Comment

The narrowing of the scope of the jurisdiction of the Code is helpful in removing potential uncertainty and reducing the risk of companies being subject to the Code without the companies, or potential bidders for them, being aware of this. In particular, a key drawback of the "residency test" that currently applies (whereby whether a company is considered by the Panel to have its place of central management and control in the UK, Channel Islands or Isle of Man and is therefore subject to the Code depends on where the directors of the company are resident) is that a company can fall into and out of the jurisdiction of the Code when the composition of its board changes. Similarly, a potential bidder seeking to assess whether a target company is subject to the Code may not always easily be able to ascertain the residence of all directors and therefore whether the residency test is met. The potential application to UK registered companies listed only overseas of both the Code and takeover regulation of the overseas place of listing can also create uncertainty and complexity, particularly following Brexit and the "shared jurisdiction" rules of the EU Takeover Directive ceasing to apply. Meanwhile, we have over the years seen more than one example of unlisted companies and their advisers failing to appreciate that the Code applies to them and this adversely affecting sale processes that had in some cases already begun. The reduction of the "run off" period after a company has been listed from ten years to two years and the narrowing of the scope of companies to which this applies should substantially reduce this risk.

In depth

The key changes set out in RS 2024/1 can be summarised as follows. 

Companies to which the Code will still apply:

• Subject to the transitional arrangements described below, from the implementation date, the Code will only apply to companies that are registered in the UK, Channel Islands or Isle of Man ("UK registered" companies) with securities admitted to trading (currently or within the last two years) on a:
  • UK regulated market (e.g., Main Market of the London Stock Exchange); 
  • UK multilateral trading facility (e.g., AIM); or
  • stock exchange in the Channel Islands or the Isle of Man (e.g., International Stock Exchange),

all referred to as "UK listed" companies. 

Companies which will stop being Code companies

• The Code will cease to apply to companies that are not UK listed companies but that are UK registered companies and are considered by the Panel to have their place of central management and control in the UK, Channel Islands or Isle of Man. The test applied by the Panel in making this determination, known as the "residency test" and based on where a majority of the company's directors are resident, will be abolished.
• Similarly, UK registered companies that are private companies and have within the previous 10 years have either been UK listed companies or met other criteria relating to dealings in their securities or having filed a prospectus will cease to be subject to the Code unless they fall within the above definition of a "UK listed company" due to having had their securities admitted to trading on a relevant exchange within the previous two years. 
• It is particularly worth noting that UK registered companies whose securities are, or were previously, traded solely on an overseas market (such as NYSE or NASDAQ) will automatically fall outside the Code's jurisdiction, subject to the transitional arrangements referred to below.

Transitional arrangements for companies which will stop being Code companies

• Transitional arrangements will apply for a period of two years following the implementation date in relation to companies to which the Code applies immediately prior to that date, but which fall outside the scope of the new regime (a "transition company").
• The transition period has been reduced from the three years proposed in the consultation paper to two years after the Panel took into account the views of various respondents. The Panel believes that a two year period is sufficient for companies who will fall outside the jurisdiction of the Code to make alternative arrangements to mitigate the effect of that, whether by having securities admitted to trading in the UK (thereby coming back within the Code jurisdiction), amending their articles to provide similar protections (e.g., via "synthetic Rule 9 provisions") or giving shareholders an opportunity to exit the company.
• Note that companies which currently are outside the jurisdiction of the Code only because they do not meet the "residency test" may still be transition companies, i.e., subject to these transitional arrangements. A company will fall within the jurisdiction of the Code for a particular transaction if it satisfies the residency test on the "relevant date". 
• A new definition of "relevant date" will be included in the new transition appendix to the Code, reading as follows: " when the transaction is announced. 

Growth companies – proposed arrangements

• The Code would not apply to the following companies solely by virtue of the companies' securities being traded on:
  • The proposed Private Intermittent Securities and Capital Exchange System (PISCES) (if it comes into being);
  • private markets (e.g., TISE Private Markets); or 
  • secondary/crowdfunding platforms (e.g., Seedrs).

This is on the basis that it would be disproportionate for the Code to apply to these categories of companies.

Companies with a sole beneficial owner

• Where companies with a sole beneficial owner technically fall within the jurisdiction of the Code (for example a public company that is a wholly owned subsidiary), it has been the Panel's longstanding practice not to seek to apply the Code to the company, on the basis that there are no minority shareholders to be protected. The Panel is frequently consulted on this issue and proposes to codify its practice in the introduction to the Code.

Additional points of clarification

• In response to a point raised in the course of the consultation, the Panel has clarified that, in a scenario where a bidder had acquired 100% of the securities of a UK listed company and that company subsequently issues new securities (or existing securities are transferred) to new shareholders, such that the former bidder ceased to be the sole beneficial owner (but without the company again becoming UK listed), the Code would not apply unless the company’s securities were readmitted to listing.
• On or before the implementation date, the Panel will update its Note to advisers in relation to re-registering a public company as a private company and publish a similar note in relation to the cancellation of admission to trading. They will also, on or before the implementation date, publish a new page on the Panel’s website which will explain the companies to which the Code does and does not apply.
• The Panel will retain the ability to grant a waiver from the application of some or all of the provisions of the Code in respect of a company which has ceased to be "UK listed". However, the response statement makes clear that: 1) this will only be considered in the context of the specific circumstances of a transaction; 2) a waiver is only likely to be granted  respect of the application of the entire Code where the Panel considers that it is inappropriate or disproportionate for the Code to apply to the company in relation to the particular transaction; and 3) it is unlikely that the Panel would grant a waiver from the application of the Code to a company simply as a result of its having ceased to be UK quoted within the previous two years.