Schemes of arrangement in the Australian jurisdiction

Co-authored by Ryan Lennon, Managing Associate

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Schemes of arrangement in the Australian jurisdiction

Schemes of arrangement in the Australian jurisdiction

Co-authored by Ryan Lennon, Managing Associate

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December 19, 2024

Key points

Schemes of Arrangement are governed by section 411 of the Corporations Act 2001 (Cth) (Act).
Schemes of Arrangement can be approved by the Federal Court of Australia or a Supreme Court of a State as below discussed.
Schemes of Arrangement involve a complex but streamlined process that must be followed to ensure they can be and are approved by the Court to allow them to take effect.
The Australian Investment and Securities Commission (ASIC) must be notified of each Scheme of Arrangement.
ASIC must either confirm that it does not object to the Scheme of Arrangement or provide details of its objections.
ASIC’s published Regulatory Guide RG-60 details its processes related to proposed Schemes of Arrangements.

Alert content

The below table sets out in a simplified tabular form the required process for a Scheme of Arrangement:

Phase 1	Phase 2	Phase 3
Initial Proposal and Negotiation (a) Confidentiality Agreements Parties enter into confidentiality agreements as required (b) Negotiate Terms Terms of the scheme are negotiated between the target company (Target), bidding company (Bidder) and other relevant parties (for example financiers) (c) Due Diligence Bidder undertakes due diligence on Target Target undertakes due diligence on Bidder (particularly where consideration includes Bidder scrip)	Preparation of Scheme Documents (a) Draft Scheme Implementation Agreement A formal agreement outlining the scheme’s terms is prepared and executed (b) Prepare Scheme Booklet An explanatory statement (Scheme Booklet) is drafted, including: Details of the scheme Independent Expert's Report (if required) Information for shareholders or creditors (c) Obtain Regulatory Approval Necessary approvals are sought from ASIC The Scheme Booklet is lodged with ASIC at least 14 days before the First Court Hearing	First Court Hearing (Application to Convene Meetings) (a) File Application with Court An application is filed requesting the court to order meetings of shareholders or creditors to consider and vote on the Scheme proposal (b) Prepare Affidavits Supporting affidavits and evidence are prepared and filed with the Court (c) First Court Hearing The court reviews the application and can order the convening of meetings of shareholders or creditors to consider and vote on the proposed scheme

Phase 1

Phase 2

Phase 3

Initial Proposal and Negotiation

(a) Confidentiality Agreements

Parties enter into confidentiality agreements as required

(b) Negotiate Terms

Terms of the scheme are negotiated between the target company (Target), bidding company (Bidder) and other relevant parties (for example financiers)

Bidder undertakes due diligence on Target
Target undertakes due diligence on Bidder (particularly where consideration includes Bidder scrip)

Preparation of Scheme Documents

(a) Draft Scheme Implementation Agreement

A formal agreement outlining the scheme’s terms is prepared and executed

(b) Prepare Scheme Booklet

An explanatory statement (Scheme Booklet) is drafted, including:
- Details of the scheme
- Independent Expert's Report (if required)
- Information for shareholders or creditors

Necessary approvals are sought from ASIC
The Scheme Booklet is lodged with ASIC at least 14 days before the First Court Hearing

First Court Hearing (Application to Convene Meetings)

(a) File Application with Court

An application is filed requesting the court to order meetings of shareholders or creditors to consider and vote on the Scheme proposal

(b) Prepare Affidavits

Supporting affidavits and evidence are prepared and filed with the Court

The court reviews the application and can order the convening of meetings of shareholders or creditors to consider and vote on the proposed scheme

Note: The First Court hearing is held after ASIC provides its feedback. However, in practice ASIC often provides a letter to the Target stating that it does not intend to appear at the First Court Hearing or oppose the Scheme.

Phase 4	Phase 5	Phase 6
Dispatch of Scheme Booklet (a) Register Scheme Booklet with ASIC The Scheme Booklet, as approved by the Court during the First Court Hearing is lodged with ASIC (b) ASIC Review Period ASIC reviews the booklet and provides any feedback or concerns it has (c) Incorporate ASIC Comments Necessary amendments are made to the Scheme Booklet based on ASIC's input (d) Dispatch Scheme Booklet The finalised booklet is sent to all shareholders or creditors	Scheme Meeting (a) Notice of Meeting Notice is given in accordance with the court’s orders and legal requirements (b) Conduct Scheme Meeting The meeting is held to consider and vote on the Scheme (c) Voting Requirements (s 411(4)(a) Corporations Act 2001) Approval requires: A majority in number (over 50%) of shareholders or creditors present and voting; and At least 75% of votes cast in favour (d) Prepare Voting Results Results are recorded and minutes prepared for inclusion in the affidavits required by the court at the Second Hearing	Second Court Hearing (Approval of Scheme) (a) Application for Approval If approved at the meeting, the application described in above phase 3 continues and a second hearing is held at which the Target seeks the court’s approval of the Scheme (b) Prepare Affidavits Further affidavits confirming compliance with: the Court’s orders; meeting legalities are submitted conditions precedent how they will be complied with in accordance with the Scheme (c)Second Court Hearing The court assesses the scheme's fairness and legality (d) Court Approves Scheme (s 411(4)(b) Corporations Act 2001) Upon its satisfaction, the court grants approval for the Scheme to be implemented in accordance with its terms set out in the Scheme Booklet with any required amendments or conditions

