The UK Panel on Takeovers and Mergers ("Panel") published its response to a public consultation paper concerning companies subject to the City Code on Takeovers and Mergers ("Code") on 15 May 2013. The Panel announced that the application of the Code should be extended through the removal of the residency test in respect of certain companies (notably, UK companies trading on AIM).

Current Application of the Residency Test

The application of the Code to a public company that has its registered office in the UK, the Channel Islands or the Isle of Man (the "Relevant Territories"), but does not have securities registered for trading on a regulated market in the UK (which includes the Main Market of the London Stock Exchange, but does not include AIM) or a stock exchange in the Channel Islands or the Isle of Man, depends on whether the Panel considers the company in question to have its place of central management and control in the Relevant Territories, which is assessed primarily on where the directors are resident (residency test). Companies that are currently subject to the residency test include those whose securities:

  • are admitted to trading on a multilateral trading facility ("MTF") in the UK, such as AIM or ISDX Growth Market;
  • are admitted to trading outside the Relevant Territories, other than a regulated market in an EEA member state which is not the UK (e.g. NYSE); or
  • are not admitted to trading on any public market.

Amendments to the Code

Removal of the residency test

From 30 September 2013, the residency test will no longer apply to companies that have their registered offices in the Relevant Territories and whose securities are admitted to trading on an MTF in the UK (e.g. AIM or ISDX Growth Market). Consequently, the Code will apply to offers for all such companies wherever they are managed and controlled.

In addition, other minor amendments to the Code will also be made, including in relation to the 'ten year rule' (see below).

Companies still subject to the residency test

The residency test will continue to apply to a company which has its registered office in the Relevant Territories and is:

  • a public company whose securities are admitted to trading solely on a public market which is not a regulated market (either in the UK or in another EEA member state), an MTF in the UK, or a stock exchange in the Channel Islands or the Isle of Man (e.g. NYSE);
  • an unlisted public company; or
  • a private company which satisfies the ten year rule (as amended).

Private companies - 'ten year rule'

Subject to the residency test, the Code applies in limited circumstances to private companies that have their registered office in the Relevant Territories (ten year rule). During the consultation, the Panel considered proposals to amend the ten year rule and concluded that such amendments will be adopted subject to minor revisions.

From 30 September 2013, the ten year rule will apply to a private company if at any time during the previous 10 years:

  • any of its securities have been admitted to trading on a regulated market or MTF in the UK or on any stock exchange in the Channel Islands or the Isle of Man; or
  • it has filed a prospectus (rather than simply being required to file a prospectus).

Companies that are caught by the ten year rule are, and will remain, subject to the residency test (in addition to other tests that are unchanged) in relation to determining whether the Code will apply to offers for such companies.

Implementation date

The amendments to the Code will apply from 30 September 2013. There will not be a transitional period.

Impact of Amendments to the Code

Companies

The changes to the Code will result in an increased number of companies coming under the jurisdiction of the Panel, most of which will have securities admitted to trading on AIM. Many such companies may already provide for takeover protection similar to the Code within their articles of association. These companies may wish to remove these takeover protection provisions in their articles, in particular where such provisions conflict with the Code, by 30 September 2013. In cases where the application of the takeover protection provisions in the articles is subject to the discretion of the company's directors, the Panel does not consider the removal of such provisions as urgent.

Investors

Where a shareholder currently holds convertible securities, warrants or options to subscribe for new shares in a company that becomes subject to the Code as a result of the amendments and the exercise of which might trigger the mandatory offer provisions of Rule 9 of the Code, the Panel has indicated that it would likely grant a dispensation from Rule 9 on the exercise of such rights provided:

  • shareholder approval had been obtained at the time of the issue of those securities, rights or options;
  • the company seeks shareholder approval on a date after 30 September 2013; or
  • the shareholder undertakes to reduce its holding of voting rights to below 30 per cent within a reasonable time of exercising its rights.

Furthermore, shareholders with large holdings of shares in companies that become subject to the Code should be mindful of future dealings which may inadvertently result in the mandatory offer threshold of 30 per cent being crossed.

Conclusion

The Panel has made a welcome decision in removing the residency test for certain companies registered in the Relevant Territories (including, in particular, AIM companies) as this will eliminate uncertainty for investors of such companies as to whether the Code applies and will guarantee them Code protection (even where a majority of that company's directors move abroad).

However, the Panel has stopped short of widening the Code to apply to companies with offices registered overseas (the Panel considered this proposal during the consultation due to concerns regarding shares traded in the UK which are not subject to the Code where the relevant company has redomiciled to an overseas jurisdiction). Such reluctance by the Panel is understandable given the difficulties of compatibility of the Code with local laws and enforcement of the Code and its decisions overseas.