UK: UK Takeover Code – Changes Afoot For Some AIM Companies

Last Updated: 2 July 2013
Article by Simon McLeod


The UK Takeover Code, operated by the Takeover Panel, is the regulatory regime that governs the majority of public takeovers in the UK. The Takeover Code is an evolving document and changes occur, normally following a consultation process, fairly regularly. The last set of major changes were introduced in September 2011.These included provisions trying to prevent what were termed virtual takeovers, provided transparency on previously standard offer related arrangements, banned break fees except in particular circumstances and added some disclosure requirements, particularly in relation to fees. The changes were much discussed at the time and many thought that they were likely to have a large effect on the conduct of takeovers. Experience since then has not necessarily borne that out and it will be interesting to see what effect the latest changes have on takeovers.

What changes are now being introduced?

The principal changes go to the essence of the Takeover Code; namely which companies are subject to its provisions. It often comes as a surprise to clients and foreign advisers, contemplating offers for a UK listed company that a company which is listed on a UK stock market may not be subject to the Takeover Code. This is either because a company is not registered in the UK (which for these purposes includes the Channel Islands and the Isle of Man) or its shares are listed on AIM , the junior market of The Stock Exchange, but that its central control and management (effectively a residency test) is not in the UK.

The new changes mean that companies who are listed on AIM and who are registered in the UK will no longer be subject to a residency test and, therefore, the Takeover Code will apply to offers for such companies. This follows a trend as before 2006 there was a residency test for all listed companies.

The reason for the changes is to avoid some of the confusion as to which companies are subject to the Takeover Code and to avoid a situation where a company could cease to be subject to the Takeover Code simply by the change of residence of its directors.

The residency test will continue to apply, however, to public or private companies (in certain instances private companies can be subject to the Takeover Code) which are registered in the UK but whose shares are not admitted to a public market. The attached appendix is a summary of the application of the Takeover Code to companies registered in the UK, the Channel Islands and the Isle of Man and which has been produced by the Takeover Panel.

When do the changes come into effect?

The changes come into effect on 30th September 2013. There will be no transitional arrangements or grandfathering so, even if an offer is made prior to 30th September 2013 for a UK registered company listed on AIM that is not subject to the Takeover Code then, if that offer is not completed prior to that date, it will be subject to it subsequently.

What approach did companies who were not subject to the Takeover Code take?

A company could simply accept that the Takeover Code did not apply to it and that consequently its shareholders would not have the protections of the Takeover Code. As an alternative, some companies incorporate either the whole of, or particular provisions of, the Takeover Code into their constitutional documents. However, this approach is easier to state than to adopt effectively. The principal problem is that the Takeover Panel has the role of policing takeovers and is often asked to adjudge a particular set of facts and make rulings but the Takeover Panel will not, as a matter of course, give specific guidance in respect of a takeover offer that is not subject to the Takeover Code. Therefore, a company may contractually have incorporated such provisions so they prima facie bind shareholders but without the Takeover Panel playing a role the enforcement of them is often difficult.

Where companies adopt some, but not all, of the provisions of the Takeover Code, the most common approach is to try to replicate what is contained in Rule 9 of the Takeover Code which is that, if a person, together with people acting in concert with him, acquires more than 30% of the voting rights of a company, he is required to make an offer for all the outstanding shares in the company. The application of Rule 9 normally sets a benchmark price for the offer; being the highest price paid for the company's shares by a member of the concert party in the preceding twelve months. Therefore, quite a lot can hang on who is in concert with whom and, in takeovers of a hostile nature, there can be circumstances where the Takeover Panel is asked to opine on who constitutes the concert party. Without the Takeover Panel playing a role it is possible that shareholders are adversely affected.

The author has seen a number of situations where the attempt to incorporate the Takeover Code into the constitutional document has meant an added layer of confusion. In one particular instance, the Rules of the Takeover Code had been incorporated into the company's statutes but not the Notes. Given that the Notes to the Rules are almost as important as the actual Rules and, in some cases, it is not possible to interpret the Rules without reference to the Notes, it is still not clear to the author what the intention was as to what was or was not included.

Suggested actions

A company who will be affected by the changes should consider, together with its advisers, the potential consequences of it now becoming subject to the Takeover Code. If an offer is contemplated for such a company one needs to ensure any offer either is completed before 30th September 2013 or consider what needs to be done to be compliant.

If a company has in its constitutional documents an attempt to replicate any Takeover Code provisions the constitutional documents should be reviewed to see whether there are any conflicts with the Takeover Code. It should also be borne in mind that certain provisions of the Takeover Code could have an impact on corporate actions, such as where there are changes in share structure and ownership which have the effect of pushing a shareholder above a 30% threshold.

The future

It might be considered that concerning this aspect this might be the end to these changes but that may not be the case. It is interesting to note that when the previous amendments were introduced in 2006 it was suggested that the amendments being made now should be adopted then; an approach which was rejected out of hand by the Takeover Panel. At the time the concern of the Takeover Panel was that a lot of the companies listed on AIM were effectively abroad and that enforcement was practically difficult. The Takeover Panel did not like the thought of being in a position where it was unable to enforce the Takeover Code. As previously mentioned you do not have to be a UK company to be listed on the UK stock markets and the UK stock exchanges have a large number of foreign companies listed. Although it is true to say that it is often the case that a number of the largest foreign companies that have been listed on the Stock Exchange have incorporated a UK company, including some of the companies that have attracted most attention in respect of corporate governance issues, which would have made them subject to the Takeover Code, this has not always been the case. The argument is that in relation to companies incorporated in the EU they are subject to their own domestic regulatory regime in accordance with the Takeover Directive, or maybe subject to a shared regulatory regime of the UK and the company's residence but that is obviously not the case for companies formed in other jurisdictions. There is not, however, really that much practical difference between a UK company which has its main business and directors abroad and a foreign company which is in the same position.

The Takeover Panel may be concerned about its ability to enforce the Takeover Code but this author would not be surprised if in a number of years the Takeover Code was applied to all companies which were listed in the UK irrespective of where their residence was and that any foreign companies contemplating an IPO should work out the possible consequences of becoming subject to the Takeover Code in the future.

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.

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