The provisions of Part VIII of the Companies (Guernsey) Law, 2008 (the "Companies Law") facilitate the adoption by a Guernsey company of a scheme of arrangement (a "Scheme"), which is in effect a legally enforceable arrangement or compromise between the company and some or all of its creditors and/or some or all of its members, sanctioned by the Royal Court of Guernsey (the "Court").
What are the principal uses/benefits of a Scheme?
A Scheme is one of the principal restructuring mechanisms available under the Companies Law and is used for a variety of means including, notably, to implement a take private transaction in respect of which not all members are expected to be responsive and/or amenable. This can be a significant advantage over traditional takeover and reliance on squeeze-out provisions under the Companies Law. The scope of a Scheme can encompass the reorganisation of share capital, including consolidation, division, or a combination of both methods, and the alteration of the constitutional documents of the company.
What does a Scheme entail?
A Scheme can be either creditor-led or member-led. The former (which typically occurs in the jurisdiction where the company is considered to have its centre of main interest) involves creditors agreeing to compromise their debts in exchange for a restructuring that is deemed to be more favourable than the company's failure. The latter (which usually takes place in the jurisdiction of incorporation), involves shareholders agreeing to sell their shares to a bidder company, often as an alternative to the takeover provisions in the Companies Law.
In the case of a member-led Scheme there is a large degree of flexibility in how a members' scheme of arrangement can be structured. For example, to implement a take private transaction, the shares in the company may be transferred to the bidder (a transfer scheme) or they may be cancelled and then immediately re-issued to one or more persons (a cancellation scheme). Alternatively, shares in a Guernsey company may be exchanged for shares in another entity such as the bidder pursuant to a scheme – and this is an important feature of a Scheme under which a share for share exchange should not be treated as a disposal for those subject to HMRC's taxation regime. The Royal Court is afforded significant latitude under the Companies Law in what may be sanctioned as part of a scheme and the term "arrangement" under English law has a wide meaning which the Royal Court can draw upon when exercising its authority.
A Scheme can be employed in conjunction with an administration to secure a moratorium on proceedings against the company. It is important to note, though, that under Guernsey's administration regime, certain rights, such as set-off, secured interests, and enforcement rights, remain unaffected by the moratorium.
What is the process to apply for and implement a Scheme?
The process begins with an application to the Court to summon a meeting to obtain the requisite approval to the proposed Scheme (see next question below), which application may be made by, inter alia, the company, any creditor or member of the company, if the company is being wound up, the liquidator, and if the company has an administration order in force, the administrator.
Where the Court summons such meeting, notice of the meeting, together with a statement explaining the effect of the proposed Scheme and stating the material interests of the directors of the company and the effect of the Scheme on those interests (if different from the effect on the like interests of the other people concerned) must be sent to all persons which the Court so directs.
In practice this notice and statement is included as part of a scheme circular or scheme document which will include a significant amount of detail on the proposed offer to be implemented by the Scheme. Once the notice period has expired and the meeting(s) of the relevant stakeholders been held and approvals gained, the Court determines whether or not to sanction the Scheme.
A more detailed indicative steps plan and timeline is set out below.
What level of approval is required from the creditors/members?
Regardless of whether a Scheme is creditor or member led, a proposal must be put to the relevant stakeholders through a meeting summoned at the direction of the Royal Court for the purpose of approving that proposal.
At the meeting, the proposed Scheme will be regarded as agreed, and therefore ready to be sanctioned by the Court, in circumstances where:
- A majority in number representing 75% of the voting rights of the members or class of members (excluding any shares held as treasury shares) vote in favour of the Scheme; or
- A majority representing 75% of the value of the debts owed to the creditors or class of creditors (as the case may be), present and voting either in person or by proxy at the meeting agree to the Scheme.
What is the effect of a Court sanctioned Scheme?
A Scheme sanctioned by the Court is binding upon all creditors or the class of creditors, or on the members or class of members (as the case may be) and the company. Where a company is in the course of being wound up or is subject to an administration order, the Court sanctioned Scheme will also be binding on the liquidator, the administrator and contributories of the company.
When will a Scheme become effective?
There are currently no provisions in the Companies Law which provide when a Scheme becomes effective. As a consequence, the stakeholder (for example, the creditors, the members, the company or liquidator) implementing a Scheme has a level of discretion it can exercise in determining the time and date from which the Court is requested to order that a Scheme becomes effective. Generally, a Scheme becomes effective when a copy of the Court order sanctioning the Scheme is delivered to the Guernsey Registrar (and the Court order will refer to this).
What are the limitations or potential disadvantages of using a scheme of arrangement mechanism?
