Comment

The proposed approach 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. As the Panel acknowledges, these structures may evolve over time, so the preservation of flexibility and focus on a principles-based approach are a welcome and sensible way forward. The bigger picture question is whether and when there will be a substantial number of companies listed in the UK with dual class share structures – if the UK succeeds in attracting these companies to the London Stock Exchange, it will be interesting to see how market practice develops and how the Code and the Panel adapt to this – the proof of the pudding will be in the eating.

The guidance from the Panel on the potential dispensations available in the context of profit forecasts, QFBSs and investment research, amounting in practice to a limited relaxation of the regime in lower risk scenarios, is welcome news and is consistent with the overall drive across Government and regulators to remove friction in the UK markets and ensure that the UK is an attractive place for companies to list and to do business.

Given the prevalence of unlisted share alternatives on recent takeovers, a trend which shows no sign of abating, it is helpful for the Panel to provide guidance on its approach in this area. The fundamental principles of equality of treatment and sufficient timely disclosure that underpin the approach are well understood but, as is not untypical, the devil is in the detail. Financial advisers should in particular take note of the need for advance consultation with the Panel – if acting for the bidder, this is particularly in respect of the valuation range to be included in the Rule 24.11 valuation letter, whilst if acting for the target, there is particular focus on the explanation that may be published as to why (if the case) the financial adviser is unable to advise the target board as to whether the terms of the alternative offer are fair and reasonable.

In depth

The key proposals set out in PCP 2025/1 can be summarised as follows.

PCP on Dual class share structures (DCSS)

Background positioning

• Following the introduction of the substantially revised UK Listing Rules this time 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")
  • 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 are 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 is seeking 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.

Proposed 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, it is proposed that this 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 would 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 would 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
  • 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 (e.g., 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, e.g., a pro rata subscription for new shares would not trigger the obligation, whereas an acquisition of existing shares generally would.

Proposed 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, the proposal is for 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")
  • 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 (e.g., 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 proposes not to take into account the special share for the purposes of the acceptance condition.

Proposed application of other Code provisions to DCSS companies

• The PCP sets out how certain other Code provisions are proposed to apply to DCSS companies, including that Rule 14 (comparable offers) is unlikely to apply, whilst announcements under Rules 2.9 and 17 should explain the voting rights attaching to each class of shares.
• 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
  • 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.

Proposed introduction of new provisions relating to IPOs

• The Panel proposes 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 would 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 and the proposed new requirement would constitute a codification of existing practice.
• Similarly, the Panel proposes to codify 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 (e.g., the exercise of options), that future event would not then trigger a mandatory bid obligation under Rule 9.

Proposed introduction of new provisions relating to share buybacks

• The Panel proposes to make various amendments to Rule 37 (share buybacks), some of which are intended to be clarificatory. An amendment of the "disqualifying transactions" regime is also proposed 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 proposed 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 Panel also proposes to codify its 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.

Practice Statement on profit forecasts, quantified financial benefit statements ("QFBSs") and investment research

• In broad terms, this Practice Statement constitutes a limited relaxation of the application of the rules on profit forecasts, QFBSs and investment research published by a firm that is connected with a party to an offer in "lower risk" scenarios.
• The Panel may grant a dispensation from the requirements for reports to be prepared if a one-off profit forecast is published by a target after an unequivocal rejection of an approach and an offer period subsequently commences, provided that the publication was more than seven days after the unequivocal rejection.
• Where a possible offer announcement is required at a time when a securities exchange offeror has prepared a QFBS but not had sufficient time to obtain the requisite reports, the Panel may allow the QFBS to be published initially without the reports, provided that the reports are then published within 21 days (or, if earlier, the date of the 2.7 announcement). In deciding whether to allow this, the Panel will also take into account the views of the target company.
• Where a profit forecast is provided privately by a target to a bidder for due diligence purposes and the bidder is then required to publish that forecast in a document or announcement (typically due to US securities laws), the Panel will normally grant a dispensation from the requirement for the forecast to be reported on provided that it is not used in arguments as to the merits of the offer and that the document in which it is published includes prominent disclaimer statements in respect of the forecast.
• Where during an offer period a longer term (over 15 months) profit forecast is made or repeated, the Panel may grant a dispensation from the requirements for corresponding profit forecasts for the current and intervening financial years where it considers that the forecast is not intended as a means to enable the inference of profit forecasts for those years. This dispensation may be granted in respect of profit forecasts first published before an approach but required to be repeated under Rule 28, or – where the parties to the offer agree - ordinary course profit forecasts made during an offer period.
• Where a profit forecast or QFBS previously published is included in a document subsequently published during an offer period in respect of a recommended, non-competitive offer, the Panel may grant a dispensation from the requirement of that subsequent document to include a statement from the accountants and financial advisers who reported on the original profit forecast or QFBS that their reports continue to apply.
• The exemption from the Rule 28.1 reporting requirements in respect of profit estimates included in preliminary or interim results statements complying with the FCA Handbook may be extended by the Panel to profit estimates announced shortly before the formal results statement where: 1) the directors confirm to the Panel that the formal results statement will be published within an appropriately short period; 2) the profit estimate is in respect of a normal reporting period; and 3) the document or announcement containing the profit estimate contains the required director confirmations.
• In relation to a recommended, non-competitive offer, the Panel may be willing to grant a dispensation from the requirements for a connected firm to obtain Panel consent to publish investment research (and for the research to be pre-vetted by the Panel) provided that the connected firm confirms in writing to the Panel that Note 4(b) on Rule 20.1 (no statements of fact or opinion derived from non-public information and no profit forecast, QFBS or similar) has been complied with.

