Management shareholders: in a class of their own?  

Ahead of the Deal - Australian M&A briefing

Roll with it: navigating management equity in schemes

Often a bidder will have a strong commercial rationale for wanting certainty that target management will have equity exposure to the target after implementation of a scheme of arrangement. The key question then becomes whether management will form a separate class for the purposes of the scheme. As discussed in our earlier piece on HMA International, the commercial desire must often be balanced against the downside of raising the effective threshold for approval by non-management shareholders and potentially materially reducing the threshold for a blocking stake.

It has long been accepted that separate scheme classes will arise where a scheme offers management shareholders an option (or obligation) to receive bidder scrip while other shareholders receive only cash, but that alternative structures may achieve a similar outcome while retaining the benefits of a single scheme class.

This article explores the recent decision in Re Planet Innovation [2026] FCA 1194, which indicates that one of those alternative structures which has not previously resulted in separate scheme classes, being an agreement outside the scheme for certain shareholders to subscribe for shares in the bidder group, may result in separate scheme classes if the size of the subscription for bidder group shares is sufficiently material. We also highlight some implications to consider when structuring your next scheme.

The question of class

Questions of class composition are important as they could impact the ultimate outcome of a scheme of arrangement – the approval threshold for a scheme of arrangement (at least 75% of shares voted in favour, by shareholders who represent a majority by number) needs to be satisfied in relation to each class.

Generally, courts will only separate shareholders into multiple classes where their rights are so dissimilar that it is impossible for them to consult together with a view to a common interest. Courts have emphasised caution against a “salami sliced approach” to class composition. Unnecessary separation can unfairly empower a minority group of shareholders with an effective and unwarranted veto over a scheme, meaning that a practical business-like approach should be adopted.

Where a scheme provides for participants to receive different consideration for their acquired shares, such as some participants receiving bidder scrip and others receiving cash, it is clear that those participants do not have sufficiently common interests, so will form separate classes.

Ancillary arrangements outside the scheme require further scrutiny. Ancillary arrangements involving some (but not all) shareholders may not require the shareholders participating in those ancillary arrangements to form a separate class. While there is flexibility in the matters to be considered by the court, class analysis focuses first and foremost on how the scheme affects the rights of shareholders in their capacity as shareholders, and not their broader commercial motivations.

Future employment arrangements and cash payments or incentives payable to management shareholders in connection with a scheme have the potential to be relevant to class composition, and should always be considered carefully. That said, these arrangements have routinely been held not to require class separation provided that the arrangement arises outside the scheme and the benefit is given to the shareholder for a reason other than their ownership of scheme shares and participation in the scheme.

Planet Innovation: five structures for retaining an equity interest

How do these principles apply to an opportunity for management to subscribe for shares in the bidder group outside the terms of the scheme?

In Planet Innovation, the first court hearing decision in a scheme of arrangement for the acquisition of an unlisted public company, Beach J considered five transaction structures under which some (but not all) scheme company shareholders would either acquire an equity interest in the bidder group or retain shares in the target:

1. Two classes: Under a single scheme, one group of shareholders has the ability under the terms of the scheme to elect to receive a mix of cash and scrip (or wholly scrip) in the acquirer (or its holding company), whereas other shareholders are to receive solely cash consideration. As the rights under the scheme differ between the groups, they vote in separate classes.

2. Two schemes: Separate schemes are implemented – one for shareholders receiving cash only, and another for shareholders who have the ability to elect between cash, scrip or a mixture. The two schemes are inter-conditional, meaning each must be approved by the requisite majorities (and the court) for either to proceed. This was the approach taken in the HMA International scheme we have previously covered.

3. Retention schemes: Some shareholders retain a portion of their shares in the target, which are excluded from the scheme, and do not participate in the scheme vote. The remaining shares held by all shareholders (including those who are retaining some shares) are acquired pursuant to a single scheme with one class of scheme shareholders (absent other factors calling for separate classes) for the same consideration.

