The Flawed Headcount Requirement on Schemes of Arrangement
A failed takeover of a Hong Kong-listed company has highlighted a weakness in English company law.
On 16 June, a proposed take private by way of scheme of arrangement lapsed when the resolution to approve the scheme of arrangement was not approved by the requisite majority in number of the company's independent shareholders. The resolution failed as a result of the "headcount requirement" of the scheme approval process which requires both a majority in number of independent shareholders and 75% in value of independent shareholders voting at the court meeting to vote in favour of the scheme. This case demonstrates the difficulty with the "majority in number" requirement. Here, it was shareholders with a 0.037%1 stake that were able to block the proposed privatisation as a majority in number of independent shareholders voting on the scheme.
This outcome brings into focus a serious issue when company law does not keep up with market reality. The headcount requirement stems from nineteenthcentury corporate governance when shareholders generally held their shares in their own name. Today fund managers, for example, may hold significant blocks of shares but count as only one "head". So long as the majority in number test remains, schemes of arrangement are vulnerable to being voted down by a large number of shareholders with a very small aggregate holding.