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Corporate Restructuring

By Dominic McCahill
May 02, 2014

A scheme of arrangement is a tool of English corporate law that has been used in M&A and restructurings for decades. A company implementing a scheme has complete freedom to choose with which groups of shareholders and creditors to engage to achieve the desired commercial end. The longevity of schemes in English law also has allowed a broad and detailed body of case law to develop, which has engendered predictability without endangering the tool's flexibility.

In restructurings, schemes have been used to effect complex financial reorganizations tailored to the specific needs of the stakeholders. The amount of debt can be reduced with the pain shared generally in accordance with the participants' relative legal rights and other points of leverage. In the UK, schemes often are used instead of a formal insolvency process, and they can be employed to provide more innovative solutions in administrations and liquidations than insolvency legislation alone can accommodate.

A scheme involves two court hearings. At the first hearing, the court is asked to convene one or more meetings of creditors (and/or shareholders) to consider and to vote upon the scheme proposal. A key area of focus will be the composition of the class or classes of persons whose rights are to be altered. If the meetings are summoned and each class has approved the scheme by the requisite majority (a majority in number representing 75% in value of those attending the meeting and voting), a second court hearing takes place at which the court will sanction the scheme if it is satisfied that: 1) the statutory requirements have been met; 2) the class was fairly represented and the majority acted in good faith; and 3) the scheme is appropriate in the sense that it is such as an intelligent, honest person acting in respect of his own interest might reasonably approve.

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