4. Equity subscription outside the scheme: In Re Mason Stevens [2025] NSWSC 84, also a scheme of arrangement for the acquisition of an unlisted public company, certain executives agreed to reinvest proceeds from option cancellations and cash incentive payments by subscribing for bidder group scrip on or after implementation. The same opportunity was also offered to other employees. At the first court hearing, the scheme was convened with a single scheme class, although the votes of relevant individuals were tagged (for later consideration as to whether the relevant votes have a bearing on the outcome – a pragmatic approach which allows for class composition questions to be deferred). Ultimately, the scheme was approved by the requisite majorities at the scheme meeting and the result would not have been different had the tagged votes been excluded, meaning further scrutiny of the classes was not required. 

In contrast, in Planet Innovation where four founder shareholders agreed to each subscribe for bidder group shares if the scheme became effective, those founder shareholders formed a separate scheme class. Beach J acknowledged similarities with Mason Stevens, but identified two key distinguishing features in the form of the proportionally high:

• value of the share subscription: $8 million (6.8% of aggregate scheme consideration) vs ~$1.79 million (0.9% of aggregate scheme consideration) in Mason Stevens; and
• percentage of scheme company shares held by the founder shareholders participating in the share subscription: 33.38% vs an undisclosed but presumably lower figure in Mason Stevens.¹

The size of the pre-scheme shareholding of the founders illustrates how having separate classes can be significant for deal certainty. If 33.38% of shares are excluded from voting in the main class, and at least 75% of votes cast at a meeting must approve the scheme, then an interloper would require only 16.66% of all target shares to block the scheme (assuming 100% voter turnout). Since 100% voter turnout would be highly unusual, the practical threshold for a blocking stake is even lower.

Other distinguishing features when compared to Mason Stevens included that:

• the independent board committee of Planet Innovation determined (and the company proposed to the court) that the founder shareholders should constitute a separate class;
• only the four founder shareholders were offered the opportunity to subscribe for equity (and not a broader number of employee shareholders); and
• the source of funds for the bidder group equity subscription was unspecified.

The distinguishing factors made the outcome "fairly clear" – separation into two classes.

An important consideration arising under this structure is the availability of capital gains tax scrip for scrip rollover. Scrip for scrip rollover is commonly available where target shareholders receive bidder group scrip in the scheme, but not where target shareholders separately subscribe for shares outside the scheme.

5. Cash / scrip election schemes, with a condition requiring scrip elections: All shareholders have the ability to elect for either cash or scrip (or a mix of both), but a certain minimum level of scrip elections (potentially from certain key shareholders) is a condition of the scheme.

Structuring implications for your next deal

The five structures highlight that where there is a desire for management to be invested in the bidder group after the transaction, there may be a need to balance competing priorities. A structure that allows management (who are supportive of a deal) to vote in the same class as other shareholders can offer material benefits to deal certainty. All else being equal, both the bidder and target should have a strong preference for deal certainty. However, deal certainty is not the only relevant consideration. Each deal, and within each deal each bidder, target and shareholder, has individual financial, tax, accounting, legal and other features driving structuring preferences.

The contrast between the decisions in Mason Stevens and Planet Innovation makes clear that it should not always be assumed that schemes providing for management to subscribe for equity in the bidder group outside the scheme will allow management to vote in the same class as other shareholders. These structures exist on a spectrum. At 0.9% (Mason Stevens), management subscription may not be class-creating, whereas at 6.8% (Planet Innovation), separate classes may be warranted. While there is no bright line, and other factors should also be considered, the higher the quantum relative to the deal, the more likely it is that management will form a separate class. In each case, it requires a commercial evaluative judgment of the particular transaction.

It is important also to consider how the way in which schemes are presented to the court may drive outcomes. If the independent board committee of Planet Innovation had not determined that the founders should constitute a separate class, and if Planet Innovation had submitted to the court that it was appropriate for the founders to vote in a single class with other shareholders, might this have led to a different outcome?

The key takeaway is that structure matters, but so does size. Bidders and targets considering a management subscription model should factor in the quantum of both the management subscription and the initial management shareholding from the outset when considering class composition and implications for deal certainty.

Authors: Susannah Macknay, Partner; Zoe Leyland, Counsel; Jonathan Bisset, Senior Associate and Jordan Bassilious, Graduate. 

Want to know more?

• A tale of two schemes: the novel structure for management roll in HMA International
• Hitting new peaks: recent developments in schemes of arrangement
• Where there's a nil, there's a way (to vote)

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