On 15 May 2013, the UK Takeover Panel (the Panel) announced important changes to the scope of the City Code on Takeovers and Mergers (the City Code). Essentially, these changes mean that takeover bids for a wider range of companies will now be subject to the City Code, including bids for all companies incorporated in the United Kingdom, the Channel Islands or the Isle of Man (Relevant Companies) which are quoted on AIM1. However, in a departure from the original proposals, the City Code will not be extended to apply to bids for Relevant Companies which only have a US listing if they are managed and controlled from outside the United Kingdom, the Channel Islands or the Isle of Man.

The changes, which are outlined below, follow a consultation process which was launched by the Panel in July 20122, and will come into force on 30 September 2013.

Current rules

Currently, a bid for a Relevant Company whose securities are admitted to trading on a “regulated market” in the United Kingdom (e.g., the Main Market, but not AIM)3, or on any stock exchange in the Channel Islands or the Isle of Man, will be subject to the City Code.

If the Relevant Company’s securities are not admitted to trading on a regulated market, the bid will only be subject to the City Code if the company is considered by the Panel to have its place of central management and control in the United Kingdom, the Channel Islands or the Isle of Man (the so-called “residency test”). In these circumstances, if the Relevant Company is a private company, the bid will only be subject to the City Code if:

  • any of its securities have been admitted to the Official List;
  • dealings and/or prices at which persons were willing to deal in any of its securities have been published on a regular basis for a continuous period of at least six months;
  • any of its securities have been subject to a “marketing arrangement”4; or
  • it has been required to file a prospectus for the issue of securities with the registrar of companies or any other relevant authority in the United Kingdom, the Channel Islands or the Isle of Man, or to have a prospectus approved by the United Kingdom Listing Authority,

at any time during the 10 years prior to the relevant date (the so-called “ten year rule”).

In evaluating where a company is resident for this purpose, the Panel will look at the structure of the board, the functions of the directors and where they are resident. If a majority of its directors are resident in the United Kingdom, the Channel Islands or the Isle of Man, the test will normally be satisfied. Where there is an even split between the number of directors who are so resident and those who are not, the Panel will typically consider where the chairman is resident, and whether he (or she) has the casting vote in relation to board decisions. On occasion, the Panel may also take into account other factors, such as the functions of the directors and the history of the company. The latter may include any public statements that it has made regarding the applicability or non-applicability of the City Code to any bid for it.

As a result, bids for some publicly traded Relevant Companies are not currently subject to the City Code.

Proposed changes

In its consultation, the Panel invited views on whether to abolish the residency requirement.

The Panel has now decided to do so in relation to Relevant Companies which have securities admitted to trading on a “multilateral trading facility” in the United Kingdom5, or on any stock exchange in the Channel Islands or the Isle of Man, at any time during the 10 years prior to the relevant date. This means that regardless of where that company is resident, the City Code will apply to a bid for a Relevant Company if any of its securities are admitted to trading on:

  • a regulated market in the UK (e.g., the Main Market) or any stock exchange in the Channel Islands or the Isle of Man (e.g., the CISX);
  • a multilateral trading facility in the UK (e.g., AIM); or
  • on a regulated market in one or more member states of the EEA, but not on a regulated market in the UK.

This is a significant change, and means, among other things, that bids for non-resident companies which are quoted on AIM will be subject to the City Code.

However, the residency requirement will continue to apply to a bid for a Relevant Company which 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), a multilateral trading facility in the UK, or a stock exchange in the Channel Islands or the Isle of Man;
  • a public company whose securities are not traded on any public market; or
  • a private company (although a bid for such a company will only be subject to the City Code if that company satisfies the ten year rule (as to which, see above)).

In short, then, the residency requirement is down, but not out.

In addition, the Panel proposes to make some minor changes to the ten year rule. The latter are not anticipated to have a material impact in practice.

Practical issues

Those companies which will become subject to the City Code as a result of these changes may wish to remove from their articles of association any provisions which seek to replicate provisions of the City Code (e.g., in relation to disclosure of interests, mandatory offers, etc.).

Such companies should also consider whether the exercise of any convertible securities, warrants or options to subscribe for new shares could trigger an obligation to make a mandatory offer under Rule 9.1 of the City Code. Helpfully, the Panel has confirmed that where a person holds such securities, warrants or options in a company which becomes subject to the City Code as a result of these changes which, if exercised, would trigger an obligation to make a mandatory offer, the Panel would be likely to consent to:

  • the exercise of the rights without a mandatory offer being triggered, if shareholder approval had been obtained at the time of issue;
  • the company seeking the approval of its shareholders after 30 September 2013 for the exercise of the rights without a mandatory offer being triggered; or
  • the exercise of the rights without a mandatory offer being triggered, provided that the person undertakes to reduce the number of shares carrying voting rights in which it is interested to below 30% within a reasonable time.

Conclusion

In extending the scope of the City Code in this manner, the Panel has sought to balance the need to extend the protections conferred by the City Code to those companies to which investors might expect those protections to apply (including, particularly, certain AIM-quoted companies), with the difficulty of enforcing the City Code in relation to those companies which do not have a sufficient nexus with the United Kingdom, the Channel Islands or the Isle of Man.

Deletion of the residency requirement will reduce the potential for uncertainty as to whether the City Code applies in certain situations, and will provide increased protection for shareholders in some publicly traded companies which are UK incorporated, but which are not UK resident.

For this reason, the proposed changes are to be welcomed.