Comment

The Panel’s confirmation of the approach (largely unchanged from that set out in the PCP) to companies with dual class share structures and corresponding Code changes are consistent with the philosophy underpinning the relevant provisions of the Code in comparable scenarios such as share buybacks, IPOs and Rule 9 waiver transactions. The preservation of flexibility and focus on a principles-based approach are a welcome and sensible way forward given that these structures may evolve over time, whilst the codification of “dispensation by disclosure” on an IPO is welcome. There seem to be more encouraging signs that the UK IPO market may finally be back on an upward trajectory (albeit from a recent low base) and it remains to be seen whether this momentum continues and, if so, whether and when there will be a substantial number of companies listed in the UK with dual class share structures. For now, it is helpful to have the “plumbing” in place – watch this space!.

In depth

The key changes set out in RS 2025/1 can be summarised as follows.

Dual class share structures (DCSS)

Background positioning

Following the introduction of the substantially revised UK Listing Rules last year, companies with a DCSS may now list in the single segment for equity shares of commercial companies. The Panel considers that it is therefore appropriate to clarify how the Code applies to companies with a DCSS.

The principal types of DCSS seen in the UK market to date, on which the Panel has based its thinking, are

• Class B shares with multiple votes per share (on all resolutions) (“DCSS 1”);
• A single special share conferring majority/veto rights on some or all resolutions from the point of issue (“DCSS 2”); or
• A single special share conferring majority/veto rights on some or all resolutions from the point of a third party obtaining control of a majority of the ordinary shares (“DCSS 3”),

in each case with the special/class B share(s) being extinguished or converted to ordinary shares on a particular trigger event. A number of common trigger events were described in the PCP, including a “time sunset” of a specified number of years after the company’s IPO.

The Panel acknowledges that the types of DCSS used in the UK market are likely to evolve over time and accordingly has sought to ensure that the Code changes are principles-based to allow for flexible application to different DCSSs as these emerge. Most of the changes focus on the DCSS 1 structure, with fewer issues arising in relation to the other two structures.

Application of Rule 9 (mandatory bid obligation) to DCSS companies

Where Class B shares in a DCSS 1 company are extinguished or converted as a result of a trigger event and a shareholder’s proportional voting rights increase, this will be treated as an “acquisition” of interests in shares for the purposes of Rule 9, meaning that a mandatory bid obligation would be triggered if that shareholder (together with its concert parties) thereby increases its voting rights through a Rule 9 threshold (an increase to 30% or more, or an increase from a starting position of between 30% and 50%).

The Panel will normally grant a dispensation from the mandatory bid obligation unless: (a) the trigger event is the expiry of a time sunset (subject to the potential dispensation “by disclosure” described below); or (b) the shareholder, at the time of the acquisition, had reason to believe that a trigger event (other than a time sunset) would occur. In either of those circumstances, if the Panel concluded that Rule 9 would operate unduly harshly, it may grant a specific dispensation, though that would be likely to be contingent on the shareholder disposing of sufficient interests in shares to take them below the relevant Rule 9 threshold.

At the time of an IPO, the Panel will be able to grant a “Rule 9 dispensation by disclosure” to a specific shareholder or concert party, provided that:

• The IPO admission document appropriately discloses the maximum percentage of voting rights that the shareholder (or concert party) would hold following a trigger event; and
• Except with the consent of the Panel, there have been no further acquisitions of interests in shares by the shareholder (or concert party) since admission. Consent will normally be given where the Panel is satisfied that if the acquisition were to have occurred after a trigger event, no mandatory bid obligation would have been triggered (eg on a pro rata subscription for new shares under a rights issue).

A dispensation by disclosure of this nature may subsequently be invalidated by an acquisition of shares after the IPO, if such an acquisition would have triggered a mandatory bid obligation were it to have been made after a trigger event. This will depend on the circumstances, eg a pro rata subscription for new shares would not trigger the obligation, whereas an acquisition of existing shares generally would.

