The Corporations Act 2001 - Essay Example

Corporation law 2 Name Tutor Course Date Abstract Section 602 of the corporations act 2001 (Cth) provides guidelines for the takeover process. The scheme of arrangement is one of the methods that are used for the process of affecting a takeover in Australia and it is guided by section 411. However, the scheme of arrangement is increasingly becoming common in Australia. The features of a scheme of arrangement is different from that of a takeover and hence the adoption of each method of acquisition. One of the main features of the scheme of arrangements is the involvement of the courts during the approval of the process which is guided by section 411(17). The involvement of the courts is one of the main advantages of the scheme of arrangement. This is because it leads to the transparency of the process and hence instilling the confidence of all the stakeholders involved. Complex processes are usually involved in the takeover bids in accordance with section 602 during the acquisition process and hence the popularity of the scheme of arrangement. It is also argued that the scheme of arrangement is efficient as it gives room for agreement through the give and take concept. This ensures that all the parties involve are satisfied with the process. Corporation law Introduction The takeover regulations in Australia are under of chapter 6 in the Corporations act 2001 (Cth). According to section 602(a), the takeover should take place in a competitive, efficient and informed market. According to section 602(b), the holders of shares should also know the identity of the persons who intend to acquire the interest of the company. This will also ensure that the securityholders are protected during the takeover process. According to section 602(d), the take over process should take place in a transparent and competitive manner. This is for the purposes of ensuring that all the bidders are treated fairly. According to section 602(b) (ii) the security holders and the directors of the company should also have adequate time to examine the proposals of the bidders. The corporation act 2001 (Cth) also lays out rules and regulations that should be followed during the process in order to avoid any misconduct that may interfere with the process1 (Mirko, 12). The method of acquiring the control is also defined in section 619. One of the methods that have become popular in Australia is the use of the scheme of arrangements under section 411. The provisions that guides the scheme of arrangements is also outlined in part 5.1 of the corporations regulations 2001, 2(Corporation act commonwealth 2001, 3). The scheme of arrangements allows the company to reconstruct its capital, assets or liabilities through an approved court procedure in accordance to section 411(17). However, this is usually done after the approval of the creditors or the security holders of a company. The paper thus discusses the issues of the scheme of arrangement and why it is common in Australia in comparison with takeover bids. Debate In Australia, the methods of acquisition mainly involve the scheme of arrangement and the takeover bids. However, the scheme of arrange is increasingly becoming popular inn Australia. In the scheme of arrangement, the bidders are usually aware of the risks that are associated with this method of acquisition. This is because the method can lead to the bidder loosing all or gain all. This presents a risk to the bidder and yet the method is increasingly becoming common. The court may also refuse to sanction a scheme of arrangement if it finds it appropriate according to section 411. In the case of In Re Millstream Recycling Ltd (No 2) [2010] IEHC 538, the high court sanctioned the scheme of arrangement in relation to the creditors of company subject to conditions. This increases the risk of the scheme of arrangement and the bidders do not have control over the process unlike the takeover methods of acquisition. This method of acquisition is also less flexible for the bidder in terms of acquisition. The disclosure requirements are however not strict as compared to the other market takeover bids which is a requirement under section 654B and 654C.In the case of Phosphate Co-operative Co of Australia Ltd v Shears & Anor (No 3) (1988), the court ruled that a company should disclose all the information that will tend to influence the decagon of the interested members 3( Australian Securities and Investments Commission , 7) The report by the independent expert is not a must during the acquisition process. This has a potential of exposing the bidders to risks that may led to losses. The scheme of arrangement has a lot of risks associated with it but it has a wide support4 (Sheehy, 218). This has led to the debate of why the method is popular. Position According to section 411, the control of the acquisition process is mainly done by the target although it is subject to the terms of agreement. The support of the target is also considered essential during the process of acquisition. The oversight role during the process is usually assigned to the panel in accordance to section 411. The court approval is usually required before the process continues according to section 411. This means that several court hearing is required before the process is approved. The conditions that are involved during the acquisition are usually subject to certain terms. Cash and security is usually requited during the process and hence its popularity among most of the bidders. The announcement can only be made after the agreement with the target. The time taken to complete the process is usually longer as compared to the other methods. The minimum duration is usually four months. This is unlike the other methods which take a shorter time of between two to three months. A wide range of corporate restructures can be achieved through the use of this method of acquisition. However it is also important to note that this method is common during the friendly acquisitions as compared to the hostile acquisition (Praag, 33). Scheme features The main features of a scheme of arrangement the use of the courts as well as the securityholders to approve the acquisition process. This means that the process cannot take place without the approval of the courts. On the other hand the votes of the securityholders are usually required before the process is approved in accordance to section 411. This percentage requirement for the approval is 75% of the votes according to section 411(4) (a) (ii) (B). The use of compromise is also an important feature of the scheme of