Practice Statement on unlisted share alternatives

• In recent years, unlisted share alternatives (also known as "stub equity") have become noticeably more common on Code governed takeover offers. The Panel has taken the opportunity in this practice statement to provide guidance on how it normally applies and interprets various Code provisions in the context of these, mainly based on the key principle (General Principle 1) that all target shareholders must be afforded equivalent treatment and the corresponding Rule 16 prohibition on special deals. Emphasis is also placed on the requirements for target shareholders to be given sufficient time and information to enable them to reach a properly informed decision on the offer.
• The key message throughout the practice statement is to emphasis the importance of early consultation with the Panel on both the terms of any alternative offer and the related disclosure requirements.
• The practice statement summarises terms that are, and are not, likely to be acceptable for an unlisted share alternative. Maximum aggregate acceptance thresholds (whereby a cap is placed on the percentage of the bidco shares available and there is pro rata scale back in the event of oversubscription) and minimum aggregate acceptance thresholds (below which no shares will be issued and all target shareholders will instead receive cash) are permissible.
• By contrast, individual minimum numerical acceptance thresholds (e.g., the alternative is only available to a shareholder in respect of a minimum number or value of shares) is prohibited, though individual minimum percentage thresholds (e.g., any shareholder can only elect for the alternative in respect of at least 50% of their shares) are permissible.
• Share exchange ratios should be clear and should not be structured so as to exclude target shareholders below an individual minimum numerical threshold. Fractions can be rounded down, with a corresponding payment in cash for the fractional amount made in lieu. There must also be appropriate disclosure of any specific arrangements that may result in dilution of the shareholding in bidco that would otherwise be held by electing target shareholders, e.g., an additional subscription in cash for bidco shares by another bidder group company to fund offer related fees and expenses.
• Subject to consulting the Panel, it may be permissible for bidders to include legal or regulatory restrictions on the availability of the unlisted share alternative, for example where trade sanctions apply to a target shareholder or where overseas securities laws or regulations may result in a significant risk of civil, regulatory or, particularly, criminal exposure where an alternative offer is made available to target shareholders in a particular jurisdiction.
• It may (again subject to consultation) be acceptable for certain governance rights to be granted to any shareholder who holds at least a specified percentage of the bidco shares. The Panel will pay particular attention to the rights to be granted on that basis to ensure that they are proportionate. The practice statement specifies that monetary benefits, early exit rights and the ability to act as shareholder representative to make decisions on behalf of minority shareholders are unlikely to be permitted.
• The Panel expects detailed disclosure to be made in the Rule 2.7 announcement of the terms of the unlisted share alternative, including (inter alia) investment risk factors, details of the bidco group, economic and governance arrangements and settlement mechanics.
• A bidder will only be able to use nominee arrangements (whereby a nominee would hold legal title to the bidco shares and the electing target shareholders would hold beneficial title only) if either those arrangements are imposed on all electing target shareholders (rather than only those below a certain threshold) or the arrangements are optional.
• The Panel makes clear that the Rule 24.11 valuation of the unlisted share alternative must: 1) include all relevant factors taken into account; 2) explain how the estimate of value per unlisted share relates to each target share; 3) if a range is used, ensure the range is "sufficiently narrow to result in meaning full disclosure" (noting that if Bidco is leveraged, a wider range may be appropriate); and 4) set out both the estimated total enterprise value and, after adjusting for acquisition debt, the implied total equity value of bidco.
• The practice statement includes a reminder of the obligations that target directors and the Rule 3 financial adviser have to set out their views on the alternative offer. The target directors are also encouraged to include in the 2.7 announcement (and not only in the offer/scheme document) a statement as to whether they intend to accept the offer and if so whether they intend to elect for the unlisted share alternative. The Rule 3 adviser is obliged to consult the Panel if they plan to explain in the offer/scheme document that they are unable to advise the target board whether the terms of the alternative offer are fair and reasonable, with the Panel wishing to be consulted in advance about the explanation given.