With effect from 30 September 2013, the Takeover Code will widen the categories of companies it regulates by partially removing the residency test for companies which have their registered offices in the UK, the Channel Islands or the Isle of Man.
These changes will have important consequences for AIM-listed companies incorporated in the UK, the Channel Islands or the Isle of Man.
Under the current regime, companies incorporated in the UK, the Channel Islands or the Isle of Man need to have their place of central management or control in the UK, the Channel Islands or the Isle of Man (the so-called "residency test") in order to be subject to the Takeover Code. Historically, this residency test has caused a degree of uncertainty since a company may fall outside the Takeover Code if its directors relocate and it can be very difficult for an outside party (e.g. a possible offeror or investor) to determine whether such a company is subject to the Takeover Code.
Going forward, all AIM listed companies with registered offices in the UK, the Channel Islands or the Isle of Man, but whose directors are based overseas, will now automatically fall within the regulation of the Takeover Code. While this may serve to cure the uncertainty outlined above, it also has significant practical implication for companies who may not choose to be subject to such a regime.
AIM-listed companies incorporated outside the UK, the Channel Islands or the Isle of Man (e.g. the British Virgin Islands or the Cayman Islands) will continue to fall outside the regulations of the Takeover Code.
Other than the regulation of a takeover offer for the company, the Takeover Code could impact on a company's on-going activities as follows:
- Directors will need to familiarise themselves with the requirements of the Takeover Code and the obligations that it places on them, for example in relation to dealing with potential takeover offers, making announcements, etc. The Takeover Panel expects directors of companies to which the Takeover Code applies, and their advisers, to be familiar with their obligations, and the consequences of breach can be serious.
- Investors in such companies will not be able to increase their shareholdings to over 30% or, if they already hold between 30% and 50%, they will not be able to increase their shareholdings at all, without being obliged to make a mandatory offer for the company, unless they obtain a waiver from the Panel and the consent of the company's independent shareholders.
- If a company has convertible securities in issue, the exercise of them could trigger a mandatory cash offer (subject to the above thresholds).
- Some companies that are not currently subject to the Takeover Code have provisions in their Articles which seek to replicate the mandatory takeover provisions of the Takeover Code. Once the Takeover Code applies to these companies the provisions in their Articles will need to amended to avoid conflict.
- Where companies have publicly stated that the Takeover Code does not apply to them (for example, in their AIM admission document) they will need to announce that with effect from 30 September 2013 the Code will apply to them.
- If an ongoing transaction straddles the 30 September implementation date then it will become subject to the Takeover Code from that date.
Is the Code right for your company?
Directors of many companies looking to list, or that have already listed, have made a conscious decision regarding their chosen structure. There can be a number of factors in this decision making process. Tax is often a key driver, but so too is flexibility.
Using an offshore entity as the listed vehicle is tried and tested on markets throughout the world and AIM is no exception. Directors, advisors, regulators and, perhaps more importantly, investors accept the legitimacy of structuring using offshore entities and understand that this does facilitate flexibility allowing, particularly junior and medium size companies, to be rather more fleet of foot. Something that is incredibly important in the current market.
Companies incorporated in the British Virgin Islands or the Cayman Islands will remain outside the scope of Takeover Code regulation. This may be of significant benefit in avoiding the practical implications outlined above but also in enabling early stage or follow on investment where significant stakes may be established. It may also be helpful where the listing is the company's only nexus with the UK - management and control sitting elsewhere.
Unless a company has clear links to the UK, the Channel Islands or the Isle of Man, the additional burden of complying with the UK Takeover Code imposed by the widening net, may well be something that directors would choose to avoid. If a structure has yet to be determined then it is certainly worth considering alternatives to the UK, the Channel Islands and the Isle of Man. If companies incorporated in those jurisdictions are already listed, directors should consider the potential benefits of either migrating their company to the British Virgin Islands or Cayman.