Key Takeaways

• The UK Takeover Panel is consulting on amendments to the Takeover Code to narrow its application to UK listed companies.
• The proposal provides welcome certainty for issuers and acquirers that UK incorporated companies currently listed on the NYSE or NASDAQ (or other non-UK exchanges) will not be subject to the Takeover Code, regardless of where the directors are resident.
• These changes may unlock value by removing a potential obstacle to certain international transactions involving non-UK listed public companies, particularly where the current application of the Takeover Code is seen as disproportionate or anomalous.

Overview

The City Code on Takeovers and Mergers (the “Code”) contains a number of traps for the unwary, not least that it can extend to unlisted companies or companies with overseas listings, with seemingly limited nexus to the UK public markets.

On 24 April 2024, the Takeover Panel published its first consultation paper of 2024, which proposes to narrow the application of the Code to companies that are – or recently have been – listed in the UK. The “residency test”, which currently brings non-UK listed public companies (and some private companies) into scope based principally on where the majority of the company’s directors are resident, will be abolished.

The proposed changes, if implemented, will “refocus” the Code on companies that are registered and listed (or were recently listed) in the UK, and provide welcome certainty for those that are not, particularly UK public companies that are listed overseas (such as on the NYSE or NASDAQ) and therefore subject to alternative regulation and market norms.

Who is in and who is out?

The Panel’s proposal is that the Code would apply to companies with their registered office in the UK (or the Channel Islands or Isle of Man) and (1) which have any of their securities admitted to trading on a UK regulated market (such as the London Stock Exchange), a UK Multilateral Trading Facility (such as AIM) or a Channel Islands or Isle of Man stock exchange (referred to as “UK listed” companies), or (2) which have been UK listed in the previous three years.

The Code will no longer apply to UK registered companies whose securities are admitted to trading on an overseas market, even if their place of central management and control is in the UK. The Panel’s longstanding approach for determining a company’s place of central management has been to look to where the majority of its directors are resident. This test has always risked arbitrary results and a company can, in theory, fluctuate in and out-of-scope based on minor changes to the composition of its board or residency of non-executives. Abandoning the residency test will provide welcome certainty and allow companies greater flexibility on board composition.

The proposed amendments will narrow the application of the Code, with one material exception. While the three-year run-off period is a substantial shortening of the current 10-year period, it will now apply irrespective of the company’s residency. Currently, a UK registered company moving its UK-listing to, for example, the NYSE or NASDAQ, will cease to be subject to the Code if its place of central management and control also ceases to be in the UK. Under the new arrangements, the three-year run-off will apply regardless.

Impact for market participants

The impact for affected companies (and their acquirers) will be stark. For unlisted companies that are currently subject to the Code, they will cease to be bound by a regime that is principally designed to protect public shareholders and cumbersome for privately held businesses. For overseas listed issuers, they will no longer be subject to rules that do not reflect the regulations and market standards of their listing venue. For example, break fees are prohibited under the Code, but remain a customary deal protection measure in US public deals. We expect these changes to reduce deal costs and friction associated with implementing transactions. They may even unlock value for affected companies.

Transitional arrangements

While the changes to the Code are expected to come into effect before the end of 2024, transitional arrangements will apply for three years to current Code companies that will now fall outside the Code’s jurisdiction. The arrangements are intended to give companies time to adapt to their new status, implement alternative shareholder protections (if required) and, ultimately, to allow shareholders time to exit their investment before the Code ceases to apply.

PISCES and other private markets

The consultation also confirms that companies whose shares are traded on PISCES, the proposed new trading platform for private company securities, will not be subject to the Code under the new regime. The Panel acknowledges that to do so would be self-defeating, given the platform’s purpose is to provide growth companies with capital and liquidity at an earlier stage in their lifecycle, before becoming subject to the enhanced regulation associated with a full listing.

It remains to be seen whether the proposed changes provide a boost to existing private markets, allowing them to publish information in relation to share dealings or share prices, without bringing participants into the jurisdiction of the Code.

Schemes of arrangement

The amendments to the Code will not impact the availability of a scheme of arrangement to implement an acquisition of a UK company listed overseas. In recent years, we have seen schemes become the preferred structure for bidders looking to acquire English public companies, irrespective of whether the Code applies, and expect that trend to continue.

Timeline

The Panel’s consultation closes on 31 July and a response statement is expected in Autumn 2024. The changes to the Code are likely to come into effect in Q4 2024.

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