Tackling class issues in schemes of arrangement

Scott Morrison, Of Counsel at Orrick, explores Re SABMiller plc and examines the impact of a scheme of arrangement in a merger transaction on shareholder class composition.

Original news

Re SABMiller plc [2016] EWHC 2153 (Ch), [2016] All ER (D) 47 (Sep)

The Companies Court held that, on the true construction of sections 895 and 896 of the Companies Act 2006 (CA 2006), it had jurisdiction to make an order summoning a meeting of only some of the applicant company's shareholders to whom a scheme of arrangement was proposed, other than two majority shareholders of the company, on the basis that those majority shareholders were prepared to give undertakings to the court at sanction to be bound by the scheme. The court held that CA 2006, ss 895 and 896 should be interpreted flexibly and purposively so as to coincide with the legislative intention to promote compromises and arrangements, so as to permit the court, where appropriate, to accept undertakings from creditors or members to be bound by the scheme.

How did the issue in this case arise?

The issue in this case arose in relation to a scheme of arrangement proposed by SABMiller plc (SABMiller) and its shareholders under CA 2006, s 896. The purpose of the scheme was to effect an acquisition of the entire issued share capital of SABMiller.

The scheme of arrangement was the first step in a three-step process that would ultimately see the merger of brewing giants Anheuser-Busch InBev SA/NV (AB InBev) and SABMiller. The $79bn takeover (a British record) had been approved by antitrust regulators in Europe, the US, China and South Africa.

The scheme of arrangement was to enable the SABMiller shareholders to receive 100 shares in Newbelco SA/NV (Newbelco) in consideration for their SABMiller shares. Schemes of arrangement are common in merger transactions as they allow them to be implemented without the need for all shareholders (or creditors, where applicable) to agree to the terms of the merger. The scheme of arrangement in this case would have allowed the terms of the merger to be imposed on all shareholders where 75% by value and a majority in number of shareholders present and voting agree to the terms of the merger. In order for the scheme of arrangement to be successful, each ‘class’ of shareholders must approve the terms of the proposed scheme by the requisite majority.

The SABMiller judgment considered whether all shareholders of SABMiller should form a single class or whether shareholders with larger shareholdings should form different classes from shareholders with smaller holdings, due to the special rights enjoyed by the former. When determining class composition for the purposes of a scheme, the court will consider shareholders to be in a single class where their rights are ‘not so dissimilar as to make it impossible for them to consult together with a view to their common interests’.

What were the main legal arguments?

The issue of determining the class of shareholders was made complicated by the AB InBev takeover offer of Newbelco shares. This offer involved having two consideration options in the newly-formed merger of AB InBev into Newbelco:

  • cash only, or
  • cash and unlisted shares

The two largest SABMiller shareholders, Altria Group Inc (Altria) and BEVCO Ltd (BEVCO), own a combined 40.33% of the company. When the merger was announced, they made irrevocable undertakings to AB InBev to:

  • vote in favour of the scheme, and
  • accept the mixed cash and shares consideration

Although SABMiller shareholders were able to accept either offer, the mixed offer had been tailored for Altria and BEVCO and included several features, such as the unlisted nature of the shares and the five-year lock-up, which were commonly considered to be unattractive to minority shareholders. As a result, it was argued at the scheme hearing that the merger offer separated Altria and BEVCO from minority shareholders de facto by offering them different terms—and this put them in separate classes.

This case was strengthened by the fact that Altria and BEVCO had been party to longstanding shareholder-type agreements with SABMiller pursuant to which they had enjoyed special rights as majority shareholders.

What did Snowden J decide on the class test?

It is settled law that ‘persons whose rights in a scheme of arrangement are so dissimilar that they cannot sensibly consult together with a view to their common interest’ should form separate classes (Sovereign Life Assurance Company v Dodd [1892] 2 QB 573). Snowden J did not diverge from this principle in this judgment and found that Altria and BEVCO should not vote with other shareholders in the scheme meeting. Although the complexities of this case were novel, the application of this principle to the facts can be traced throughout the judgment. It is clear that Snowden J, supported by both merger parties and Altria and BEVCO, considered the rights of those major shareholders to be sufficient to put them in a different class.

What are the practical implications for lawyers?

As Snowden J states in his judgment, any consideration of classes is highly fact-specific. However, this case highlights the need to carefully consider the treatment of shareholders (or creditors, where applicable) in a scheme of arrangement to ensure that the proposed structure will not fracture a single class of creditors in a way that could destabilise the scheme.

There have been concerns that this judgment increased the risk that majority shareholders (or creditors in creditor schemes) could consider themselves to be in different classes from minority shareholders, even in the absence of obvious differences in rights. The SABMiller judgment does not support this principal because, on the facts of the case, the two groups of members could quite plainly be said to enjoy different rights, both arising prior to, and as a consequence of, the proposed merger.

Interviewed by Stephanie Boyer.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Restructuring and Insolvency

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