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We have previously highlighted certain proposed changes to the Takeover Code (“Code”) which determine the companies that are subject to the Code, namely the removal of the residency test. When we last addressed this issue, the consultation period had just closed and we were awaiting the Takeover Panel’s response statement. In May 2013, the Code Committee of the Takeover Panel published its response statement, confirming that for the most part the proposals would be adopted as initially drafted. The changes to the Code have now come into effect, from 30 September 2013, and will apply from that date to all companies and transactions to which the Code relates. This includes live transactions which were in progress at the effective date.
Formerly, the Takeover Code applied to all companies listed on the Official List that are registered in the UK, Channel Islands or Isle of Man. However, it would only apply to other public companies registered in these jurisdictions (including those listed on AIM or the ISDX Growth Market) if they were also considered by the Takeover Panel to have their place of central management and control in the UK, Channel Islands or Isle of Man. This was known as the residency test.
Under the initial proposals, the residency test was to be removed in its entirety. However, in its final proposals, the Code Committee rowed back from this slightly, such that from 30 September:
Application to AIM or ISDX Listed Companies - By the Takeover Panel’s estimation, there are approximately 200 additional listed companies which will now fall within the Code’s jurisdiction as a result of these changes. A disproportionately high number of these come from the Energy and Natural Resources (“ENR”) sector as many such companies opted to list on AIM (or ISDX) with a UK plc, or Channel Islands or Isle of Man company, at the top of the corporate group, although management was located elsewhere. Such companies would not have been regulated by the Code up to now, however, going forward they will be.
Application to ENR sector public takeovers - Whilst there will be a loss of flexibility in structuring bids for some AIM (and ISDX) companies, for whom offers will now have to be made in full compliance with the Code, overall the changes have been welcomed by the majority of commentators.
The phasing out of the residency test will remove uncertainty for many public companies, their shareholders and prospective bidders around whether the Code does or doesn’t apply at a given point in time, especially relevant for companies whose place of management and control is fluid. It will also remove the need for the kind of “mandatory bid” provisions adopted by many listed companies in their articles of association, which have provided a partial solution at best of how to achieve Code-equivalence for companies falling outside of the scope of the Code.
Considerations for Directors - Directors of public companies now falling within the Code’s remit should familiarise themselves with the Code and their obligations under it, and will no doubt require the assistance of their advisers in connection with this. As referred to above, the changes apply to transactions which are in progress at the time of the introduction so companies in an offer period or for whom an offer was in contemplation as at 30 September should already have been in consultation with the Panel as to the impact of the rule changes on them.
Directors will also need to consider whether changes need to be made to their company’s constitution. Many listed companies previously outside the jurisdiction of the Code have attempted to adhere to core Code principles by including in their constitutional documents provisions which mimic the requirements of Rule 9 of the Code. Rule 9 is the cornerstone of the Takeover Code and requires, amongst other things, any shareholder (or connected group) that becomes interested in shares carrying 30% or more of the voting rights of a company to make an offer for the remaining shares. For companies now subject to the Code post 30 September, such “Rule 9-equivalent” provisions in their constitution will have ceased to be relevant, and may even conflict with the requirements of the Code itself. In either case, companies should be considering whether and when to remove provisions from their constitution.