UK UPDATE – Recent Changes to the UK’s City Code on Takeovers and Mergers
Executive Summary: Recent amendments to the UK’s City Code on Takeovers and Mergers, the main rules governing takeovers in the UK, are discussed below. The most significant changes resulting from these amendments are: (i) it will allow offerors to engage in early and have increased involvement with the offeree’s pension trustees in an offer; and (ii) all UK, Channel Islands and Isle of Man incorporated public companies trading on an multilateral trading facility in the UK, will be subject to the code, regardless of residence of central management and control.
The Code Committee of the Takeover Panel has published Response Statements setting out amendments to the Takeover Code (“Code”) following its consultation on extending certain rights of employee representatives to the trustees of offeree company pension schemes and the rules for determining the companies that are subject to the Code.
In summary, the most significant changes as a result of the amendments are: (i) it will allow offerors to engage in early and have increased involvement with the offeree’s pension trustees in an offer; and (ii) all UK, Channel Islands and Isle of Man incorporated public companies trading on an multilateral trading facility in the UK, will be subject to the code, regardless of residence of central management and control.
(i) Response Statement on Code amendments for pension scheme trustees
The Code Committee published its consultation paper Pension Scheme Trust Issues (PCP 2012/2) on 5 July 2012 which proposed amendments to the Code relating to certain employee representative rights being extended to apply also to trustees of the offeree company’s pension scheme.
On 22 April 2013, the Code Committee announced its response statement (RS 2012/2) to the consultation paper which subject to certain modifications, approved amendments to the Code to give pension scheme trustees similar rights to those of employee representatives, with effect from 20 May 2013. Key changes include:
(i) a new definition of “Pension Scheme” to limit those schemes in respect of which the offeror must state its intentions in the offer document. The definition defines such schemes as being a funded scheme which is sponsored by the offeree, provides pension benefits, some or all of which are on a defined benefit basis and has trustees (or managers).
(ii) an amendment to new Rule 24.2(a)(iii) to specify that the statement of the offeror’s intentions need relate only to certain specified matters such as employer contributions; accrual of benefits for existing members of the scheme; and the admission of new members to the scheme.
(iii) the decision not to implement the proposed requirements for (a) the offeree board to include in its circular its views on the effect of the offer on the offeree’s pension scheme and (b) disclosure of any agreement between offeror and the trustees relating to future funding (although where the agreement is a material contract, it will still need to be disclosed as such).
(iv) greater access to information. The offeror and offeree will be required to make the same documentation available to the company trustees as they are required to make available to the employee representatives, including the announcement starting the offer period; the offer document; the announcement of a firm intention to make an offer; and the offeree’s board circulars in response to any revised offer document. Trustees will be able to provide the offeree’s company with an opinion on the effect of the offer on the pension scheme. This opinion must either be attached to the circular on the offer to shareholders or published on the website and the publication announced on the RIS.
Following discussions with the UK Pensions Regulator, the Takeover panel has confirmed that there will be no obligation under the Code for the offeror or offeree to send offer-related documentation to the Pensions Regulator, nor will there be any obligation on the Panel to notify the Pensions Regulator of takeover offers. Any decision to seek clearance from the Pensions Regulator will be a matter for the offeror.
The objective of the amendments is to encourage an open debate by ensuring the offeror, the offeree and the offeree’s pension trustees can discuss their views during the early stages of the offer, enabling any issues to be considered by the offeror’s shareholders.
(ii) Companies subject to the Code
The Code Committee published its consultation paper (PCP 2012/3) on the 5 July 2012. The consultation paper proposed:
- the removal of section 3(a)(ii) of the Introduction to the Code the ‘residency test’
- the amendment to section 3(a)(ii)(A) and (D) of the Introduction Code known as the ten year rule in relation to certain private companies, including the proposal to apply the Code to private companies that have filed a prospectus for the issue of securities during the ten year period.
The Code automatically applies to companies trading on the regulated markets. The residency test is used to determine whether traded companies on non regulated markets are within the jurisdiction of the Code. If the company has shares admitted to AIM, but the place of central management and control is outside of the UK, the Code will not apply to that company.
The code applies to offers of companies listed on a UK regulated market (i.e. the London Stock Exchange) whose registered offices are in the United Kingdom, the Channel Islands or the Isle of Man (the Relevant Territories).
On 15 May 2013, the Takeover Panel published its response statement (RS 2012/3) following consultation on proposed amendments to the Code for determining which companies are subject to the Code.
The Code Committee supported the proposal that the ‘residency test’ should be abolished for UK, Channel Island and Isle of Man registered companies who have securities admitted to trade on a multilateral trading facility in the UK with effect from 30 September 2013.
However, the Code Committee acknowledged that the ‘residency test’ shall remain for public and private companies which have their registered offices in UK, the Channel Islands and the Isle of Man if it is:
- a non traded public company
- a public company who’s securities are admitted to trading on any market which is not a regulated market (either in the UK or in another EEA member state), an multilateral trading facility in the UK, or a stock exchange in the Channel Isles and Isle of Man
- A private company who have had securities admitted to trading within the previous 10 years (the ten year rule).
The Code Committee also supported, subject to minor changes, the proposed amendments to section 3(a)(ii)(A) to (D). The amendments will affect private companies by:
- Simplifying the ten year test; the company must satisfy that the company’s securities have been admitted to trading on a regulated market or a multilateral trading facility in the UK or any stock exchange in the Channels Islands or Isle of Man at any time during the ten year period
- The company have actually filed a prospectus for the offer, admission to trading or issue of securities (as opposed to the current test of whether a prospectus is required).
Although respondents suggested the time period could also be reduced to five years, perhaps even three years, the Code Committee said this was outside the scope of the consultation.
The Takeover Panel acknowledged that there will not be a need for transitional arrangements or an extended transitional period, the effective date of 30 September 2013 the Takeover Panel believes give companies enough time to remedy any issues arising from the changes. Such companies, who will now become subject to the Code, should review their articles of association to ensure they do not contain conflicting provisions with the Code.
Furthermore, the amendments may now affect shareholders in companies who come to fall within the jurisdiction of the Code. It is important to identify whether a shareholder my trigger a Rule 9 mandatory bid on exercise of convertible securities, warrants or options, in such cases the company should approach the Takeover Panel to seek dispensation from Rule 9.