The United Kingdom's (“UK”) Takeover Panel (the “Panel”), the regulatory body that oversees the conduct of public mergers and acquisitions, recently commenced a consultation process about the application of its regulations, the 'City Code', to companies which have historically not benefited from its protection. This is of immediate importance to many companies quoted on London’s AIM market with operations overseas.
Currently AIM companies only fall under the Panel's jurisdiction if they have their registered office in the UK, Channel Islands or the Isle of Man and the Panel accepts that the central management and control of the company is in one of those locations. In common parlance – where does the heart and soul of the company reside (the ‘residency test’)? In making its decision, the Panel will examine the structure of the board, the functions of the directors and where they are resident; often if a majority of the board is not resident in one of the above locations the City Code may not apply.
In its consultation paper the Panel put forward three arguments for removing this residency test. Firstly, shareholders have an expectation of City Code protection for fully listed and for AIM quoted companies. This is especially true in the case of retail investors in AIM companies who are attracted to the high risk and potential rewards, for example in resource stocks. Second, directors may change and the company may pass the residency test in one year, but not in another, creating uncertainty which is not good for the market or shareholders who might have thought they had the benefit of the City Code’s protection. Third, if a takeover offer is made, it may be difficult for shareholders to ascertain without speaking to the company whether or not the City Code will apply. Again, this leads to uncertainty for shareholders.
Having considered the arguments, the Panel is in favour of removing the residency test. This means that the City Code will apply to all public (and certain private) companies which have their registered office in the UK, Channel Islands or the Isle of Man. This also brings the City Code into line with common law cases where courts would expect that a bidder for any public company should follow the principles of the City Code, as it would be evidence of it acting reasonably to all shareholders.
Responses to the consultation are due by 28 September 2012 and will be considered by the Panel before it publishes its response statement, setting out the final amendments which are expected to take effect approximately one month later and to apply to all transactions with effect from that date. That said, it is expected that the Panel will take a closer interest in public companies not covered by the City Code until the implementation date and to avoid any doubt in the case of an existing transaction, the Panel has recommended that parties consult with them before the implementation date.
Despite worries of enforcement against overseas directors, the Panel is confident that it will remain able to regulate takeover activity for all companies under its jurisdiction.
Implications of this change are that:
- The number of companies subject to the City Code will significantly increase;
- Boards of previously non-City Code governed companies will need to familiarize themselves with the Code;
- Companies which previously structured their board composition to avoid City Code application will be able to re-examine and change their composition without regard to the residency test;
- Previously non-City Code governed companies may need to announce the fact that the City Code applies;
- Previously non-City Code governed companies may need to remove provisions in their Articles of Association that seek to incorporate protections similar to those in the City Code, such as the disenfranchisement of shareholders moving over 30%;
- Bidders for previously non-City Code governed companies will now not be able to stake build above 30% without triggering a Rule 9 mandatory bid; and
- Companies looking to incorporate in the UK with overseas directors and come to the AIM will no longer be able to avoid the City Code.