On 30 September 2013, various changes were made to the application of The City Code on Takeovers and Mergers (the Code), widening the categories of companies regulated by the Code. Given the significance of these developments, it is worth reminding companies of the changes that took place.
About the Code
The Code is a UK statutory set of rules which shape the structure and timetable of takeovers. The Code is designed to be flexible and enable the efficient resolution of points of interpretation in a takeover transaction. The Code rules are administered by the UK Panel on Takeovers and Mergers (Panel). The main objective of the Code and the Panel is to ensure fair treatment of all target shareholders in takeover bids.
Non-compliance with the Code may result in sanction by the Panel and the UK Financial Conduct Authority; such sanctions can include the payment of compensation to affected shareholders and/or a public statement of censure regarding the offender's conduct.
Previous application of the Code
Prior to 30 September 2013, if a company's securities were admitted to trading on a regulated market in the UK (for example, the London Stock Exchange) or on the Channel Islands Securities Exchange (previously known as the Channel Islands Stock Exchange), the Code automatically applied. However, where companies were not admitted to trading on such markets or traded on a multilateral trading facility in the UK (MTF), the Code only applied if that company's management and control was considered by the Panel to be in the UK, the Channel Islands or the Isle of Man (this was often referred to as the "residency test"). Notably, AIM is a MTF.
The Key Changes
Companies Listed in the UK or Channel Islands
From 30 September 2013, the Code applies to companies which have their registered offices in the UK, Channel Island and Isle of Man if any of the securities are admitted to trading on:
- a UK regulated market (e.g. the Main Market or the ISDX Main Board) or any stock exchange in the Channel Islands;
- on an MTF (e.g. AIM or the ISDX Growth Market),
irrespective of their place of central management and control (i.e. without reference to the residency test).
The residency test will continue to apply to public companies (other than open-ended investment companies; see below) having their registered office in the UK, Channel Islands or the Isle of Man and whose securities are not admitted to trading on a public market. Therefore, the Code will apply to public companies if the Panel considers that they have their place of central management and control in the UK, Channel Islands or the Isle of Man.
The Panel had initially proposed that the Code should automatically apply to UK, Channel Island or Isle of Man registered companies whose securities are admitted to trading solely on an overseas market, but instead it retained the residency test in respect of such companies.
NB: A company incorporated under the Isle of Man Companies Act 2006 with its registered office in the Isle of Man, or a company having its registered office in Guernsey, will be subject to the same test as for a private company (see below).
The application of the Code to private companies with their registered offices in the UK, Channel Islands or the Isle of Man has also changed. The previous 10 year rule (i.e. where a company was potentially subject to the Code because, broadly, it satisfied the residency test and had securities admitted to trading within the previous 10 years) has been changed as follows:
- by simplifying the 10 year test into a sole requirement that the company's securities have been admitted to trading on a regulated market or a MTF in such jurisdictions at any time during the relevant 10 year period; and
- by amending the Code so that it applies to private companies which have actually filed a prospectus for the offer, admission to trading or issue of securities (the previous test was whether a company was required to file a prospectus).
Open-ended Investment Companies
The Code does not apply to open-ended investment companies (OEIC) as defined in the Takeover Directive (Directive 2004/25/EC). Broadly speaking, for a company to constitute an OEIC it must have as its object the collective investment of capital provided by the public, and operate on the principle of risk-spreading. Shares (or other units issued by the company) must be repurchased or redeemed at the option of the holder out of the assets of the company.
Implications for companies now subject to the Code
- The Code will regulate any takeover offers for the company, without transitional arrangements.
- An affected company should undertake a review of its articles of association to ensure that any conflicting provisions are removed as soon as possible.
- Shareholder profiles should be reviewed and consider whether any of the Code company's shareholders form a concert party (as defined in the Code), such that further acquisitions would trigger a Rule 9 (of the Code)
- mandatory bid obligation. If the Rule applies, an offer or for shares is generally required to make a mandatory offer for all shares not currently owned by it as a result of acquiring or increasing a 30% or greater voting stake. This issue may also be relevant on the exercise of convertible securities, warrants or options.
- If the company has a share buyback programme in place, it may need to obtain clearance from the Panel as well as independent shareholder approval, if a shareholder could end up holding 30%+ as a result of a buyback.
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.