The Code Committee of the Takeover Panel (the Panel) has issued a consultation paper proposing amendments to the jurisdiction test that determines whether a company is subject to the Takeover Code (the Code).
The Current Jurisdiction Test
The Code applies currently to companies with shares admitted to trade on any regulated market in the United Kingdom (the London Stock Exchange (LSE) Main Market, the New York Stock Exchange Euronext (NYX) London, and the PLUS-listed market), or any stock exchange in the Channel Islands or the Isle of Man, and with registered offices in the United Kingdom, the Channel Islands or the Isle of Man (the relevant territories). The Code also applies, on a shared jurisdiction basis, to UK-registered companies with shares traded on any other European Economic Area (EEA) regulated market, and to companies with their registered office in another EEA Member State but with shares traded on the LSE Main Market or other UK regulated market.
There is an additional test for public companies quoted on the Alternative Investment Market (AIM). The Code applies only to an AIM-listed company with a registered office in a relevant territory if its place of central management and control, as determined by the Panel, is also in the relevant territories. The Panel will, generally, look at whether a majority of the directors are resident in one of the Relevant territories. If they are, the test will normally be satisfied. Where there is an even split, the Panel will typically have regard to the place of residence of the Chairman and whether the Chairman has a casting vote in board decisions.
The effect of the Code’s additional residence test, as it applies currently, is that an AIM-listed company that has a majority of directors resident overseas will not be subject to the Code. There are many companies listed on AIM to which this applies, including a large number of mineral resource companies. The result is that, at present, takeovers of these companies are not governed by the Code, even where they have their registered office in the United Kingdom.
The Panel is now consulting on proposals to amend the Code to bring these companies within its jurisdiction.
Proposed Changes to The Code
The proposed changes to the Code would remove the additional residency requirement that an AIM-listed company must be centrally managed and controlled within one of the relevant territories in order to fall within the jurisdiction of the Panel.
The Panel considers that investors in publicly-traded companies that have their registered office in one of the relevant territories may have a reasonable expectation of Code protection. It also notes that it can be difficult for a third party to determine whether the residency test is satisfied in any particular case. Further, the residency test means that a target company’s Code status could change if a majority of the directors decided to relocate outside the United Kingdom.
The key consequence of becoming subject to the Panel’s jurisdiction is that a company’s shareholders will have the protection of the Code. The Code’s General Principles and Rules provide that shareholders in a company subject to a takeover offer must be treated fairly and must not be denied the opportunity to decide on the merits of the bid.
The significance of becoming subject to the Code will depend on the shareholder profile of a given company. Unlike the LSE Main Market, which requires a minimum of 25 per cent of a company’s shares to be in public hands, AIM has no free float requirement. It is common for the controller of an AIM-listed company to have a percentage shareholding greater than 50 per cent. For such companies, the impact of the Panel’s proposed changes would be relatively minor. For an AIM-listed company under the effective control of a shareholder group with a shareholding of between 30 and 50 per cent (or less), the impact would be marked, as such stakes could not be increased without there being a mandatory offer or Panel waiver and shareholder consent.
For companies registered in the relevant territories that may prefer to remain outside the scope of the Code, a restructuring would be required in order to relocate. This would usually be achieved via a scheme of arrangement that puts in place a new holding company incorporated in the new jurisdiction of choice. The time and cost implications of such a step are not insubstantial, and consideration would need to be given to how such a move would be perceived by shareholders, customers and the market.
The Panel’s proposed changes will not affect AIM-listed entities registered outside the relevant territories. These will continue to fall outside the scope of the Code even if the proposals are implemented.
Affected companies should seek advice on how the proposed changes may affect them, from issues relating to control and corporate transactions to smaller housekeeping matters. For example, deeming provisions in articles of association that incorporate some (but often not all) of the Code will, most likely, need to be amended.
Responses to the Consultation should be submitted by 28 September 2012. To review the Consultation (PC2012/3), please go to: http://www.thetakeoverpanel.org.uk/consultation/current-consultations