On April 24, 2024, the UK’s Panel on Takeovers and Mergers (the “Panel”) published a consultation paper which proposes to narrow the scope of the companies to which the City Code on Takeovers and Mergers (the “Code”) applies.

The Code currently applies to UK-registered companies that are also UK-listed. It also applies to a range of UK-registered companies that are not UK-listed if they satisfy a residency test, meaning that their place of central management and control is in the UK. The Panel proposes to abolish this residency test, and for the scope of companies to which the revised Code applies to be significantly narrower than under the current Code. The revised Code will apply only to companies that both: (i) are UK-registered; and (ii) are either UK-listed or have delisted in the three years prior to becoming subject to a takeover bid. As at present, companies that are not UK-registered will not be subject to the Code.

The consultation closes for responses on July 31, 2024. The Panel intends to publish a Response Statement setting out the final amendments to the Code in Autumn 2024, and to implement the amendments approximately one month later. A transition period will apply such that companies outside the scope of the amended Code will nevertheless remain subject to the current Code for three years.

FIVE KEY TAKEAWAYS

1.     CODE WILL APPLY ONLY TO UK-LISTED COMPANIES OR COMPANIES THAT HAVE RECENTLY DELISTED FROM THE UK MARKETS

The Panel proposes that the Code will apply to any company which has its registered office in the United Kingdom, the Channel Islands or the Isle of Man (a “UK-registered” company) if:

• Any of its securities are admitted to trading on a regulated market or multilateral trading facility in the UK or a stock exchange in the Channel Islands or the Isle of Man (“UK-listed”); or
• Any of its securities were UK-listed in the three years prior to the date on which an offer or possible offer for the company is announced under the Code, or on which some other event having significance under the Code occurs (the “relevant date”).

At present, UK regulated markets comprise the London Stock Exchange and Aquis Stock Exchange, UK multilateral trading facilities comprise the Alternative Investment Market and the Aquis Growth Market, and the sole stock exchange in the Channel Islands is The International Stock Exchange.

2.     CODE WILL CEASE TO APPLY TO CERTAIN UK-REGISTERED COMPANIES

Consequently, the Code would cease to apply to the following UK-registered companies which have their place of central management and control in the UK, Channel Islands or the Isle of Man (i.e., which meet the Panel’s “residency test”):

• Public or private companies which were UK-listed more than three years prior to the relevant date.
• Public or private companies whose securities are, or were in the 10 years prior to the relevant date, only traded on a market outside the UK.
• Public or private companies whose securities are, or were in the 10 years prior to the relevant date, traded using a matched bargain facility.
• Other unlisted public companies.
• Private companies that have filed a prospectus in the 10 years prior to the relevant date.

3.     CODE WILL APPLY TO RECENTLY DELISTED COMPANIES REGARDLESS OF RESIDENCY

Under the Code’s current residency test, UK-registered companies that are not UK-listed can, in effect, choose whether or not the Code applies to them by deciding where to locate their place of central management and control. Conversely, whether or not the revised Code applies to a company will depend only on whether it: (i) is UK-registered; and (ii) is either UK-listed or has been UK-listed in the three years prior to the relevant date.

An important consequence of this is that, unlike under the current Code, a UK-registered company which has delisted from the UK within three years of the relevant date will be subject to the Code regardless of whether or not it satisfies the residency test. Delisted companies will no longer be able to avoid the application of the Code by relocating their central management and control outside the UK. In this respect, the revised Code may apply to some companies which would not be subject to the current Code (either currently or following a delisting) because they do not meet the residency test. The three-year period during which the revised Code will apply post-delisting is, however, shorter than the 10-year period that applies to delisted companies that meet the residency test under the current Code.

Companies delisting from the UK markets will be required to disclose to their shareholders that the Code will cease to apply after three years.

4.     CODE WILL CONTINUE TO APPLY TO NON-UK-LISTED COMPANIES DURING A THREE-YEAR TRANSITION PERIOD

If the Code is amended as proposed, the changes described under point 1. above will take effect on the implementation date. Therefore, if a UK-listed company delists following the implementation date, it will remain subject to the Code for three years.

However, the changes described under point 2. above will not take effect on the implementation date and there will instead be a three-year transition period before they take effect. The transition period is intended to give such companies and their shareholders an opportunity to put in place alternative arrangements to the Code (such as amending articles of association to incorporate similar shareholder protections to those afforded by the Code). The residency test will continue to apply throughout the transition period.

5.     CODE WILL NOT APPLY TO COMPANIES TRADED ON PISCES

The Panel has confirmed that the Code will not apply to companies by virtue of their shares being traded on the proposed private intermittent securities and capital exchange system (“PISCES”) which the UK Government intends to introduce by the end of 2024. PISCES will establish UK-based intermittent trading platforms for trading shares in unlisted companies. For more information on PISCES, please see our memo here.

This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “Changes to UK Takeover Code,” dated April 29, 2024, and available here.