The UK Government has announced its intention to prohibit company takeovers by way of cancellation schemes of arrangement

In his 2014 Autumn Statement, the Chancellor of the Exchequer announced the UK Government's proposal to amend section 641 of the Companies Act 2006 to prohibit acquisitions of companies (both public and private) by way of cancellation schemes of arrangement. The effect is such that takeovers of companies (with certain limited exceptions) will no longer be possible without incurring stamp duty of 0.5 per cent. It is expected that the amendment to the Companies Act 2006 will be made in early 2015, but as yet it is unclear when the amended legislation will take effect or if there will be any grandfathering provisions.

Companies listed on AIM (and certain other growth markets) will remain exempt from the stamp duty requirements (see below).

It is expected that takeovers will continue to be capable of being effected by transfer schemes of arrangement. There remain a number of significant benefits to using such a structure, including:

• the lower voting thresholds applicable on schemes of arrangement (a majority in number representing 75 in value), so lowering deal execution risk;
• the certainty of outcome (i.e. once the court has sanctioned the scheme, all shareholders are bound whether they voted for or against the scheme);
• potentially, more flexibility around the timetable (e.g. to accommodate waiting times for obtaining regulatory clearances);
• the potential for shareholders to receive a fixed number shares in the bidder without the need for a prospectus in the UK; and
• the ability of US shareholders to receive shares in the bidder without the difficulties associated with US securities laws, by relying on the exemption in section 3(a)(10) of the US Securities Act 1933.

Companies listed on AIM and certain other growth markets will continue to be able to benefit from the abolishment of stamp duty which came into effect in April 2014. However, it is important to remember that the exemption from paying stamp duty on the acquisition of shares in such companies applies only whilst that company is admitted to trading on the relevant exchange. To ensure that a bidder obtains the full benefit of this exemption, the target company should not be de-listed until after the effective date of the scheme of arrangement (and, in the case of takeover offers, after the squeeze-out has been completed, otherwise the bidder will pay stamp duty on the shares which it acquires through the squeeze-out).

Update

It has now been confirmed that the Regulations amending section 641 are effective as from 4 March 2015. Click here to read our newsflash on this.