Phase 4

Phase 5

Phase 6

Dispatch of Scheme Booklet

(a) Register Scheme Booklet with ASIC

The Scheme Booklet, as approved by the Court during the First Court Hearing is lodged with ASIC

(b) ASIC Review Period

ASIC reviews the booklet and provides any feedback or concerns it has

Necessary amendments are made to the Scheme Booklet based on ASIC's input

(d) Dispatch Scheme Booklet

The finalised booklet is sent to all shareholders or creditors

Scheme Meeting

(a) Notice of Meeting

Notice is given in accordance with the court’s orders and legal requirements

(b) Conduct Scheme Meeting

The meeting is held to consider and vote on the Scheme

Approval requires:
- A majority in number (over 50%) of shareholders or creditors present and voting; and
- At least 75% of votes cast in favour

(d) Prepare Voting Results

Results are recorded and minutes prepared for inclusion in the affidavits required by the court at the Second Hearing

Second Court Hearing (Approval of Scheme)

(a) Application for Approval

If approved at the meeting, the application described in above phase 3 continues and a second hearing is held at which the Target seeks the court’s approval of the Scheme

(b) Prepare Affidavits

Further affidavits confirming compliance with:
- the Court’s orders;
- meeting legalities are submitted
- conditions precedent how they will be complied with in accordance with the Scheme

(c)Second Court Hearing

The court assesses the scheme's fairness and legality

(d) Court Approves Scheme (s 411(4)(b) Corporations Act 2001)

Upon its satisfaction, the court grants approval for the Scheme to be implemented in accordance with its terms set out in the Scheme Booklet with any required amendments or conditions

Phase 7	Phase 8	Phase 9
Lodgement with ASIC and Scheme Effectiveness (s411(10) Corporations Act) (a) Lodge Court Order with ASIC The court's approval order is lodged with ASIC (b) Scheme Becomes Effective The scheme becomes legally effective upon lodgement with ASIC	Implementation of Scheme (a) Implementation Date The date when the scheme's terms are executed (b) Update Registers Share or creditor registers are updated accordingly (c) Issue Consideration Consideration (cash, scrip or a combination of both) is paid to entitled parties (d) Post-Implementation Steps Complete, any additional actions, for example, delisting from the ASX	Completion (a) Announce Completion The successful implementation is announced to the market and stakeholders (b) Final Reporting All necessary final reports and documentation are prepared and filed

Phase 7

Phase 8

Phase 9

Lodgement with ASIC and Scheme Effectiveness (s411(10) Corporations Act)

(a) Lodge Court Order with ASIC

The court's approval order is lodged with ASIC

(b) Scheme Becomes Effective

The scheme becomes legally effective upon lodgement with ASIC

Implementation of Scheme

(a) Implementation Date

The date when the scheme's terms are executed

(b) Update Registers

Share or creditor registers are updated accordingly

Consideration (cash, scrip or a combination of both) is paid to entitled parties

(d) Post-Implementation Steps

Complete, any additional actions, for example, delisting from the ASX

Completion

(a) Announce Completion

The successful implementation is announced to the market and stakeholders

(b) Final Reporting

All necessary final reports and documentation are prepared and filed

The above table describes in base terms a “standard” Scheme of Arrangement process.

All Schemes have unique elements and they all require careful consideration to ensure they are capable of ultimately obtaining the Court’s approval.

For example, the recent decision of Re Base Resources [2024] FCA 1069, in which Dentons acted for the Bidder, required the Court to consider the effect of shareholders of Base Resources being given shares of Energy Fuels Inc, a company listed on the New York Stock Exchange and the effect on shareholders holding entitlements through a custodian which were tradable on the Alternative Investment Market as part of the London Stock Exchange.

Re Base Resources is an example of just some of the unique elements that can arise in a Scheme of Arrangement and required the consideration of legislation across multiple jurisdictions.

What’s changed

The Federal Court of Australia recently moved to streamline the process of applying for approval of a scheme of arrangement; see the Federal Court of Australia’s Schemes of Arrangement Practice Note (GPN-SOA).

That Practice Note sets out the Federal Court’s expectations in relation to an application to the Federal Court for it to approve a Scheme of Arrangement.

The Federal Court’s decisions in Re Alumina Ltd [2024] FCA 806 and Re Base Resources demonstrate, among other things, the Federal Court’s approach about the effect of foreign legislation on Schemes proposed in Australia.

The impact/what the reader needs to know or do

Schemes of Arrangement are an effective vehicle for a company to acquire the shares of another company by engagement with the other company and through it and its shareholders or for a company to resolve indebtedness by engagement with their creditors and shareholders by a formulated and court supervised process.

Schemes of Arrangement can include novel concepts and agreements that satisfy the parties and shareholders commercial objectives.

However, care must be taken to ensure the strict process set out by the Act and ASIC are followed which requires considerable attention to detail and high standards of probity.

Next steps

Dentons has a highly skilled team of lawyers available (in various Australian and international jurisdictions) to assist in your considerations about proposing, applying for and implementing Schemes of Arrangement through all of the above described phases including novel aspects of your proposed Scheme of Arrangement.