Back to basics: proposed changes to the jurisdiction of the UK Takeover Code

On 24 April 2024, the UK’s Takeover Panel (the Panel) published a consultation paper which proposed sweeping changes to the jurisdictional framework of the UK’s City Code on Takeovers and Mergers (the Code).

Revised jurisdictional scope – The application of the Code would be narrowed to companies which have their registered office in the UK, the Channel Islands or the Isle of Man (referred to as UK-registered companies) and:

• whose securities are admitted to trading on a UK regulated market, a UK multilateral trading facility or a stock exchange in the Channel Islands or the Isle of Man (referred to as UK-listed companies; or
• which were UK-listed at any time in the last three years.

Currently, the Main Markets of the London Stock Exchange and of the Aquis Stock Exchange are designated as UK regulated markets and the London Stock Exchange’s AIM market and the Aquis Growth Market are designated as UK multilateral trading facilities. The International Stock Exchange qualifies as a stock exchange in the Channel Islands or the Isle of Man for these purposes.

Removal of the “residency test” – In addition, the Panel is proposing to do away with the central management and control/residency test, which currently applies to UK-registered public companies which are not UK-listed and to certain UK-registered private companies (provided that those private companies exhibit certain public company hallmarks). This test has always been somewhat of a blunt instrument, focussing primarily on where the majority of a company’s board of directors is resident and, importantly, meant that such a company could drift into and out of the Code depending on the composition of its board. 

Companies no longer within the scope of the Code – If these proposals are adopted it would mean that, subject to the transitional arrangements referred to below, UK-registered companies whose securities are admitted to trading on an overseas exchange (e.g. the NYSE or NASDAQ) will no longer be subject to the Code even if they are centrally managed and controlled from the UK. This would be an important change, as it removes the scope for both the Code and the rules of an overseas exchange or overseas securities regulator applying to an offer for such a company. The changes also mean that certain other categories of company, including UK-registered “unlisted” public companies and private companies that have filed a prospectus within the previous 10 years, will no longer fall within the scope of the Code.

Three year “run off” period – For companies that are UK-registered and UK-listed and that cancel their listing, the Panel is proposing that they should cease being subject to the Code three years after delisting. This represents a significant shortening of the current 10 year run-off period under the Code. However, it is worth highlighting that if a UK-registered company wants to move its listing from, say, the Main Market of the London Stock Exchange to NASDAQ, the Code will still apply to that company for three years following the delisting.

Transitional period – A three-year transitional period is proposed for companies that will no longer be subject to the Code following the implementation of the proposed changes. This is designed to allow those companies to put in place alternative arrangements (e.g. by amending their constitutional documents) or to give shareholders in those companies an opportunity to sell their shares if they do not wish to be shareholders in a company without the protections afforded by the Code.

Crowdfunding platforms and private markets – Lastly, the Panel has also clarified that companies whose shares or other instruments are traded on crowdfunding platforms (e.g. Seedrs Secondary Market), matched bargaining facilities (e.g. JP Jenkins or Asset Match) or other private markets (e.g. TISE Private Markets) will not be subject to the Code. This is clearly a logical position, as imposing the additional regulatory burden of having to comply with the Code on such companies would be disproportionate. Similarly, if the Government’s proposals to establish a Private Intermittent Securities and Capital Exchange System (or PISCES – covered in more depth in our article) are adopted, the Panel has clarified that the Code would not apply to companies whose shares are traded on that platform. 

Our view – We fully support the Panel’s proposals, which will streamline the application of the Code and remove the uncertainty faced by certain companies as to whether they were subject to the Code or not. With the UK’s capital markets rules in a state of flux (see our latest corporate law update), these changes would bring welcome clarity to the jurisdictional scope of the Code.

Next steps – The Panel’s consultation is open for responses until 31 July 2024. A response statement setting out the final new rules is expected in the autumn of 2024, with those rules then coming into force one month after the publication of the response statement.