Earlier this year the Takeover Panel (the Panel) conducted a consultation in respect of its proposal to narrow the scope of the companies to which the Takeover Code (the Code) applies. The outcome of that consultation was published on 6 November 2024. The Panel's proposals will be adopted largely without amendment refocusing the application of the Code on companies which are registered and listed (or were recently listed) in the UK. The changes to the Code will be implemented on 3 February 2025.
Why were these changes proposed?
The Panel accepts that the existing rules are "complex and opaque and it is not always clear to market participants, or even to the company itself, whether the Code applies to a company". This is particularly the case when applying the 'residency test' (see below) to an unlisted public company or private company.
Further, the application of the Code to companies adds costs and regulatory burdens. Whilst the application of the Code offers shareholders certain protections, the Panel is of the view that those companies which will fall outside the remit of the Code going forward can provide their shareholders adequate protection through the implementation of 'Code-like' provisions, drag and tag rights or other structures in their articles of association.
Indeed, the Panel stated in the consultation paper (PCP 2024/1 24 April 2024) that the proposed changes are "intended to refocus the application of the Code on those companies which might expect to be subject to takeover regulation and to provide clarity and certainty as to the companies which fall within the Panel’s jurisdiction".
Which companies will the Code apply to following implementation of the proposals?
Subject to the transitional arrangements, the Code will apply to a company if, the company has its registered office in the UK, the Channel Islands or the Isle of Man (i.e. it is UK-registered) and either:
- any of the company’s securities are admitted to trading on a UK regulated market e.g. the main market of the London Stock Exchange, a UK multilateral trading facility such as AIM, or a stock exchange in the Channel Islands or the Isle of Man (i.e. the company is UK-quoted); or
- the company was UK-quoted at any time during the two years prior to the 'relevant date'.
For this purpose, the relevant date is the date on which an announcement is made of a proposed or possible offer for the company or the date on which some other event occurs in relation to the company which has significance under the Code.
The Code will continue to apply to a company for a period of two years after it ceases to be UK-quoted, regardless of whether the company satisfies the 'residency test'. Whilst the so called 'run off' period is to be reduced from 10 to two years, the removal of the 'residency test' means the Code will apply to every UK-registered company that was UK-quoted at any time during the two years prior to the 'relevant date'.
Which companies will the Code no longer apply to following implementation of the proposals?
Subject to the transitional arrangements and provided that the company had not been UK-quoted at any time during the two years prior to the 'relevant date', the Code will no longer apply to:
- a public or private company which was UK-quoted more than two years prior to the 'relevant date';
- a public or private company whose securities are, or were previously, traded solely on an overseas market;
- a public or private company whose securities are, or were previously, traded using a 'matched bargain facility';
- any other 'unlisted' public company; and
- a private company which filed a prospectus at any time during the 10 years prior to the 'relevant date'.
In addition, the 'residency test', which allows certain companies that have their place of central management and control in the UK, the Channel Islands or the Isle of Man to be subject to the Code, will be abolished at the end of the transition period. The somewhat uncertain test focuses primarily on the residency of a majority of a company's board of directors and means that UK-registered public companies which are not UK-quoted and certain UK-registered private companies can fall within the scope of the Code due to their board composition.
Separately, the Panel has confirmed that companies whose shares will be traded on the proposed new PISCES platform (an intermittent trading venue) will not be subject to the Code as a result. The application of the Code to such companies would likely prove a disincentive to this new platform.
Transition Period
Transitional arrangements will apply for a period of two years in relation to companies to which the Code applied immediately prior to the implementation date (3 February 2025) but which fall outside the scope of the new regime. This will provide such a 'transition company' with an opportunity to put in place alternative arrangements such as, for example, making appropriate amendments to its articles of association or enabling shareholders to exit their investment if they do not wish to be shareholders in the company without the protections afforded by the Code.