UK takeovers—the demise of the scheme of arrangement?

 In an unexpected move, Chancellor George Osborne announced in his Autumn Statement the introduction of measures to prevent avoidance of stamp duty on takeovers—aimed at the use of cancellation schemes of arrangement, under which no stamp duty is currently payable.

What is the significance of this announcement?

The Chancellor has announced, as part of its theme of ‘Ensuring a fair contribution from business’, that:

'The government will, by early 2015, bring forward amendments to section 641 of the Companies Act to prohibit reductions in share capital by target companies in takeovers conducted using schemes of arrangement in order to protect the stamp tax base.'

Traditionally, UK company takeovers have been structured as offers by a bidder to the shareholders of the target company to transfer their shares in the target to the bidder in return for consideration paid by the bidder. Stamp duty at 0.5% of the transaction value is payable by the bidder on this structure. Increasingly in recent years, particularly on the larger deals, takeovers have been carried out using schemes of arrangement, which can be structured to enable bidders to avoid paying stamp duty by cancelling the target’s shares and reissuing them directly to the bidder. The Autumn Statement says that the government believes that takeover structures that achieve the same outcome should have the same stamp duty treatment.

What will this mean in practice?

The £5.6bn offer Aviva has just announced for Friends Life Group Limited is proposed to be structured as a cancellation scheme of arrangement, so Mr Osborne might just have added £2.8m to Aviva’s deal costs.

Coming in the wake of the Obama government's crackdown on the use of tax inversion schemes which has seen the abandonment of several high profile bids this year—such as Pfizer’s bid for AstraZeneca and AbbVies’ bid for Shire (see our recent News Analysis: Market Tracker Talking Points—hot topics in UK public M&A)—could this latest measure be a further thorn in the side of the UK’s recovering public M&A market?

 

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