Refocusing the application of the UK Takeover Code

Introduction

On 24 April 2024, the UK Takeover Panel (Panel) published consultation paper PCP 2024/1: Companies to which the Takeover Code applies which proposes a refocusing and significant narrowing of the types of companies subject to the UK Takeover Code (Code). The consultation closes on 31 July and the Panel has indicated that it intends to publish a response statement and final rule changes in Autumn 2024 with the changes being implemented approximately one month thereafter.

In this briefing we outline the proposed changes and discuss our views.

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 (Listed) the position will remain unchanged, however the application of the Code to other companies would be significantly restricted. 

This is because the proposed changes would, subject to certain transitional provisions discussed further below, mean that a company would only be subject to the Code if it was incorporated in a Code Jurisdiction and was either Listed or had been Listed in the previous three years (regardless of whether it satisfied the residency test, which would be abolished).

As a result, the Code would 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 had been Listed in the previous three years). The changes would also make it clear that companies would 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 currently being consulted on by HMT) or on a private market or crowdfunding platform.

Why are the changes proposed?

The Panel’s intention in making 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) Listed.

Will there be transitional arrangements if the proposals are adopted?

Yes. Transitional arrangements would apply to companies that, immediately prior to the implementation date, are not Listed 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 three years, and assuming they did not become Listed, Transition Companies would 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 was not subject to the Code on the implementation date could still become subject to the code during the transition period if its board composition changed such that the residency test was met at the relevant time. The Panel has included in the appendices to the consultation helpful tables and flowcharts summarising how the proposed transitional arrangements would apply. 

Our views

As the Panel notes, 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 proposed and the removal of the residency test will provide greater clarity and certainty - arguments that were relevant previously when the residency test was dropped for MTF companies a number of years ago. 

It is perhaps unsurprising that the Panel is proposing to tighten 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) Listed and that the current ten year run off period following delisting should be reduced - the proposed three-year period does not seem unreasonable. The intended 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 mentions, the question of the Code’s application to such companies would be likely to arise less frequently in practice as a result of broader changes being made.

In relation to overseas traded companies, as the consultation notes 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 would mean that overseas traded companies that are presently in-scope would 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.