is a recognised abuse the court will look at.
The two hearings
- The convening hearing, before the vote: may the meetings be held on this class basis? This is where a class objection belongs, and a court will say so.
- The sanction hearing, after: was the process fair, were shareholders properly informed, and would an intelligent and honest member of that class reasonably approve? The court has a discretion and uses it sparingly.
Why bidders still sometimes choose an offer
A scheme is run by the target, so a hostile bidder cannot use one — the company will not apply on its behalf. It is also slower, and it hands the timetable to a court. A contractual offer is faster, can be launched without cooperation, and can succeed partially. The choice is a straight trade between certainty and control of the process.
4 · AdvancedThe numbers & the documents
What "the whole company or nothing" is actually worth
Consider a bidder funding a purchase with committed debt. On an offer, it might end up with eighty per cent: it owes the full financing, it does not control the target's cash, and it cannot easily push debt down into the business. On a scheme it either has all of it or has drawn nothing. Lenders price that difference, and on a leveraged transaction it can be the deciding factor — see leveraged finance and the take-private.
Stamp duty and structure
In several jurisdictions a scheme can be structured as a cancellation of the existing shares and an issue of new ones to the bidder, rather than as a transfer. Whether that is available, and what it does to transfer taxes, is a real and unglamorous driver of which structure is chosen. It is also the kind of thing that changes when a legislature notices.
The dissenting shareholder's position
A shareholder who votes against a scheme and loses is bound. That is the point of the procedure and it is also its constitutional oddity: property is transferred without the owner's consent, on the vote of others in the same class. The safeguards are the class test, the disclosure requirements, and the court's discretion to refuse — which is used rarely, but the possibility of it is what disciplines the process.
The same logic, applied to creditors rather than shareholders, is how a restructuring plan binds a dissenting lender. It is the single most important idea shared between this desk and restructuring.
Where schemes fail
- The class objection succeeds at the convening hearing, and the structure is rebuilt.
- The majority in number is missed while the value threshold is comfortably passed — a retail turnout problem rather than a value problem.
- A regulatory condition is not satisfied by the long stop date, which stops a scheme exactly as it stops an offer.
- A competing bid appears between the announcement and the meetings, and the board changes its recommendation.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Scheme of arrangement in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyRecommended offerDealA listed company bought with its own board's blessing — then a year of waiting for people outside the room
- EasyWhat kills a dealAnalysisFive ways a transaction fails to happen, counted across every deal on the site — and the one that decides most of…
- MediumLiability managementDealAn issuer buying back or exchanging its own bonds
- MediumSqueeze-outDealPast a statutory threshold, a buyer may take the last shares whether or not those owners agree
- MediumTender offerDealA price published to every shareholder at once
- HardRestructuring planDealThe court procedure that delivers a takeover, applied to creditors