From 30 September 2013, the application of the UK Takeover Code (the "Code") is being extended to apply to a wider spectrum of companies. The revised Code will now apply to all companies traded on AIM incorporated in the UK, the Channel Islands or the Isle of Man (a "Home Territory") regardless of where the company’s management and control is located.

What is the Code?

The Code is a UK statutory set of rules which shape the structure and timetable of takeovers. It is designed to be flexible and enable the quick resolution of points of interpretation in a takeover transaction. The Code rules are administered by the UK Panel on Takeovers and Mergers (the "Panel"). The Panel is an independent body, comprised of members with expertise in takeovers, securities markets, industry and commerce. The central objective of the Code and the Panel is to ensure fair treatment of all target shareholders in takeover bids.

Under the Code, stake building in a target company may be restricted and it may also have an effect on the takeover bid itself. When a bidder (or persons acting in concert with that bidder) acquires an interest which carries 30 per cent or more of the voting rights of a company or when a bidder already holding between 30 and 50 per cent of the voting rights acquires additional interests which increases its percentage of the voting rights, that bidder must make a "mandatory offer" to all shareholders. This mandatory offer must be made in cash (or include a cash alternate) at no less than the highest price paid by the bidder during the offer period or within the previous 12 months.

Non-compliance with the Code may result in sanction by the Panel and the Financial Conduct Authority; such sanctions can include the payment of compensation to affected shareholders and/or a public statement of censure regarding the offender’s conduct.

Current Application of the Code to Companies Incorporated in a Home Territory

Whether the Code applies to a listed public target company is determined by the nationality of the target company in a takeover transaction and the market on which the target company’s shares are listed on.

The Code applies to all takeover offers for companies incorporated in a Home Territory whose securities are traded on a regulated market in the UK (e.g. a company whose securities are listed on the Official List of the London Stock Exchange) or on any stock exchange in the Channel Islands or the Isle of Man.

Currently, for a company incorporated in a Home Territory whose securities are traded on a multilateral trading facility in the UK (e.g. on AIM or the ISDX Growth Market), the Code only applies currently if that company’s central management and control is considered by the Panel to be in a Home Territory.

This is "the residency test" and in applying the test the Panel usually takes into account factors such as the residence of the majority of a company’s directors. For example, if an AIM listed UK incorporated company has the majority of its board resident in Australia, it is likely the Panel will decide that the Code currently does not apply to it.

The change to the Code, which will come into force on 30 September 2013, will affect companies:

  1. which are incorporated in a Home Territory;
  2. whose securities are admitted to trading on a UK multilateral trading facility (e.g. on AIM or the ISDX Growth Market); and
  3. which have their place of central management and control outside of a Home Territory.

These companies will now be subject to the Code. So in the example above, the UK incorporated company will be subject to the Code, regardless of the fact that it is managed and controlled from Australia.

The Code’s application to public companies whose registered office is in a Home Territory but whose securities are admitted to trading solely on an overseas market (outside of a European Economic Area regulated market) has not changed and the "residency test" has been retained for these companies. For example, a UK incorporated company listed on the NYSE which has the majority of its board resident in the UK, will satisfy the residency test and therefore the Code will apply to this Company.

What are the implications for AIM companies?

  • A review of a relevant AIM company’s articles of association should be undertaken to accommodate the Code’s application. If there is a conflict between the articles of association/constitutional documents and the Code, the Panel has indicated that it expects prompt action to remedy any conflicting provisions.
  • There may be an obligation to make a market announcement regarding the Code’s application and the company’s website may also need to be updated to refer to the application of the Code.
  • Directors may need training on the implications of the Code and the duties and responsibilities it imposes on them.
  • Major shareholders and those "acting in concert" with them need to consider any implications of the Code’s application to the company. For example, are there any holders of convertible securities, options or warrants which if exercised, could trigger a mandatory rule 9 offer under the Code as a result of acquiring or increasing a 30% or greater voting interest? If so, consultation with the Panel may be advisable with a view to achieving an exemption or dispensation from the Code’s provisions.

Comment

Removal of the central management and control test for AIM companies has been generally welcomed by the market as it provides clarity in this area for prospective bidders and for the shareholders in the AIM target company. In anticipation of the changes coming into force on 30 September 2013, it is important to keep the Code in mind, and whether it will apply to any proposed takeover transaction. If this could be an issue in the context of any transaction governed by the Code, the Panel should be consulted before the 30 September deadline.