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E-MailRichard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum by John Banes, Phillip R. Mills, Simon Witty, and Dan Hirschovits.
On July 5, 2012, the Code Committee of the U.K. Takeover Panel (the “Panel”) published three Public Consultation Papers (“PCPs”) setting out proposed amendments to the U.K. Takeover Code (the “Code”). The Code sets out binding rules for proposed takeovers of companies and is focused on ensuring a non-coerced choice by shareholders without input by the incumbent board, unlike the typical U.S. approach that permits the incumbent board to act in a manner it believes can best protect shareholders.
Of particular interest are proposals to amend the rules for determining companies that are subject to the Code. If implemented as proposed, the changes contemplated will have the effect of bringing companies that are not currently subject to the Code within its jurisdiction.
The U.K. government recently announced plans to introduce a binding, three-yearly shareholder vote on the compensation policy of U.K. incorporated, quoted (publicly traded) companies, which include companies listed on the NYSE and NASDAQ, even if not listed in the U.K. (read a recent Davis Polk blog post on this topic here). These latest proposals provide a further reminder that the U.K. applies some, and may be about to apply more, corporate governance and shareholder protection measures which resonate most in the context of publicly traded companies on the basis of location of incorporation rather than location of listing. This approach is different from that adopted in the U.S., which focuses on the listing location and does not impose its rules on U.S.-domiciled companies not listed on a U.S. exchange, and could lead some U.K. incorporated companies to consider re-domiciling.
Removal of the residency test
Currently, the Code applies to an offer for a public company that has its registered office in the U.K., the Channel Islands or the Isle of Man if it has securities admitted to trading on a regulated market in the U.K. or on a stock exchange in the Channel Islands or the Isle of Man. However, the Code also applies to an offer for a public company that has its registered office in the U.K., the Channel Islands or the Isle of Man and whose securities are not admitted to trading on one of the markets mentioned above if the Panel considers that it has its place of central management and control in the U.K., the Channel Islands or the Isle of Man (the “residency test”).
Under the proposed amendments, the Code Committee proposes to remove the residency test in its entirety. As a result, the Code will potentially apply to all offers for public and (subject to certain further criteria) [1] private companies that have their registered offices in the U.K., the Channel Islands or the Isle of Man. [2]
By way of practical example, an offer for a public company with its registered office in the U.K. or Jersey, with securities listed on the NYSE or NASDAQ and with its place of central management and control outside the U.K., the Channel Islands and the Isle of Man would, under the new proposals, be subject to the Code, even though that company does not currently meet the residency test.
Other changes
The other two PCPs propose amendments to particular rules in the Code, including those in relation to profit forecasts disclosure, merger benefits statements (to be renamed “quantified financial benefits statements”) and the disclosure of material changes in information published in an offer document, as well as proposals to extend the framework currently provided in the Code for the benefit of the target company’s employee representatives (following Kraft’s takeover of Cadbury) to apply to trustees of the target company’s pension schemes.
Responses to the PCPs are requested by September 28, 2012.
Endnotes
[1] In broad terms, the Code will apply to an offer for a private company if its securities have traded in the U.K., the Channel Islands or the Isle of Man, or if the company has filed a prospectus, in the previous 10 years.
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[2] The Code also applies in certain instances of shared jurisdiction. These provisions are not affected by the proposed removal of the residency test and are therefore not considered further.
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