This alert provides a brief summary of recent updates to the UK's City Code on Takeovers and Mergers (the "Code"), the primary rule book governing the regulation of takeovers in the UK, and in particular those relating to the categories of companies that are subject to the Code, as well as certain issues affecting the trustees of offeree companies' defined-benefit pension schemes.

Introduction

On April 22, 2013, the Code Committee of the UK Takeover Panel (the "Code Committee") published its Response Statement to its consultation paper on certain pension scheme issues. This was followed by a Response Statement to its consultation paper on the type of companies that fall within the jurisdiction of the Code, which was published on May 15, 2013[1]. The amendments to the Code to be introduced in relation to those proposals relating to offeree company pension schemes will come into force on May 20, 2013 and an amended version of the Code will be published on that date. The amendments to the Code in relation to those companies and offers that are subject to the Code will take effect on September 30, 2013 (so as to allow any companies that may be affected to make any changes to their constitutional documents and/or operational procedures they feel are appropriate in light of those changes), although the updated Code will apply to any transactions that straddle that date.

The most significant of the changes to come into effect as a result of these two sets of updates to the Code are: (i) the increased disclosure by bidders or offerors of certain matters relating to target pension schemes and arrangements with target pension scheme trustees; (ii) a new right given to target pension scheme trustees to have their opinion on a bid or offer published; and (iii) a new category of companies which were previously outside the jurisdiction of the Code falling within the remit of the Code and regulation by the Panel from September 30, 2013. These changes will primarily impact certain UK, Channel Island or Isle of Man companies whose shares are admitted to trading on the London Stock Exchange's AIM market or the ISDX Growth Market.

Summary of Updates to the Code: PCP 2012/3 – Companies Subject to the Code

1. Overview of the Consultation Paper on Companies Subject to the Code

The principal proposal of the Code Committee's public consultation paper on those companies that are subject to the Takeover Code ("PCP 2012/3") was the removal of the provisions by virtue of which the Code applies to offers for certain companies only if they "have their place of central management and control in the UK, the Channel Islands or the Isle of Man", i.e. the so-called "residency test". PCP 2012/3 also proposed certain minor, clarificatory and consequential amendments to the Code (which are outside the scope of this alert).

2. Companies Currently Subject to the Code and Application of the "Residency Test"

The Code currently applies (and will continue to apply) to offers for companies which have their registered office in the UK, the Channel Islands or the Isle of Man if any of their securities are admitted to trading on a regulated market[2] in the UK, or any stock exchange in the Channel Islands or the Isle of Man regardless, in either case, of the target's place of central management and control or "residency". The residency test is also not relevant for offers for companies which have their registered office in the UK if their securities are admitted to trading on a regulated market in one or more member states of the EEA (but not in the UK); offers for such companies are and will continue to be subject to the "shared jurisdiction" regime under the Takeover Directive[3], regardless of their residency.

However, the residency test does currently apply to offers for other public companies which have their registered offices in the UK, the Channel Islands or the Isle of Man, including those whose securities are admitted to trading on a multilateral trading facility[4] (an "MTF") in the UK, such as the London Stock Exchange's AIM market, are admitted to trading outside the UK, the Channel Islands and the Isle of Man (other than on a regulated market in an EEA member state other than the UK), such as the New York Stock Exchange (the "NYSE"), or are not admitted to trading on any public market.

3. The Code Committee's Decision to Remove the Residency Test for Certain Companies

Following the responses to PCP 2012/3, the Code Committee has concluded that the residency test should no longer apply to offers for companies which have their registered offices in the UK, the Channel Islands or the Isle of Man which have securities admitted to trading on an MTF in the UK. This means that, regardless of the target's place of central management and control (or "residency"), the Code will apply to offers for all companies which have their registered offices in the UK, the Channel Islands or the Isle of Man if any of their securities are admitted to trading on a regulated market in the UK or any stock exchange in the Channel Islands or the Isle of Man, an MTF in the UK , or a regulated market in one or more member states of the EEA other than the UK (but in this last case only with respect to the "employee information and company law matters" described in the "shared jurisdiction" provisions of paragraph (iii) of section 3(a) of the Introduction to the Code). The biggest impact of this expansion in the remit of the Code and authority of the Panel will be in respect of UK, Channel Island or Isle of Man incorporated companies with shares admitted to trading on AIM or the ISDX Growth Market. Some of these companies are currently outside the scope of the Code as they fail to satisfy the "residency" test; however, from September 30, 2013 they and shareholders invested in them will be subject to the rights, obligations under and protections afforded by the Code.

