A more welcoming Panel? Takeover Panel seeks to narrow application of UK Takeover Code

Authors: James Frecknall, Ian Lopez

On 24 April 2024, the Code Committee of the Takeover Panel (the "Panel") launched a public consultation (PCP 2024/1, the "Paper") on a proposed new simplified jurisdictional framework which, if adopted, would narrow the scope of companies to which the UK Takeover Code (the "Code") applies.

In short, the proposals seek to refocus the application of the Code on the Panel's primary statutory remit: companies which are registered and listed in the UK, as well as companies which were recently so listed. The new framework would sweep away the complexity of the existing rules, reduce the number of companies currently subject (or potentially subject) to the Code, including those which are registered in the UK but listed overseas (such as on the NYSE or Nasdaq). This will result in greater certainty for companies, shareholders and market participants more broadly. It also marks something of a retreat from the more expansive approach of the Panel to jurisdictional matters seen in recent years.

The consultation is open until 31 July 2024, and the Panel expects to publish its response statement this coming autumn. If, as we expect, the changes proposed in the Paper are implemented into the Code, this will occur approximately a month thereafter. To provide a soft landing, companies which fall out of the Panel's jurisdiction as a result of the changes will be subject transitional arrangements for a 3-year period.

A new jurisdictional framework

The Paper proposes (subject to the transitional arrangements described below) that the Code will apply only to companies which:

• have their registered office in the UK, the Channel Islands or the Isle of Man; and
• have (or have had at any time during the previous three years) any of their shares or securities[1] admitted to trading on:
  • a UK regulated market (i.e. the Main Markets of the London Stock Exchange and the Aquis Stock Exchange);
  • a UK multilateral trading facility (i.e. the AIM market of the London Stock Exchange and the Acquis Growth Market); or
  • a stock exchange in the Channel Islands or the Isle of Man (i.e. The International Stock Exchange).

For ease of reference, the Paper refers to the above as being "UK registered" and "UK listed", and the UK, Channel Islands and the Isle of Man collectively as the "UK".

The Code does not apply to any companies which are not UK registered. This fact is unchanged by the proposals.

A narrower focus

As a result of the proposals, certain companies which are registered in the UK, do not meet the listing criteria above but may nonetheless previously have been subject to the Code will (again subject to the transitional arrangements) find themselves free of the Panel's jurisdiction. This will include:

• any UK-registered company which was UK listed more than three years prior to the relevant date (the current run-off period is ten years);
• any UK-registered company whose securities are, or were previously, traded solely on an overseas market (including the NYSE or Nasdaq);
• any UK-registered company which has filed a prospectus with a relevant authority in the UK at any time in the previous 10 years; and
• any other UK-registered public, but unlisted, company.

Companies in these categories, would, under the current rules, be subject to the Code if considered by the Panel to have their "place of central management and control" in the UK (often referred to as the "residency test"). The primary factor taken into account by the Panel in assessing the residency test is whether a majority of the company's directors are resident in the UK. The Paper proposes (subject to the transitional arrangements) the abolition of the residency test.

The potential application of the Code to companies in the categories above often comes as a surprise. Indeed, the Panel concedes in the Paper that in many cases these companies are unaware that they are subject to the Code and often seek Panel consent to disapply it when a transaction arises.

The reduction in the run-off period relating to a previous UK listing from 10 to 3 years is noteworthy given the increasing trend for UK listed companies to migrate their listings to the NYSE or Nasdaq. These companies will be freed from the Panel's jurisdiction much sooner than would previously have been the case.

The Paper also confirms that companies traded on a range of non-traditional trading platforms, including matched bargain facilities (e.g. JP Jenkins and Asset Match), a Private Intermittent Securities Exchange System (PISCES) and secondary markets of crowdfunding platforms (e.g. the Seedrs Secondary Market) will not be subject to the Code if the changes are implemented. In certain cases, it is arguable that UK-registered companies traded on such platforms may fall within scope of the existing regime owing to a reference in the current criteria to the publication of dealings and/or prices on a regular basis for a continuous period of at least six months during the previous ten years.

It is worth noting that UK-registered companies with dual listings in the UK and overseas will not be impacted and will remain subject to the Code.

Transitional arrangements

Companies that would (or might) previously have been subject to the Code but are out of scope under the new framework will remain subject to the existing regime (including the residency test), and so potentially subject to the Code, for a transitional period of three years from the date the proposed changes are implemented.

These transitional arrangements are intended to give affected companies and their shareholders time to adjust to being free of the protections offered by the Code. The Panel envisages that measures that may be taken by such companies could include:

• the company taking steps to subject itself to Panel jurisdiction by admitting shares or securities to trading on a relevant market;
• amending its articles of association to include appropriate shareholder protections; and
• facilitating the exits of shareholders who do not wish to hold an interest in a company not subject to Code protections.

Impact of the changes

The Panel's move to simplify the jurisdictional framework of the Code will generally be welcomed. The existing regime is opaque, in certain respects even subjective, and has occasionally resulted in the Code applying to companies against their intentions and without their knowledge. Even for companies alive to the issue, the current regime can result in considerable uncertainty. In particular, the arbitrary nature of the residency test has left companies exposed to a significant regulatory burden being imposed (or lifted) as a result of changes of residence of their directors, which lies outside of their direct control. On the flip side, it has also meant certain companies have been able to engineer whether or not the Code applies simply by stacking their boards so as to satisfy, or not to satisfy the test.

Companies which find themselves freed of Code protections may find they become more attractive takeover targets. For example:

• Any potential bidder will not be bound by the Code's announcement regime and constrained by its offer timelines.
• It may be easier for bidders to build a stake in the target in advance of an approach, and doing so will not result in requirements to offer a minimum level or consideration, or to make an offer in cash or with a cash alternative. Further, acquisition of 30% or more of a company's voting shares will not result in an obligation to make a "Rule 9" mandatory offer for the rest of the company.
• Where an offer is agreed with the target board, the target will also be able to agree inducement fees / break fees payable to the offeror in the event the deal falls over. Such fees are prohibited by the Code.

On the other hand, Code restrictions on targets taking so-called "frustrating actions" would not apply, and so well advised target boards may find they have more weapons in their arsenal to attempt to disincentivise or frustrate a hostile bid. This could include effecting a significant acquisition or disposal, or implementing a special dividend, buyback or other return of capital. In all cases, directors will need to comply with their statutory and fiduciary duties, exercise any powers for a proper purpose, and be mindful of reaction of their existing investor base.

It remains to be seen what additional protections affected companies may wish to incorporate into their articles of association during the transition period. We anticipate in certain cases seeing attempts to replicate certain "beneficial" provisions of the Code, in particular the Rule 9 mandatory bid requirement described above. There are certainly difficulties with attempts to implement Code protections in this way, not least the problem of how to replicate the discretion of the Panel in applying certain rules. Some companies will prefer to rely on traditional drag and tag provisions to protect their shareholders. This will all be something of a balancing act. Companies will need to look at ways to protect their investors' interests without setting up excessive defences and deterring bona fide takeover approaches. As ever, shareholder engagement will be paramount.

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