There are obvious benefits to using a Scheme, such as all creditors/members being bound by the decision of the Court sanctioning the Scheme, in certain circumstances, a Scheme entails a shorter timeframe for acquiring 100% control, and a Scheme provides clarity on opposition during the voting process, reducing uncertainty compared to a traditional takeover offer.
Notwithstanding these benefits, using a Scheme is not suitable for every situation and may have disadvantages in certain cases – for example, where there are different class rights which may require separate Scheme meetings to account for different classes of members. Whilst the whole process in respect of an application and sanctioning of a Scheme in Guernsey is pragmatic, with all requirements drafted flexibly, by virtue of the involvement of the Court there is an additional level of complexity and costs given the procedural formalities, documentation and timelines. Further, a Scheme may not be used to overcome or circumvent specific requirements of the Companies Law.
For these reasons, before opting for a Scheme, it's crucial to consider whether the strategic aims align with the limitations and requirements of the Scheme process. A company and/or stakeholders should weigh these potential disadvantages against the specific circumstances existing at the time and the overall strategic goals.
Indicative steps plan/timeline
The steps and time period for the approval, sanctioning and implementation of a Scheme will largely be dependent upon the articles of incorporation specific to the company in question and the class composition of members and/or creditors, when the application can be lodged with the Court, the availability of the Court to determine the application, and whether or not the company is regulated, listed and/or traded in Guernsey or elsewhere. However, an indicative step plan and timeline for a Scheme under the Companies Law is set out below.
Step 1: Preparatory work and lodging of application
The company prepares all the documents relevant to the proposed Scheme and arranges for these documents (including an application requesting a meeting to propose the Scheme to the creditors and/or members) (the "Scheme Documents") to be lodged with the Court. In the case of a take private Scheme, the negotiation of the transaction framework and bidder's due diligence with respect to the company will have usually been carried out (and relevant announcements made) as a step prior to this.
The Scheme Documents must be lodged two days before the hearing at step 2 which is usually lined up by the company's Guernsey legal counsel in advance.
Step 2: First Court hearing
A directions hearing is held during which the Court will make various directions in relation to the Scheme Documents. Importantly, these directions will include a direction to convene a Court-sanctioned general meeting of the relevant stakeholders.
Timeframe: Three days after step 1
Step 3: Delivery of Scheme Documents to relevant stakeholders
The company should ensure sufficient resources are available in the days following step 2 to prepare copies of the Scheme Documents and any related documents (such as meeting notice, shareholder circulars etc.) and arrange delivery within the requisite timeframe.
It is usual convene a second general meeting of the relevant company in order to deal with matters which may be supplemental to the Scheme (for example, amendments to articles of incorporation and the granting of general power to the directors to do all things necessary to implement the Scheme).
Timeframe: Within five days of step 2
Step 4: Scheme Documents and all related documents deemed delivered and received by relevant stakeholders and notice period (in relation Scheme and meeting of the relevant stakeholders) starts running.
Timeframe: Three days after step 3
Step 5: Stakeholder meeting(s)
Meeting(s) at which creditors/class of creditor or members/class of members vote on the proposed Scheme (having considered the Scheme Documents and related documents) are held.
Timeframe: Within 14 days of steps 3 and 4
Step 6: Chair's affidavit
The company arranges for the Chair of the meeting at step 5 above to agree to and swear to an affidavit confirming that, inter alia, the Scheme Documents as required by steps 3 and 4 above were delivered/received, the notice provided at step 4 above was given, the meeting at step 5 was held and the outcome of the meeting.
Timeframe: Within seven days after step 5
Step 7: Second filing day
The company arranges for a further court bundle to be lodged with the Court. Bundle to include the Chair's affidavit (see step 6 above) and an application for an order to sanction the Scheme. The company (or their Guernsey legal counsel) also arranges for a second hearing to be listed at which the application for an order to sanction the Scheme will be determined.
Timeframe: Two days before step 8
Step 8: Second Court hearing
Application for an order to sanction the Scheme determined. If the Court is minded to exercise its discretion in favour of a Scheme it will issue an Act of Court (referred to in this note as a Court order) to sanction the Scheme.
Timeframe: Three days after step 7
Step 9: Guernsey Registrar notified
The company must file a copy of the Court order with the Guernsey Registrar, together with a copy of the memorandum and/or articles to the extent these were altered pursuant to the terms of the Scheme and Court order. Under Guernsey law, the Scheme will be effective in accordance with the Court order (rather than on filing with the Registrar).
Timeframe: Within seven days of step 8
The information contained in this guide is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter.
