Takeover Code extension: tips for bidders

Author: Gemma Varriale | Published: 17 Jul 2012
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The UK Takeover Panel has published a consultation paper on new proposals to extend the jurisdiction of the UK Takeover Code to cover all public companies with registered offices in the UK, the Channel Islands or the Isle of Man. If brought in, the plans are set to have a wide impact.

Under the current framework, companies whose securities are not traded on a so-called regulated market are only subject to the Code if they have their registered office in, and are centrally managed and controlled in, the UK, the Channel Islands or the Isle of Man.

"The Panel has taken the view that people may be investing in these companies under the misapprehension that they are covered by the Code and they would therefore be benefitting from the protections the Code provides," said Scott Hopkins of Skadden in London.

According to Hopkins, as well as causing investor uncertainty, it can also be unclear from market participants’ perspective whether a company is a Code company or not.

Under the present framework, the Panel uses a residency test to determine whether a company is centrally managed or controlled in the UK.

This test looks at where the majority of the directors reside, as well as factors such as the roles of individual directors and the history of the company.

But the test can produce different results at different times. "A director’s place of residence is not always apparent from the public information," said Hopkins. "The fact that the make up of the board and the residency of directors can shift means that the Code’s jurisdiction can be unclear."

Under the new proposals, the location of central management and control would become irrelevant. This means that a number of companies listed on non-regulated markets such as the Alternative Investment Market (AIM) now look set to become subject to the Code.

The Panel published the consultation on July 5, with the consultation period ending on September 28. The Panel’s proposed extension would cover all transactions, effective from the implementation date. This includes transactions that straddle that date, unless this would result in the new rules having retrospective effect.

But many companies set to be affected have Code-like protections built into their constitutional documents.

These provisions give directors significant discretion on when and how the Code–like protections are enforced. If the proposed changes are implemented, directors would lose that element of discretion.

According to Hopkins, bidders considering offers for these companies will need to seriously review the impact the Code will have on the deal.

In a client mailing on the proposals, Skadden commented that shareholders in such companies with stakes approaching the mandatory bid threshold of 30 percent (or who hold between 30 percent and 50 percent, such that the acquisition of a single share would trigger a mandatory bid) should be prepared to put safeguards in place to ensure dealings do not occur inadvertently.