Stamping out cancellation schemes

Lydia Hutchinson

A common method of effecting corporate takeovers for many years has been by way of a target company entering into a scheme of arrangement with its shareholders (rather than by way of a standard takeover offer made by the buyer).  This method is used for a number of reasons, including potentially shorter timescales and a lower threshold of shareholder approval to give certainty that 100% of the target will be acquired.  However, another convenient benefit (if a “cancellation” scheme is used) is that no stamp duty is payable, on the basis that no shares are transferred – the buyer pays the consideration to the sellers in consideration for their agreement to permit the reduction and cancellation of their shares and the re-issue of shares to the buyer, rather than for a transfer of their shares.

For any scheme of arrangement, court approval is required.  Although a court is unlikely to approve a scheme of arrangement if the sole aim is to avoid stamp duty this is rarely the predominant reason that a scheme of arrangement takeover route is adopted.  George Osborne announced earlier today that he would be counteracting perceived stamp duty avoidance on takeovers.

Minimal detail has been given so far, but it appears that this will be achieved by amending section 641 of the Companies Act 2006 (or regulations made under it) to prevent reductions in share capital by target companies in takeovers conducted using schemes of arrangement, rather than through tax legislation.  Current transactions may be affected, as the Government expects to do this by early 2015 – watch this space!

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