U.K. Takeover Panel Response to Consultation – May 2013

On May 15, 2013, the Code Committee of the U.K. Takeover Panel (the “Panel”) published its response statement 2012/3 following a consultation on proposals to amend the rules for determining the companies that are subject to the U.K. Takeover Code (the “Code”) (read our client newsflash on the July 2012 consultation here). The Code sets out binding rules for proposed takeovers of companies and is focused on ensuring a non-coerced choice by shareholders without input by the incumbent board, unlike the typical U.S. approach that permits the incumbent board to act in a manner it believes can best protect shareholders.

As of September 30, 2013, changes to the Code will have the effect of bringing certain companies that are not currently subject to the Code within its jurisdiction. However, these changes will not be as wide ranging as had been envisaged by the July 2012 consultation.

In addition to these changes to the Code, the U.K. government recently confirmed its legislative plans to introduce a binding, three-yearly shareholder vote on the compensation policy of U.K. incorporated, quoted (publicly traded) companies, which include companies listed on the NYSE and NASDAQ, even if not listed in the U.K. (read a recent Davis Polk client memorandum on this topic here). These legislative and regulatory changes provide a further reminder that the U.K. applies some corporate governance and shareholder protection measures which resonate most in the context of publicly traded companies on the basis of location of incorporation rather than location of listing. This approach is different from that adopted in the U.S., which focuses on the listing location and does not impose its rules on U.S.-domiciled companies not listed on a U.S. exchange, and could lead some U.K. incorporated companies to consider re-domiciling.

Removal of the residency test for certain companies (including U.K. incorporated companies traded on AIM)

Currently, the Code applies to an offer for a public company that has its registered office in the U.K., the Channel Islands or the Isle of Man if it has securities admitted to trading on a regulated market in the U.K. or on a stock exchange in the Channel Islands or the Isle of Man. However, the Code also applies to an offer for a public company that has its registered office in the U.K., the Channel Islands or the Isle of Man and whose securities are not admitted to trading on one of the markets mentioned above if the Panel considers that it has its place of central management and control in the U.K., the Channel Islands or the Isle of Man (the “residency test”).

In its July 2012 consultation, the Code Committee proposed to remove the residency test in its entirety. As a result, the Code would have potentially applied to all offers for public and private companies with their registered offices in the U.K., the Channel Islands or the Isle of Man. By way of practical example, an offer for a public company with its registered office in the U.K. or Jersey, with securities listed on the NYSE or NASDAQ and with its place of central management and control outside the U.K., the Channel Islands and the Isle of Man would, under the July 2012 consultation, have become subject to the Code, even if that company did not meet the residency test.

However, a majority of respondents to the July 2012 consultation felt that the residency test should be retained for certain categories of companies, in particular a company which has its registered office in the U.K., the Channel Islands or the Isle of Man but whose securities are admitted to trading solely on an overseas market, on the basis that shareholders of such companies would be likely to expect to be protected by the regulatory requirements applicable in the overseas market rather than by the Code.

Consequently, the Code Committee has determined that the residency test should continue to apply to a company that has its registered office in the U.K., the Channel Islands or the Isle of Man if it is a public company whose securities are admitted to trading solely on a public market which is not a regulated market (either in the U.K. or in another EEA member state), a multilateral trading facility (“MTF”) in the U.K., or a stock exchange in the Channel Islands or the Isle of Man. In other words, the Code will continue not to apply to an offer for a public company with its registered office in the U.K. or Jersey, with securities listed on the NYSE or NASDAQ and with its place of central management and control outside the U.K., the Channel Islands and the Isle of Man.

However, the Code Committee has determined that the residency test should no longer apply to offers for companies which have their registered offices in the U.K., the Channel Islands or the Isle of Man and which have securities admitted to trading on an MTF in the U.K. (for example AIM or the ISDX Growth Market). As a result, an offer for a public company with its registered office in the U.K. or Jersey, with securities admitted to trading on AIM and with its place of central management and control outside the U.K., the Channel Islands and the Isle of Man will become subject to the Code as of September 30, 2013.

A useful summary of the application of the Code following the changes is set out in Appendix B to the Code Committee’s response statement (see response statement RS2012/3 here).

The changes to the Code will take effect on September 30, 2013 and will apply from that date to all companies and transactions to which the Code then relates, including those ongoing transactions that straddle the effective date for the changes.

Whilst it is difficult to determine how many additional transactions would have been subject to the Code over recent years as a result of these changes, it is clear that going forwards a number of companies in the Energy and Natural Resources sectors traded on AIM will now be subject to the Panel’s jurisdiction. It remains to be seen whether the certainty of the Code’s application will encourage or hinder M&A activity for these companies.