It is almost a year since four major changes to the UK Takeover Code (the “Code”) were implemented, notably the general prohibition on break fees and other deal protections, the requirement to identify potential bidders, the automatic 28 day “put up or shut up” period and enhanced disclosure in offer documentation.
These changes were largely driven by a sense that, in the aftermath of the highly publicised takeover of Cadbury by Kraft, the balance was too much in favour of a potential bidder. Whilst those changes have a direct impact on those quoted insurance companies that fall within the jurisdiction of the Code a number of insurance groups have, over the years, redomiciled to overseas jurisdictions such as Bermuda.
Perhaps as a result of recent takeover activity in the sector, this has not escaped the attention of the UK Takeover Panel (the “Panel”). There is no suggestion that in moving to Bermuda or elsewhere companies were seeking to take advantage of falling outside the jurisdiction of the Code – quite the contrary, as those companies sought to replicate certain of the fundamental principles of the Code into their bye-laws.
The scope of the Code’s jurisdiction is currently the subject of a Panel consultation paper. The most common application is where the target has its registered office in the UK1 and its securities admitted to trading on the main market of the London Stock Exchange. Currently, it is less clear if the Code applies under the second limb – that is where the target is registered in the UK and its securities are not admitted to trading on the main market of the London Stock Exchange and instead, for example, on the AIM market. In such a case, as to whether the Code applies depends on whether the target company is considered by the Panel to have its place of central management and control in the UK. This requirement is currently referred to as the “residency test”. The main argument in favour of removing the residency test is to provide greater clarity and certainty as to when a target company is subject to the Code. The principal argument against removing the residency test has related to the ability of the Panel to enforce the rules of the Code and to monitor their compliance where the offeree company does not have a sufficient nexus with the UK.
The removal of the residency test may not have a significant effect on quoted insurance companies. What is perhaps of much greater interest to those quoted insurance groups is the fact that the Panel has in the consultation paper noted concerns that overseas companies which have their securities admitted to trading on the London Stock Exchange’s main market are not currently subject to the Code and has specifically identified Bermuda as an example of where companies have redomiciled. The Panel states that it intends to investigate whether it might be feasible and proportionate for some measure of Code protection to be extended to shareholders in such companies while acknowledging that it is mindful of a number of potential difficulties in relation to the regulation of such offers particularly as to compatibility of the Code with local laws and the Panel’s ability to enforce the Code.
Such an extension of the Code’s jurisdiction would represent a significant departure from the current state of play and throws up a number of questions, not least whether the Panel would have the necessary resources to police a greater number of companies. It would also take the jurisdiction of the Code in a direction of travel well beyond that set out in the underlying EU Takeovers Directive. In addition, would the Panel limit its jurisdiction to offers in relation to companies that had redomiciled having formerly fallen within the jurisdiction of the Code or would it extend to all overseas companies with a listing on the main market of the London Stock Exchange?
The impact would be felt far beyond the insurance market but, going forward, a group’s board may take into account the application of the Code in addition to insurance regulatory and other factors in determining optimal group structure.