In Issue 1 of ENeRgize (July 2011), we highlighted an exception to the application of the Takeover Code, which has been used in ENR sector takeovers of AIM or PLUS quoted companies.
Currently, the Takeover Code applies to companies listed on the Official List that are registered in the UK, Channel Islands or Isle of Man. However, it only applies to companies registered in these jurisdictions that are listed on AIM or PLUS-quoted if they also have their place of central management and control in the United Kingdom, Channel Islands or Isle of Man (as applicable) (the "Residency Test"). In practice, the Panel will consider a range of factors to assess whether a company meets the Residency Test, including the structure of the board, the roles of the directors and their place of residence.
The Code Committee of the Takeover Panel has raised concerns over the perceived arbitrary application of the Residency Test, and is seeking to close this loop, through amendment of the Takeover Code. On 5 July 2012, the Takeover Panel published a public consultation paper setting out their proposed amendments and seeking comments on the removal of the Residency Test. In respect of private companies, the Takeover Panel is also seeking to simplify the provisions stipulating when the Takeover Code shall apply to such companies.
The Proposals
Under the Code Committee's proposals, the Residency Test shall be removed from the Takeover Code in its entirety. The wording of the new section 3(a)(i) shall read as follows:
"The Code applies to all offers ... for public and private companies and Societas Europea (and, where applicable, statutory and chartered companies) which have their registered offices in the United Kingdom, the Channel Islands or the Isle of Man, but in relation to private companies only when..."
The Code Committee argues that its proposed amendments to the Takeover Code will:
- provide protection for shareholders of companies which are registered in the United Kingdom, the Channel Islands or the Isle of Man, and in whose securities the public have invested, but are currently outside the jurisdiction of the Takeover Code. The Panel has recognised that shareholders of AIM quoted companies have an expectation that they shall be afforded the protection of the Takeover Code. This is particularly so in the ENR sector where investors are attracted to the potentially considerable returns offered by investment in emerging market exploration activities;
- reduce confusion and practical difficulties which arise as a result of changes to the status of an offeree company when applying the Residency Test (for example, when the residency of the company's directors changes); and
- increase transparency in the application of the Takeover Code.
The principal concern in respect of the proposed amendments to the Takeover Code, is the Panel's ability to enforce the Takeover Code where an offeree company does not have a sufficient nexus with the United Kingdom, the Channel Islands or the Isle of Man, rendering monitoring and sanctioning less effective.
Considerations
Considerations for AIM listed companies in the ENR sector, should these proposed amendments be adopted:
A number of ENR sector public takeover transactions which would currently fall outside of the Takeover Code will become regulated.
Companies wishing to continue to fall outside of the jurisdiction of the Takeover Code may wish to consider incorporating a new overseas Topco. Such overseas incorporated companies are not subject to the Takeover Code regardless of whether they are listed on AIM or the Official List. Note however that the Code Committee has come under pressure from some quarters (see 0 below) to consider expanding the Code's jurisdiction to all UK listed companies regardless of their place of incorporation.
Directors of companies which have previously taken advantage of the application of the Residency Test exception will need to get up to speed with the Takeover Code and the obligations it places upon them.
Companies currently outside of the Code will need to consider whether their current constitutions remain appropriate and fit for purpose in light of application of the Takeover Code.
Next Steps
The period for submission of comments to the Code Committee closed on 28 September 2012. The Takeover Panel will consider the responses which it has received and is expected to publish a response statement in November 2012. This statement will set out the final amendments which we expect will come into effect one month thereafter.
Responses to the public consultation paper, some of which are publicly available, have been predominantly supportive of the proposes amendments. The Association of British Insurers have gone further and pushed the Code Committee to consider further jurisdictional expansion, to cover companies whose securities are admitted to trading on public markets in the United Kingdom, but are incorporated in overseas jurisdictions. This would be a radical expansion of the Takeover Code's jurisdiction, and we will keep you updated with any proposals which may be put forward.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
