Public company change of control series: Part 26 Scheme of Arrangement

The City Code on Takeovers and Mergers (Takeover Code) regulates transactions which may result in control of a public company and is designed to ensure fairness, transparency and equal treatment of shareholders. The Takeover Code is a set of binding rules and general principles which govern how company takeovers and mergers are administered and executed in the UK.

Acquiring control is achieved primarily either by a Part 26 Scheme of Arrangement (Scheme) or a Contractual Offer. While the Takeover Code applies to both Schemes and Contractual Offers, their mechanics, approval thresholds, and timetables differ.

Our Public company change of control series will provide a guide to both a Scheme and a Contractual Offer and highlight their key differences. In the first of the series, we look at a Scheme.

What is a Part 26 Scheme of Arrangement?

A Scheme under Part 26 of the Companies Act 2006 is a court‑sanctioned process commonly used to acquire a UK public company. It effects a “change of control” by binding all target shareholders, once effective, delivering a higher level of execution certainty.

Under a Scheme, the bidder and target agree the terms of acquisition and the target proposes the Scheme to its shareholders. The Scheme usually takes the form of a transfer scheme (all shares transferred to the bidder in exchange for cash and/or shares). The Takeover Code applies to the transaction, including disclosure, dealing restrictions and Panel oversight of Takeover Code related timetable and conduct requirements.

The process for a Scheme

A Scheme typically comprises the following stages:

1. Pre‑announcement: the bidder and target engage, conduct due diligence, agree terms and publish a firm intention announcement which is a formal public statement (under Rule 2.7 of the Takeover Code). This announcement must set out the consideration, financing confirmations, key conditions, and statements of intention.
2. Publication of the scheme circular: the target publishes the scheme circular to its shareholders, including full terms of the scheme and the explanatory statement required under section 897 of the Companies Act 2006, notices of shareholder meetings, expected timetable, and the target board’s recommendation. Where consideration includes securities, a prospectus or equivalent document may be required.
3. Court directions hearing: the court considers class composition and orders the convening of the scheme meeting(s). Proper class constitution turns on the rights to be affected under the scheme; differential treatment or rights may necessitate separate classes.
4. Acquire shareholder approvals: the target holds a court‑convened scheme meeting at which the statutory majorities must be achieved, and typically also holds a general meeting to approve related resolutions (if required, e.g. example to increase allotment authority for share consideration).
5. Ensure Scheme conditions are satisfied: the bidder and target progress regulatory and merger control conditions, any financing conditions, and any third‑party consents. The Takeover Code requires prompt updates via announcements and adherence to long‑stop dates agreed in the scheme circular.
6. Court sanction hearing: the court considers whether the statutory requirements have been met and whether the Scheme is fair. Shareholders and other interested parties may be heard. If sanctioned, the court order is filed at Companies House, and the scheme becomes effective when the order is delivered to the Registrar of Companies.
7. Completion: settlement of the consideration then follows in accordance with the Scheme terms. The target applies to delist its shares and may re‑register as a private company if appropriate. Dissenting shareholders are bound without the need for separate squeeze‑out procedures (a squeeze out allows a bidder who has acquired a very high percentage of a target company’s shares to force the remaining minority shareholders to sell their shares). If the scheme fails to achieve the scheme meeting majorities or court sanction, it lapses. However, the scheme circular typically includes a Panel approved switch mechanism to a contractual offer.

In the second instalment of our Public company change of control series, we look at the mechanics of a Contractual offer.

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