arrangement. This means that the bidders and the target company have to come to an agreement in order for the process to proceed. The issue of give and take is also an important concept of compromise as it is used during the process of acquisition. The scheme is usually involved in friendly takeovers. This is because o the difficulties that is involved in reaching a compromise when dealing with he hostile acquisition. The members are usually given the opportunity to vote for or against any opportunity before the process are approved. It is also important to note that the individual vote in the scheme of arrangement does not count. The use of the majority votes is thus one of the features of the scheme of service5 (Chapple, 10). Takeover features The main feature of the takeover bids lies on the security issues according to section 617. This is because the offer has to relate to all the securities in the target companies. The main consideration for the securities in takeovers is usually cash6 (Rich, 27). This means that the cash has to be paid incase of an increase in the consideration. According to section 624, the timing is also an important feature for the takeover. This means that the duration is dependant on the whether the contestant is the target company or the contestant is a rival company. During the process, the conditions usually vary and are guided by section 625. In some instances, the regulatory approval must be obtained before the approval process. On the other hand, the conditions may be specific and hence prohibiting some of the activities to be carried out during the process under section 611. The bidder’s statements must be prepared in the case of takeovers in accordance to section 636. This is an important feature as the document is usually useful during the process. The terms of the bid as well the prescribed statement should be contained in the document according to section 637. It is also important for target statements to be available during the process of responding to the statements. It is thus evident that the features of the takeover are demanding to both the bidder and the target. Debate The support to the scheme of arrangement method is also attributed to the complex nature of the takeoffs. During the process, the bidder is allowed to pay cash or any other combinations of scrip in accordance to section 411. This is unlike the takeoff methods of acquisition and hence its support. The use of scheme of arrangement is convenient as it also considers more issues in relation to the bidder and the target as compared to the takeoff. This therefore allows the bidders to make proposals subject to the approvals of the regulatory considerations. The bidders with minority security holding are also supported through the use of this method of acquisition. This is because it allows them to make their proposals without the need for support from the target company7 (Lipton, 15). However, it is important to note that the support of the target company may play an important role during the documentation process. The merger implementation agreement is also supported by the scheme of arrangement. This plays an important role in ensuring that the relationship between the bidders and the target is friendlier. The use of the takeover is applicable to different situations including a hostile acquisition as the level of compromise is usually low. The scheme of arrangement is being supported due to its simplicity in ensuring that an acquisition takes place. On the other hand, it also has fewer restrictions as compared to the takeoff method of acquisition. Since the method also sports a good relation between the target and the bidders, it ensures that the process is transparent. Analysis According to section 411 of the corporations act 2001 (Cth), the term arrangement is defined as the reorganization of the company and it affects the rights of the shareholders. The process of carrying out the process through the use of the scheme arrangement is also defined clearly in On the other hand; the popularity of the scheme of arrangement is due to various factors that favors both the bidder and the target. According to section 411(4) (a) (ii) (B) the offering company has to achieve only 75% of the votes in its favor for it to be successful. This has played an important role in increasing the support of the scheme arrangements in Australia. This is much easier as compared to the takeover which requires the company to gain 90% of the votes in its favor according to section 664 A. This is a good thing for the bidders and the shareholders of the company as it makes the process of acquisition easy. The arrangement is usually between the bidders and the target during the process of acquisition. This means the method can only be used where the acquisition or merger is friendly. This is because in instances of hostility, it is difficult for the parties involved to come up to an agreement. In some of the instances, it is important to note that not all the shareholders may be supporting the process of acquisition. The use of the method is thus effective as only 75% of the votes in favor of the process are required8 (McConvil, 52). The scheme of arrangement has a higher level of certainty as compared to the takeover bids. According to section 411, the acquirer will know the results of the acquisition once the court proceeding are over. This is considering that the approval of the process is dependant on the decisions of the courts. This ha s also contributed to the increase in popularity of the method. The levels of uncertainty in takeover bids are high. This is because the 90% of votes which is the requirement in section 664A for the takeover may not be attained and hence the failure of the acquisition by the bidders. The involvement of the courts in each of the step in the acquisition process in accordance to section 411 is also a factor that has led to the increase in the popularity of the scheme arrangement. This is because the involvement of the courts guarantees the transparency of the process9 (Mallesons, 10). The confidence of the shareholders is also enhanced through the transparent process and hence ensuring that the bidder wins their support. It is also important to note that transparency is one of the factors that have been emphasized by the corporation act 2001 (Cth). The method is fully compliant of the provisions of the corporation act. The structural flexibility of the scheme of arrangement has also played an important role in contributing to the popularity of the method in Australia. The level of compliance to the corporation act 