"English Schemes of Arrangement Expand to Continental Europe and Beyond"

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

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 U.K., 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 can accommodate.

The appeal of English schemes of arrangement, coupled with recent case law supporting their use, has contributed to a significant increase in European companies outside of the U.K. relying on this tool to address their financial difficulties. We believe the following factors will result in this trend continuing into 2014.

Jurisdictional Flexibility. In Europe, the opening of insolvency proceedings is governed by the European Insolvency Regulation, which restricts this action to the country where a company has its center of main interests (or COMI). The COMI concept also is found in Chapter 15 of the U.S. Bankruptcy Code concerning the recognition of non-U.S. bankruptcy proceedings. However, because schemes are creatures of corporate rather than insolvency law, they are not governed by the European Insolvency Regulation — and their use is not limited to companies that have their COMI in the United Kingdom.

Governing Law Clauses. Recent case law has established that a scheme of a non-U.K. company can be implemented where the debts in question are governed by English law, and there is ample evidence to show that, if approved, the effect of the scheme would be recognized in the company’s home jurisdiction. To date, schemes have been successfully implemented for companies incorporated in Spain, Germany, Italy, the Netherlands, Denmark, Bulgaria and even Kuwait. Given the prevalent use of English law clauses in international financings, the scheme has the potential to be used even more broadly in the future.

Amend-and-Extend Transactions. Traditionally, schemes have been used to effect substantial balance sheet restructurings. Schemes involve two court hearings and bespoke drafting of the scheme documents following detailed negotiations; consequently, they have tended to be deployed in more complex situations. Recently, however, schemes have been used under straightforward circumstances. A defining feature of the distressed European landscape since the global financial crisis began has been a reluctance on the part of lenders to realize losses that otherwise can be avoided. This has led to what are sometimes called “amend-and-extend” transactions under which maturities are pushed out and other terms adjusted. This permits the company to postpone addressing what may be fundamental structural issues for the period of the extension with the hope that the economic environment will improve. Several European companies, including Spanish retailer Cortefiel and German roofing supplier Monier, successfully used schemes in 2012 and 2013 to obtain amend-and-extend agreements on their debt facilities.

No Creditor Consensus, No Problem. There appears to be an increasing appetite to use schemes in a broader set of financial circumstances to address the problem posed by holdout creditors. Finance agreements often require unanimity — an often impossible threshold to achieve — to amend key terms such as the amount of principal and maturity dates. When this happens the results can include deadlock, having to pay holdouts in accordance with the original terms or even the failure of the business. A scheme provides a method of binding a minority to a new deal.

Stay on Legal Proceedings. Since it is not a creature of insolvency law, the proposal of a scheme does not give rise to a moratorium to prevent creditors from taking action against the company to maximize their own recovery or to derail the scheme itself. In Bluecrest Mercantile BV v. Vietnam Shipbuilding Industry Group [2013] EWHC 1146 (Comm), a recent English High Court case on this issue, monies had come due under a facility, and two of the lenders sought summary judgment. The company had no defense to the claim, but negotiations on a scheme were reasonably well-advanced. The court used its inherent case management powers to grant a temporary stay to give the chance for a scheme to be developed and approved. It will be interesting to monitor whether the grant of a stay becomes a relatively common feature of the scheme process.

******

As the eurozone crisis continues to linger and companies and investors seek to remedy financial distress, the use of schemes is expected to grow in European restructurings where there is significant English law-governed debt. Notwithstanding some recent changes to the formal insolvency processes in countries such as Spain and Germany, European borrowers should view the British legal system’s unique tool as an additional aid in navigating the restructuring process.

* This article appeared in the firm's sixth annual edition of Insights on January 16, 2014.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.