On 15 May 2013, the UK Panel on Takeovers and Mergers (the “Panel”) published a statement confirming that the UK Takeover Code (the “Takeover Code”) will apply automatically to all companies registered in the UK, Isle of Man or Channel Islands (“UK registered companies”) whose shares are admitted to trading on a UK-based multilateral trading facility such as AIM or the ISDX Growth Market.
The Takeover Code is a detailed set of rules applied by the Panel which governs the conduct of takeovers in the UK and is designed to ensure equality of treatment of shareholders. As an example, it requires any person (or persons acting in concert with that person) who acquires 30% or more of the voting rights of a target company (whether by a series of transactions or not) to make a mandatory cash offer to the other shareholders for the rest of the company. This requirement can also be triggered by the exercise of convertible securities and share buy-back programmes, as well as share purchases.
Currently UK registered companies whose securities are admitted to trading on AIM or the ISDX Growth Market are only subject to the Takeover Code if the Panel considers their place of central management and control to be in the UK, Channel Islands or the Isle of Man (the so-called “residency test”).
The residency test has been the subject of criticism in the past as it is based on the Panel’s subjective judgment of potentially variable factors, such as the residency of a target company’s directors at any given time, which has led to potential bidders and target companies themselves being uncertain as to whether the Takeover Code applied to them or not.
These changes are the result of an extensive consultation process with market participants, which followed the publication of the Panel’s initial proposals on 5 July 2012. In these proposals, the Panel had also intended to abolish the residency test in respect of UK registered companies whose shares are admitted to trading on overseas markets.
However, in light of concerns raised during the consultation process that the automatic application of the Takeover Code to such companies may conflict with the local takeover rules of the relevant overseas markets and suggestions that they should be afforded the opportunity to “opt in” or “opt out” of the Takeover Code’s application by means of a shareholder resolution, the Panel decided by way of compromise to retain the residency test when determining whether the Takeover Code applies to these companies.
This means, for example, that a UK registered company which is listed on the TSX (but not also on AIM or the ISDX Growth Market) will continue to be outside the scope of the Takeover Code unless it satisfies the residency test (which it may not in many cases). The residency test has also been retained for UK registered public companies whose securities are not admitted on a public market.
Finally, the Takeover Code will continue to apply automatically to UK registered companies whose shares are admitted to trading on a UK/EEA regulated market (such as the London Stock Exchange), whether or not they are also listed elsewhere.
The changes do not have immediate effect but will be introduced with effect from 30 September 2013. This is partly in order to allow companies newly subject to the Takeover Code which currently have provisions in their articles of association replicating certain rules of the Takeover Code (i.e. because it has not applied to them until now) time to obtain the necessary shareholder approvals to remove these provisions to avoid any risk of overlapping regimes.
However, it should be noted that no transitional arrangements have been put into place. Therefore, an offer announced prior to 30 September 2013 in respect of a UK registered company whose securities are admitted to trading on AIM or the ISDX Growth Market which was not governed by the Takeover Code at the date of its announcement, will become so on 30 September 2013, if it has not lapsed or become unconditional beforehand.
On the whole, this is a positive development particularly in view of the uncertainty of the present regime. In our experience, shareholders in most UK registered companies whose shares are quoted on AIM or the ISDX Growth Market expect to be protected by the Takeover Code and it is anachronistic and arbitrary that this protection can be lost inadvertently by, for example, the relocation of its directors. That certainly will however come with a cost – compliance with the Takeover Code can be expensive.
On the other hand, most UK registered companies listed on overseas markets with little connection to the UK aside from their place of incorporation would be surprised if the Takeover Code applied to them as they would expect to be protected by the takeover rules of the place of their central management and control (and/or the market on which they are traded) rather than the UK.
Whilst an objection to retaining the residency test for such companies is that it is difficult for an outside party such as a bidder to determine whether the Takeover Code applies, greater confusion would in our view be caused if the Panel claimed automatic jurisdiction as potentially two sets of takeover rules could apply. In these circumstances, the Panel would share jurisdiction with the overseas regulatory body and this normally means that a transaction specific set of takeover rules acceptable to both bodies would need to negotiated before any bid could be initiated (with the increased compliance costs and delay this would entail).
In our opinion, the Panel was therefore right not to abandon the residency test for these companies.