On 24 April 2024, the UK Takeover Panel published PCP 2024/1 ("PCP 2024/1"), in which it is consulting on a significant narrowing of the types of companies that will be subject to the Takeover Code (the “Code”) - i.e., as targets for which any offers must comply with the Code's provisions (a “Code company”).  Comments are called for by 31 July 2024 and the Panel intends to publish a Response  Statement in Autumn 2024, with the new provisions expected to be implemented one month later (the “implementation date” or “ID”).

Essentially, the Panel is proposing restricting the Code's application to UK companies that are, or have been within the three years preceding an offer, listed or traded on UK markets (including the Channel Islands and Isle of Man) ("UK-listed companies"). 

Currently, public (and certain private) UK companies that have their equity/voting securities traded outside of the UK ("non-UK listed companies") but have their place of central management and control within the UK (including the Channel Islands or Isle of Man) (the so-called “residency test”), are also - sometimes to their surprise -  subject to the Code. These existing non-UK listed companies that are subject to the Code immediately before the ID will, over a transition period of three years, be removed from the Code's scope. Future companies which after the ID are non-UK listed companies at the time of an offer for them will only be caught by the Code if they have had a UK listing or trading within the three years prior to that offer.

Why is the Panel making these changes?

The Panel notes that in many cases non-UK listed companies are not aware that they will fall within the Code's jurisdiction if they satisfy the residency test and often try to find a way of avoiding the Code's application, including by seeking the Panel's consent to shareholders waiving their rights under the Code. As a result, the Panel thinks that it would be appropriate to reduce the regulatory burdens that the Code imposes on these companies and so is proposing removing them from the Code, subject to transitional arrangements applying to those companies currently subject to the Code.     

UK-listed companies

The current rule applying the Code to UK, Channel Islands & Isle of Man registered companies ("UK companies") with equity/voting securities ("securities") traded on a UK Regulated Market/UK MTF/Channel Islands or Isle of Man stock exchange will be retained unchanged. Eventually, once the transitional arrangements mentioned above have expired, only UK-listed companies will be subject to the Code - either because they have a UK listing (including trading on a UK MTF or certain stock exchanges) at the “relevant date” (e.g., when an offer period starts) or have had one in the three years prior to the relevant date. 

Recently UK-listed companies

As mentioned above, UK companies that at the relevant date have been UK-listed during the past three years will also be subject to the Code. This three year “run-off” period may be compared to the existing 10 year run-off period that applies to private companies with prior public dealings in their shares that satisfy the residency test (see “Private Code companies” below).

Transition companies and the Transition Period

Recognising that these Code jurisdiction changes may mean that current non-UK listed companies and their shareholders will want a period of time in which to adjust to the fact that investors in the company will no longer have the protections of the Code in any bid situation, the Panel is proposing a three year transitional period during which the current non-UK listed company/residency test rules will generally continue to apply to those companies as if the rules had not been changed.  

What are transition companies?

This will be a temporary category of Code company that will comprise those non-UK listed companies that immediately before the ID either:

• satisfied the residency test and, if a private company, satisfied the other “10 year run-off” conditions mentioned below, or
• would have been subject to the Code if they had satisfied the residency test.

What is the Transition Period?

As mentioned, this will be a period ending immediately prior to the third anniversary of the ID (so likely sometime in late 2027). On the expiry of the Transition Period, all transition companies will cease to be Code companies though, of course, they could subsequently become a Code company again if they became a UK-listed company.

Private Code companies

Currently, in addition to UK public companies which, even though they are non-UK listed are nevertheless subject to the Code if they satisfy the residency test, certain private UK companies that satisfy the residency test can also be subject to the Code. These are companies in respect of which there have been certain “public dealings” in the private company's securities within the 10 years prior to the relevant date (e.g., an offer for them). These “dealings” in this “10 year run-off period” include having had their securities UK-listed, dealing prices for their securities have been published for at least six months, their securities have been subject to a “marketing arrangement” or a prospectus has been filed in respect of their securities.

Changes to the status of a transition company

The proposals with regard to transition companies are quite detailed and complex -  PCP 2024/1 contains three appendices explaining them in tabular and flowchart format.  Appendix C is perhaps the most useful as that illustrates the position of transition companies pre-ID, during the Transition Period and after it has expired, as well as the impact of changes to their status during the Transition Period.

Complex as these transitional arrangements are, it is important to remember they revolve around a few key principles which reflect the continued operation of the current Code rules for non-UK listed companies:

• transition companies can include companies not currently subject to the Code because they are not UK resident 
• a private company that is not in a 10 year run-off period (i.e., it has not had any “public dealings” in its shares within the last 10 years prior to the ID), will not become a transition company
• if and while ever a transition company is not UK resident, the Code will not apply to it but if it becomes UK resident during the Transition Period and the subject of an offer, the Code will apply to it 
• if the 10 year run-off period for a private company ends during the Transition Period, the old non-UK listed company rules will cease to apply to that company and so it will cease to be a Code company
• if a public transition company re-registers during the Transition Period as a private company and none of the 10 year run-off conditions mentioned above then apply to it, it will cease to be a Code company. 

 Other minor Code jurisdiction changes

 PCP 2024/1 also proposes a few related minor changes or clarifications (reflecting current Panel practice) to the Code's application. These include:

• the Code not applying to companies with a sole beneficial owner ,
• the Panel's ability to grant waivers from the application of the Code (or some of its provisions) to non-UK listed companies, and 
• a new requirement for early consultation with the Panel about appropriate disclosures to the market if a Code company decides to cancel its UK listing (and whether or not it has an overseas listing); this reflects the fact that under the new rules the company will only remain subject to the Code during a three year run-off period. 

In addition, PCP 2024/1 also says that the Panel has reviewed certain other share trading platforms - i.e., PISCES, private markets and crowdfunding platforms - and confirms that it thinks the Code should continue not to apply to companies purely because of trading of its securities on those platforms. 

Final thoughts

We think this proposed narrowing of the range of UK companies subject to the Code's jurisdiction is likely to receive broad support. The proposals helpfully simplify the concept of a Code company by refocusing the Code's application to UK companies with a UK listing or trading of their securities. No more nasty surprises for those focused more on a company's equity domicile rather than its legal domicile. The transitional arrangements will also provide a reasonable period of protection for those investors who will face losing the protection that the Code offers, to consider their options - whether that is exiting their investment or engaging with their investee company over possible changes to the company's constitution to provide a degree of similar protection for non-controlling shareholders to that offered by the Code. 

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