Offering less to get more - harnessing the power of a scheme structure

The recent battle for Pushpay Holdings Limited (a dual ASX / NZX listed company) (Pushpay) by a BGH Capital led consortium (Consortium) has demonstrated the power of the inherent flexibility of a scheme of arrangement structure.

In its acquisition of Pushpay by scheme of arrangement (governed by New Zealand law), the Consortium initially offered Pushpay shareholders NZ$1.34 per share.  Whilst Pushpay only had one class of shares on issue, the shareholders were divided into 2 separate classes for voting purposes at the scheme meeting: (a) shareholders associated with the Consortium (holding 20.23% of Pushpay shares) (Consortium Class); and (b) all other shareholders (General Class).

The scheme was voted down by the General Class at the scheme meeting.  After lengthy negotiations, the scheme was amended on the basis that shareholders would receive increased consideration of NZ$1.42 per share, but shareholders associated with the Consortium and a group of 10 shareholders described as “sophisticated, professional offshore event-driven funds” (Arbitrage Funds) would receive the original lower consideration of NZ$1.34 per share.  The Arbitrage Funds agreed to accept the lower consideration and entered into voting agreements in favour of the scheme.

Why did the Arbitrage Funds accept less? Presumably the Arbitrage Funds were concerned that there was no other path to liquidity for their stake – no other rival bidder had materialised.  Effectively, the Consortium’s deal was the best offer on the table.

The differential consideration resulted in a 3-tiered class structure – the Consortium Class, the General Class and the Arbitrage Funds (Arbitrage Fund Class).

The scheme was ultimately approved by the requisite majorities and by the New Zealand High Court.

Schemes of arrangement and takeovers laws more broadly are very similar as between Australia and New Zealand.  Were the Pushpay scheme governed by the laws of Australia, a similar differential consideration structure could have been utilised.

One of the great advantages of a scheme of arrangement structure is its inherent flexibility as compared to takeovers.  A takeover (whether on-market or off-market) is subject to prescriptive procedural requirements governed by the Corporations Act, and differential consideration is only permitted with ASIC relief.

It is not uncommon for differential consideration to be offered in an Australian scheme of arrangement, particularly by a private capital bidder.  Private capital bidders commonly offer management shareholders the ability to receive partial scrip consideration and that offer is often only made to management shareholders.  Such an offer structure will result in management shareholders voting in a separate class to all other shareholders.

The flexibility of a dual class structure comes with a cost – the scheme must be approved by the requisite majorities in each class.  In creating a separate class, the denominator for the general voting class is reduced, and this can put pressure on the vote by giving aggrieved or disgruntled shareholders greater voting power relative to what they would have enjoyed where all shareholders voted in a single class.

The trade-off is well demonstrated by the scheme of arrangement undertaken by Zenith Energy.  The initial bidder offered cash consideration to target shareholders generally plus a partial scrip alternative to management and founders who held in aggregate approximately 23% of the target shares.  The general voting class was therefore reduced to approximately 77% of target shares.  A consortium of OPTrust and Infrastructure Capital Group acquired a 17.5% stake in Zenith (on market) which further reduced the general voting pool to approximately 60%.  At this level, and assuming voter turnout of between 40% to 60% of the shares in the main class, shareholders with between 6% and 9% can block the scheme vote.  The scheme was ultimately approved by Zenith shareholders, but only after a price bump.

The differential consideration structure utilised in the Pushpay scheme again highlights the power of the inherent flexibility of a scheme of arrangement.  However, as with most things in life, the flexibility doesn’t come without a cost, and bidders looking to utilise differential consideration will need to take into account the increased pressure on getting the vote through with a reduced “general” voting pool.

KWM acted for the OPTrust / ICG consortium on the Zenith Energy scheme of arrangement