2001 is also high when using the method and hence the trust that it has gained among the supporters. This is unlike the other methods of acquisitions which are not fully trusted by the bidders and the shareholders. The use of the scheme of arrangement is also popular due to the fact that it can be used by companies to enter into agreements with the creditors according to section 411. This can also be used for the purposes of providing an alternative to liquidation and hence its advantage to both parties. This is also an important reason for its popularity as compared to the takeover processes. It is also important to note that the concepts of the scheme of arrangement have the elements of give and take and hence benefiting all the parties that are involved. This is one of the reasons as to why most of the companies are keen on using this method during the process of acquisition. However, it is important to note that the process is purely dependant on the decisions of the court which may overturn some of the decisions according to section 411(17). The use of principles of compromise is also important and has positively impacted on the process of acquisition using the scheme of arrangement. On the other hand, it is difficult for the parties to get into disagreements and misunderstandings that may lead to the legal battles. This is because all the steps are approved by the courts in the presence of all the parties involved. It is also easier to effect changes when using the scheme of arrangement as compared to the takeover process. This is because the approval of the changes is done in the presence of all the parties in court10 (Kinnunen, 123). Arguments The use of scheme of arrangement method is considered convenient to most of the companies in Australia. This is considering that it is more secure as composed to the takeoff method. It can be argued that the high level of certainty is important in the process and it encourages more people to use the method. The approval of the courts in every step that is taken during the process is important in terms of ensuring that the process is transparent in accordance to section 411. The use of the takeover process can not guarantee any transparency. This is because of the lack of legal process during the acquisition. This plays a role in making the people reluctant to adopt the process11. The complex nature that is involved during the takeover process under section 602 also presents a lot of disadvantages to the method which has seen most of the people to opt for the use of scheme of arrangement. However it can also be urged that the use of the scheme of arrangement may take a lot of time. This is because of the numerous court proceedings that are associated with the method. However it can also be argued that the court preceding guarantees the success of the process and it reduces the chances of legal battles that may occur 12(DePamphilis, 740). Conclusion In conclusion, it is evident that the use of the scheme of arrangement is common in Australia as compared to the takeover method of acquisition. The features of the scheme of arrangement are much favorable to the bidders and the target companies as set out in section 411. This plays an important role in influencing the adoption of the process. It is also evident that the transparency in the scheme of arrangement is guaranteed as compared to the use of the takeover method of acquisition. The guarantee of transparency as well as certainty in the process is one of the reasons that encourage most of the companies to adopt the method. However, it is also evident that the method has some of the weaknesses. However, the weaknesses are suppressed by the strengths of the method. The takeover process involves a lot of complex procedures and hence its weakness. It is also evident that it has a high level of uncertainty and hence the failure of the companies in Australia to adopt it. Summation The method of acquisition used determines the success of the acquisition process. This is true for the scheme of arrangement method which has gained a lot of popularity in Australia. The debate cornering the use of the scheme of arrangement is mainly based on its features. The laws that govern the use of this method during the acquisition process have a positive impact on its use. This is because section 411 encourages the transparency during the process. On the other hand, the definition of arrangement in the Corporations act 2001 has a positive impact on the use of the method. The use of the method encourages a good relationship between the bidders and the target company. This makes the process of acquisition friendly and simple and hence eliminating the hurdles that may hinder the process. The arguments in support for the use of the scheme of arrangement are also based on its simplicity of concepts. It is thus evident that the use of the scheme of arrangement has a wide support among most of the companies in Australia as compared to the takeover process. The use of schemes to affect takeovers is thus set to continue due to its simplicity. References Mirko, Bagaric. Opting out of shareholder governance: A new perspective on contractual freedom in Australian Corporate law. Depaul bus, 2005. Sheehy, Benedict, Australia’s Eggleston principles in Takeover law, social and economic sense. Australian journal of corporate law, 2004, pp. 218. Chapple, Larelle. Australia’s corporate disclosure Regime: Lessons from US Model, Australian Journal of corporate law, 2003. 10-11. Rich, Andrew. Schemes, takeovers and Himalayan peaks: The use of schemes of arrangement to effect change of control of transactions. Herbert smith freehills. 2013. McConvil, James. Coming down the mountain: Rethinking takeovers regulation in Australia. Sandstone Academic press, 2006. Mallesons, Stephen. A guide to takeover in Australia, 2011. Corporation act commonwealth 2001, Australian corporation act. 2013. Retrieved on 23 August 2013 from, Lipton, Herzberg, Understanding company law. Thompson Reuters, 2011. Praag, Mirjam. The entrepreneur's mode of entry: Business takeover or new venture start? Journal of business venturing, 2012.Vol 27, 31-34. Kinnunen, Jani. "A Procedure for the Rapid Pre-acquisition Screening of Target Companies Using the Pay-off Method for Real Option Valuation". Journal of Real Options and Strategy, 2011, 4 (1): 117–141. DePamphilis, Donald Mergers, Acquisitions, and Other Restructuring Activities. New York: Elsevier, Academic Press, 2008. p. 740. Australian Securities and Investments Commission. (2007). Schemes of arrangement and ASIC review. Regulatory guide. Read More