Refocusing the application of the UK Takeover Code

Introduction

On 6 November 2024, the UK Takeover Panel (Panel) published response statement RS 2024/1 - Companies to which the Takeover Code applies (Response Statement) setting out final rule changes that will result in a refocusing and significant narrowing of the types of companies subject to the UK Takeover Code (Code). This follows on from the Panel’s previous consultation on this topic in April 2024.

The Panel has largely finalised the rules in the form proposed and notes that there was generally strong support for the approach outlined in its consultation. It has, however, made some changes - primarily shortening the run-off and transition periods to two years (as opposed to the three years originally consulted on).

The changes to the Code will take effect on 3 February 2025 (Implementation Date) subject to certain transitional provisions which are discussed further below.

What is the current position?

In summary, the Code will currently only apply to a company if it is incorporated in the UK, Channel Islands or Isle of Man (a Code Jurisdiction) and falls into one of the following categories:

• It is admitted to a UK regulated market, UK MTF or any stock exchange in the Channel Islands/Isle of Man.

• It is an untraded public company which satisfies the residency test (i.e. the Panel considers it to be centrally managed and controlled in a Code Jurisdiction).

• It is a private company which satisfies both the residency test and the “ten-year rule” (broadly speaking it has, during the previous ten years, been publicly traded in some form or has filed a prospectus).

This means that in certain circumstances it is currently possible for companies to be subject to the Code where they are untraded or are publicly traded in other jurisdictions or through matched bargain facilities.

What is changing?

For companies that are admitted to a UK regulated market, UK MTF or Channel Islands/Isle of Man Stock Exchange (Quoted) the position will remain unchanged, however the application of the Code to other companies will be significantly restricted.

This is because, subject to certain transitional provisions discussed further below, once the new rules come into effect a company will only be subject to the Code if it is incorporated in a Code Jurisdiction and is either Quoted or has been Quoted in the previous two years (regardless of whether it satisfies the residency test which will be abolished other than, during the transition period, for Transition Companies – see further below).

As a result, from the Implementation Date (and subject to transitional provisions) the Code will no longer have the potential to apply to companies that are only publicly traded overseas or via a matched bargain facility or to other untraded public or private companies (unless, in each case, they have been Quoted in the previous two years). The changes also make it clear that companies will not be brought within the scope of the Code by virtue of their securities being traded on a PISCES platform (the proposed new form of intermittent trading venue consulted on by HMT earlier this year) or on a private market or crowdfunding platform.

Where (following the Implementation Date) a Quoted company ceases to be Quoted it will be subject to the Code for a period of two years – given the abolition of the residency test this will be the case regardless of its place of central management and control (unless it becomes a company with a sole beneficial holder – see below). Where a company proposes to cancel its admission such that it will cease to be Quoted, it will need to make appropriate disclosure to its shareholders about the impact on Code applicability and the Panel intends to publish a new Note to Advisers on this topic prior to the Implementation Date.

The new rules also clarify that the Code will not apply to companies with a sole beneficial holder.

Why are the changes being made?

The purpose of the changes is to (amongst other things) create greater clarity for market participants by having a more objective test for when the Code applies, to focus the Panel’s primary remit on companies that are registered and listed in a Code Jurisdiction and to reduce the regulatory burden on companies that are not (or have not recently been) Quoted.

Will transitional arrangements apply?

Yes. Transitional arrangements will apply to companies that, on 2 February 2025, are not Quoted but are either (a) subject to the Code or (b) would be subject to the Code but for the fact they do not meet the residency test at that time (Transition Companies).

For a transitional period of two years from the Implementation Date (so up to and including 2 February 2027), assuming they do not become Quoted during that period, Transition Companies will effectively continue to be subject to the current rules on Code applicability (including the residency test). This means that, for example, a Transition Company that is not subject to the Code on the Implementation Date could still become subject to the Code during the transition period if its board composition changes such that the residency test is met at the relevant time. The Panel has included in the appendices to the Response Statement, helpful tables and flowcharts summarising how the proposed transitional arrangements would apply.

Our views

As the Panel commented in its earlier consultation, the current rules on Code applicability can be complex and opaque and it is not always clear to market participants (or indeed to companies themselves) whether the Code applies. As such, the more objective approach under the revised rules and the removal of the residency test will provide greater clarity and certainty.

As we have noted previously, it also perhaps unsurprising that the Panel is tightening up the Code’s application to unquoted companies given the rise in alternative ways to trade in shares over recent years including, most recently, the proposed introduction of the new UK intermittent trading venue (PISCES). We agree that the primary focus of the Code should be on companies that are (or have recently been) Quoted and that the ten year run off period following delisting needed to be reduced, with two years not being unreasonable. The codification of the Panel’s existing practice of not applying the Code to companies with a single beneficial owner is also helpful although, as the Panel has noted, the question of the Code’s application to such companies will be likely to arise less frequently in practice as a result of the broader changes being made.

In relation to overseas traded companies, these will often currently be outside the scope of the Code in any event because their board composition means the residency test is not met. And the transitional arrangements mean that overseas traded companies that are presently in-scope will have time to determine whether other protections should be put in place – for example, through amendments to their constitutional documents – and communicate these to shareholders.