Application of the acceptance condition requirements to DCSS companies

Both for the acceptance condition on a voluntary offer under Rule 10.1 and for the acceptance condition on a mandatory offer under Rule 9.3, there will be a dual test, operating as follows:

• Shares carrying more than 50% of the voting rights immediately before the relevant enhanced voting shares convert or are extinguished should be acquired by the offeror or accepted to the offer (“pre-unconditional test”); and
• Shares which would carry more than 50% of the voting rights immediately after the relevant enhanced voting shares convert or are extinguished should be acquired by the offeror or accepted to the offer (“post-unconditional test”).

Both the pre-unconditional test and the post-unconditional test must be passed in order for the acceptance condition to be satisfied. It will, however, be permissible for bidders to stipulate different percentage thresholds (of at least 50% + 1) for each of the tests (eg 50%+1 for the pre-unconditional test and 90% for the post-unconditional test).

For a company with a DCSS 2 or DCCS 3 structure, the Panel will not take into account the special share for the purposes of the acceptance condition.

Application of other Code provisions to DCSS companies

The RS sets out how certain other Code provisions will apply to DCSS companies, including that the Panel will be able to consent to a single combined offer being made for more than one class of shares where a comparable offer is required under Rule, whilst announcements under Rules 2.9 and 17 should explain the voting rights attaching to each class of shares. The Rule 2.9 announcement by a DCSS company will need to be published on the company’s website (unlike 2.9 announcements by other companies).

The Rule 16 prohibition on special deals is likely to be breached by an offer to acquire or cancel the enhanced voting shares if:

• Where the shares will convert into ordinary shares upon transfer, the offer price is above the amount derived from the applicable conversion ratio; or
• Where the shares will be extinguished or cannot transfer to the bidder, the offer price is above the nominal value of the shares.

The Rule 21.1 restrictions on frustrating action will not normally be triggered by an issue of enhanced voting shares unless the issue takes place during a “relevant period” (i.e. following an approach or offer announcement), nor by the exercise by a director of their rights as a holder of enhanced voting shares.

Introduction of new provisions relating to IPOs

• The Panel has imposed a new requirement for a company that effects an IPO that would result in it becoming subject to the Code to make appropriate disclosure relating to the Code in its IPO admission document. The disclosure should include details of the application of Rule 9 and details of any person or concert party who, on completion of the IPO will be, or is expected to become, interested in shares carrying 30% or more of the voting rights of the company. There is already a note to advisers on this on the Panel’s website (which will be superseded by a new note) and the new requirement constitutes a codification of existing practice.
• Similarly, the Panel has codified its practice of granting a “Rule 9 dispensation by disclosure” whereby, provided that the IPO admission document clearly sets out (inter alia) the maximum percentage of voting rights that a person or concert party would hold on the occurrence of a relevant specified event (eg the exercise of options), that future event will not then trigger a mandatory bid obligation under Rule 9.
• The “dispensation by disclosure” is likely to be invalidated if the recipient is itself subject to a change of control – in these circumstances, the Panel should be consulted.

Introduction of new provisions relating to share buybacks

• The Panel has made various amendments to Rule 37 (share buybacks), some of which are intended to be clarificatory. An amendment of the “disqualifying transactions” regime has also been made to relax the position in the context of an acquisition made in the run up to an AGM with a standard annual buyback authority, where there is no intention at that time to implement a specific buyback or buyback programme.
• Where the Panel grants a dispensation from Rule 9 under the “innocent bystander” note, there is a new requirement for a company to announce at the time of a specific buyback the maximum percentage of voting rights which the “innocent bystander” would hold following the buyback.
• The changes codify the Panel’s practice whereby, if a share buyback (rather than a contractual offer or scheme of arrangement) is effectively used as a mechanism where all or ultimately all of the company’s shares will become held by one shareholder (or concert party), the Panel will treat the buyback as an “offer” for Code purposes.