Use of cancellation schemes in takeovers prohibited

Corporate analysis: Following the Chancellor's announcement in the Autumn Statement 2014 to close a stamp tax 'loophole' by introducing measures to prevent the use of cancellation schemes to effect takeovers, Parliament has adopted the Companies Act 2006 (Amendment of Part 17) Regulations 2015, which came into force on 4 March 2015.

Original news

The Companies Act 2006 (Amendment of Part 17) Regulations 2015, LNB News 13/01/2015 133

SI 2015/472: Companies are prohibited from reducing their share capital by using a scheme of arrangement in connection with the takeover of that company. This is intended to prevent takeovers avoiding stamp duty and stamp duty reserve tax (SDRT). (Updated from draft on 4 March 2015)

What do the Regulations prohibit, and are there any exceptions?

The Regulations amend the Companies Act 2006, s 641 (CA 2006) (circumstances in which a company may reduce its share capital) by adding a new subsection (CA 2006, s 641(2A)) which prohibits a target company from using a capital reduction scheme of arrangement (also referred to as a cancellation scheme) in order to facilitate a public takeover. Since stamp duty and SDRT do not apply to a capital reduction or an issue of shares, a takeover by way of a cancellation scheme of arrangement resulted in a stamp tax saving. By prohibiting takeovers by way of cancellation schemes, the target company’s shares must instead be transferred, which means that SDRT or stamp duty will apply to the transfer.

The Regulations do not prohibit the use of a capital reduction in relation to an intra-group reorganisation (ie a transaction to insert a new holding company into a group structure where the shareholders of the new holding company, and their holdings, have not changed substantially from the shareholders of the target company).

It will still be possible to use a transfer scheme of arrangement to effect a public takeover.

When does the prohibition apply?

Regulation 2 includes transitional provisions so that the prohibition does not affect any cancellation scheme of arrangement giving effect to a takeover where:

  • an announcement of a firm intention to make an offer has been made, or
  • (in the case of a company not subject to the Takeover Code) the terms of the offer have been agreed

in either case, before 4 March 2015, when the Regulations came into force.

An Explanatory Memorandum is available alongside the statutory instrument. For further details on the prohibition, see our News Analyses: Government stamps its intentions on schemes of arrangement and UK takeovers-the demise of the scheme of arrangement?

Kavita Bassan, solicitor in the Lexis®PSL Corporate team.

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