Higher, wider, stronger

On 5 July, the Takeover Panel issued three consultation papers proposing changes to the Takeover Code.

These papers addressed the questions of: which companies should be subject to the code; pension scheme trustee issues; and profit forecasts and similar issues.

Much of the coverage of the proposed changes focused on the proposal relating to pension schemes, but from a lawyer’s perspective it is the proposed expansion of the panel’s jurisdiction that is of most interest.

The principal change proposed is the removal of the ‘residency test’ for companies incorporated in the UK, the Channel Islands or the Isle of Man (IOM). At present, the code does not apply to public companies incorporated in those jurisdictions unless they are either on the Official List or are considered by the panel to have their place of central management and control in one.

For example, a UK incorporated plc that is on AIM, or is unlisted, and that has most of its directors resident overseas, would not currently be governed by the code.

Under the proposed change, the code would automatically apply to any public company incorporated in the UK, the Channel Islands or the IOM, whether or not its shares were quoted (and irrespective of where they may be quoted) and regardless of its place of central management and control.

This change should be welcomed as it removes several potential difficulties with the present regime. First, shareholders in a UK company whose shares are quoted in London will often expect the code to apply and may not understand or appreciate the existence of the residency test.

Second, there are potential practical difficulties if, due to relocation of one or more of a company’s directors, a company becomes, or ceases to be, subject to the code in the event of a takeover.

Third, it is often impossible for an outside party (including a shareholder or potential bidder) to determine from public information whether the residency test is satisfied and therefore whether the code applies to a company.

Traditionally, the panel has not taken jurisdiction over these companies partly due to reservations about its ability to enforce the code effectively where there is not sufficient nexus of the company with the UK.

These reservations have partly diminished now the implementation of the EU’s Takeover Directive has given the panel some significant enforcement powers. Also, the panel is required to regulate bidders who have no nexus with the UK and has not encountered any significant problems in doing this.

At this stage, the panel is not proposing to extend its jurisdiction to cover companies incorporated overseas but whose shares are quoted in London.

However, in the consultation paper the panel flags that it is investigating whether it might be “feasible and proportionate for some measure of code protection to extend to shareholders in such companies”, given the potential difficulties in relation to compatibility with local law.

This area may therefore be revisited by the panel before too long.