Mar 2026
Court-sanctioned schemes of arrangement remain one of the most effective mechanisms available under Bermuda law for effecting privatisations and corporate restructurings. In recent years, schemes of arrangement have been used in several Bermuda company transactions, reflecting their flexibility, strong deal certainty and the Bermuda court’s approach in this area.
This article provides an overview of the legal framework governing schemes of arrangement in Bermuda, with practical guidance for those considering this option.
What is a Scheme of Arrangement?
A scheme of arrangement is a statutory procedure under Bermuda law that enables a company to enter into a binding compromise or arrangement with some or all of its shareholders (or creditors). In essence, it is an agreement for some form of ‘give and take’ approved by the requisite majority of shareholders and sanctioned by the Bermuda court, which is then binding on all shareholders, including those who voted against the proposal or did not vote at all.
From a strategic perspective, the ability to bind shareholders through a court-approved process distinguishes schemes from contractual mergers and explains their continued use in complex transactions.
Once sanctioned, scheme shares are either compulsorily transferred to the acquiror or cancelled and shares in the target company are issued to the acquiror with the result that the target company becomes wholly-owned by the acquiring party. This makes schemes of arrangement a particularly powerful tool for privatising listed companies and completing change-of-control transactions for widely held companies.
Approval Thresholds
For a scheme to proceed, it must receive the approval of each class of scheme shareholders (discussed below) at a court-convened meeting. The statutory thresholds for approval are twofold:
The Value Test: The scheme must be approved by shareholders holding not less than 75 per cent in value of the scheme shares present and voting at the meeting. This is generally straightforward in application.
The Headcount Test: The scheme must also be approved by a majority in number of scheme shareholders present and voting at the meeting. This test counts shareholders rather than shares and requires careful preparation in modern equity markets where shares are frequently held through central depositaries or nominees.
Where a company is subject to any applicable foreign Takeover Code requirements, any disinterested or independent shareholder vote stipulated by that code must also be obtained.
Practical Considerations
The Headcount Test
The headcount test originated in legislation designed for creditors’ schemes and was subsequently applied to shareholder schemes over a century ago. Its application in contemporary equity markets – for example, where depositary or beneficial interests are commonly held and traded through a single member acting as central depositary, – requires careful consideration for the relevant transaction.
A scheme is between the Company and its registered members. From a practical standpoint, beneficial owners who hold their shares through a central depositary may be encouraged to register those shares in their own names prior to the scheme meeting, thereby ensuring they are counted for the purposes of the headcount test. This legitimate enfranchisement of beneficial owners is distinct from improper share-splitting arrangements and represents an accepted means of ensuring that the true economic owners of shares are reflected in the voting process.
The headcount test can present challenges. In most cases, considered planning and shareholder engagement will mitigate any associated risks.
Class Composition
The voting thresholds described above apply separately to each class of shareholder. A class is formed by shareholders whose rights under the scheme are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. The modern approach to class composition focuses on the rights held by the shareholders in relation to the new rights conferred by the scheme rather than the particular interests of individual shareholders.
Court Sanction
Once the requisite shareholder approval is obtained, the scheme must be sanctioned by the Bermuda court. In the absence of opposition (from a minority shareholder or other interested party) at the sanction hearing (which is unusual in practice), the court is likely to sanction the scheme provided the following conditions are satisfied:
- The relevant statutory provisions have been complied with;
- The scheme shareholders were fairly represented by those who attended and voted at the court meeting;
- The statutory majority acted bona fide and did not coerce minority shareholders; and
- An honest and intelligent person, acting in respect of their own interests as a scheme shareholder, might reasonably approve the scheme.
The Bermuda court’s approach reflects a balance between procedural oversight and commerciality, giving parties a high degree of predictability where schemes are properly structured.
This final test differs significantly from the right of dissenting shareholders to seek a fair value determination in a statutory merger.
Advantages of Schemes of Arrangement
Schemes of arrangement offer considerable advantages. Where the statutory thresholds can be met and any applicable Takeovers Code requirements satisfied, parties can proceed with a high degree of certainty that the scheme will be sanctioned by the court. Further, the inability for dissenting shareholders to pursue an appraisal action mitigates the risk of additional transaction and litigation costs. These advantages make schemes an attractive structure for privatisations and other change of control transactions where deal risk must be carefully managed.
Conclusion
Schemes of arrangement remain a well-established and effective mechanism under Bermuda law for privatisations and change of control transactions of widely held companies. While the statutory approval thresholds – particularly the headcount test – require careful preparation, experienced legal counsel can assist in structuring and implementing a scheme that achieves the desired commercial objectives whilst minimising execution risk. As market conditions continue to drive consolidation and take-private transactions, schemes of arrangement are likely to remain a key feature of Bermuda’s transactional landscape.
For further information, please contact our Bermuda corporate team.
This publication is for general guidance only and does not constitute legal advice.