By way of completeness, note however that the residency test will continue to apply to a company which has its registered office in the UK, the Channel Islands or the Isle of Man if:

  • it is a public company whose securities are admitted to trading solely on a public market which is: (i) not a regulated market (such as the NYSE); (ii) not an MTF in the UK (such as AIM); or (iii) not a stock exchange in the Channel Islands or the Isle of Man; or
  • it is a public company whose securities are not traded on any public market or a private company.

In other words, it will continue to be the case that the Code will apply to an offer for such a company only if that company's place of central management and control is in the UK, the Channel Islands or the Isle of Man and, in the case of a private company, if it also satisfies the ten year rule (as amended). As such, UK-registered companies with listings on the NYSE, for example, will continue to be subject to the Code only if their place of central management and control is in the UK, the Channel Islands or the Isle of Man.

Summary of Updates to the Code: PCP 2012/2 – Target Pension Scheme Issues

1. Overview of the Consultation Paper on Pension Scheme Trustee Issues

PCP 2012/2 considered proposed amendments to the Code such that, broadly, the trustees of an offeree company's pension scheme or schemes would be afforded similar rights to those afforded to an offeree company's employee representatives (which derive substantially from the Takeover Directive). The Code Committee's stated intention was to create a framework within which the effects of an offer on an offeree company's pension scheme could be considered by shareholders in the offeree company and other stakeholders during the course of an offer. There are obvious comparisons to be drawn with the consideration, in the context of an offer, of employee and other stakeholder-related issues and the changes made to the Code following the offer by Kraft for Cadbury[5].

2. The Code Committee's Conclusions

  1. Disclosure by offerors regarding their intentions to an offeree company's defined-benefit scheme

The Code Committee has concluded that the Code should require an offeror to make adequate disclosures in relation to its intentions with regard to an offeree company's pension scheme and in particular in relation to the offeror's intentions with regard to the amount of employer contributions into the pension scheme (including with regard to the funding of any deficit), the accrual of benefits for existing members and the admission of new members. However, they also concluded that it would not be appropriate to require an offeror to make statements with regard to covenant impacts, i.e. to make an assessment of the future ability of the offeree company to meet its funding obligations to its pension scheme(s) on the basis that to require an offeror to make such statements, and to be bound by them, would be disproportionate and/or might result in non-meaningful disclosures. It should be noted that the new regime only applies to those offeree companies having one or more defined-benefit schemes, not defined-contribution schemes.

  1. Rights of target pension scheme trustees to have their opinions on the offer published

In addition, trustees of offeree company pension schemes will now be granted equivalent rights to those granted to offeree company employee representatives, namely to have appended to an offeree board circular a separate opinion from the trustees on the effects of the offer (and any revised offer) on the pension scheme, provided the opinion is received in good time before the publication of the circular and, where the opinion is not received in good time before the publication of the circular, to have the opinion published on a website.

  1. Disclosure and display of arrangements by offeror vis-à-vis target's pension schemes if they constitute a "material contract"

Although the Code Committee initially proposed that all agreements between an offeror and the trustees of the offeree company's pension scheme in relation to the future funding arrangements for the scheme should be summarised in the offer document, and made available on a website, in light of responses to the consultation they concluded that an agreement between an offeror and the trustees of an offeree company pension scheme should instead be treated under the Code in the same way as other agreements entered into by an offeror in connection with the offer. In short, the Code requires that offer documents must include a summary of each material contract entered into by the offeror during the period beginning two years before the commencement of the offer period and that an offeror publish on a website any material contract entered into in connection with the offer that is described in the offer document (or entered into after the publication of the offer document). Accordingly, where an agreement between an offeror and the trustees of an offeree company pension scheme is a "material contract" of the offeror, the Code Committee believes that it should be published on a website in the same way as any other material contract entered into in connection with the offer, but not otherwise (even if it has been referred to in an offer document).