Class Exemptions from the Takeovers Code - a summary

Published 1 June 2001

The Takeovers Code (Class Exemptions) Notice 2001 comes into force on 1 July 2001 at the same time as the Takeovers Code.

The class exemptions provide a standard form of exemption to apply to common classes of transactions. This will reduce significantly the need for applications for specific exemptions for particular transactions. The terms and conditions of the class exemptions are designed to ensure that the underlying purpose and intent of the Code are fulfilled. If the terms and conditions of the class exemptions do not fit the circumstances of a particular case, a specific exemption may need to be sought.

Key Areas

The key areas covered by the class exemptions relate to: 

  • buybacks by Code companies of voting securities;
  • allotments by Code companies of voting securities; and
  • transactions involving lenders and receivers, proxies and corporate representatives, sharebrokers, underwriters, nominee companies and bare trustees, executors, trustees and administrators of deceased estates and intra-group transfers. 

Another class exemption relates to the requirement to send a copy of the securities register of the target company to the Takeovers Panel.

The Fundamental Rule

The fundamental rule in the Code prevents any shareholder from becoming the holder or controller of more than 20 percent of the voting rights in a Code company except in a manner permitted by the Code. 

However, if a transaction falls within one of the class exemptions, increases that might otherwise be in breach of the fundamental rule will be exempted if certain conditions are met.

Buybacks and Allotments

The purpose of the class exemptions for buybacks and allotments is to facilitate these transactions. Transactions of this type can inadvertently lead to a breach of the fundamental rule. 

The policy of the class exemptions is to ensure that people are not breaking the law because they have inadvertently breached the Code. However, conditions apply to these exemptions to ensure the policy of the Code is complied with.

Buybacks

If a person increases its control of the voting rights in a Code company as a result of the Code company acquiring its own voting securities, that person is exempted from the fundamental rule if either: 

  • the acquisition is approved by an ordinary resolution of shareholders of the Code company, provided the notice of meeting complies with a set disclosure regime and certain voting restrictions are adhered to (this exemption in clause 4 closely mirrors the shareholder approval mechanism, which is an exception to the fundamental rule, set out in rules 7(c) and 15 of the Takeovers Code); or
  • the increase is eliminated (wholly or, in some cases, in part only) within six months and the additional voting rights are not exercised before that elimination (clause 5). 

If a Code company buyback reduces a person’s control of the voting rights in a Code company, that person may subsequently increase its holding - i.e. top up. However, this must happen within six months of the decrease and the amount of the top up is restricted. It must only take the person’s voting control percentage to the lesser of:

  • the control percentage of the person immediately before the increase plus an additional 5 percent of the voting rights of the code company; or
  • the control percentage of the person immediately before the decrease (clause 6). 

Example
Company A holds 30% of the voting control in Company B. Company B buys back a number of its shares with the result that A’s voting control reduces to 20%. Within six months of that decrease, A may increase its voting control to 25% (see (a) above). 

Acquisitions by associates in the six months following the decrease will also need to be taken into account in calculating the thresholds permitted by this exemption.

Allotments

If a shareholder increases its control of the voting rights in a Code company as a result of an allotment of securities by a Code company, that shareholder is exempted from the fundamental rule if either:

  • the allotment is made within six months after, and pursuant to, an initial public offering of voting securities by a company (whereby it becomes a code company), and the offer complies with certain disclosure requirements (clause 7); or
  • the allotment is made as a result of a pro rata offer to all shareholders, or under a dividend reinvestment scheme, and the increased voting control is eliminated (wholly or, in some cases, in part only) within six months and the additional voting rights are not exercised before that elimination (clause 8).

If a person’s voting control decreases as a result of a Code company’s pro rata offer or dividend reinvestment scheme, clause 9 permits that person to top up its voting control to the previous level within six months. Increases in voting control by the shareholder’s associates in this period will need to be taken into account.

If the decrease is as a result of some other allotment by the Code company, clause 10 provides that the top up must only take the shareholder’s voting control percentage to the lesser of:

  • the control percentage of the person immediately before the increase plus an additional 5% of the voting rights in the Code company; or
  • the control percentage immediately before the decrease.

Example
Company X holds 53% of the voting control in Company Y. Company Y makes a non-pro rata allotment with the result that X’s voting control reduces to 50%. Within six months of that decrease, X may increase its voting control back to 53% (see b. above).

Acquisitions by associates in the six months following the decrease will also need to be taken into account in calculating the thresholds permitted by this exemption.

Lenders and Receivers

Lenders (including persons holding security interests for lenders) and receivers appointed by lenders, are exempted from the fundamental rule if they acquire control over voting rights in a Code company under the terms of a security interest. This is subject to the condition that the security interest is held in the lender’s ordinary course of business and as part of a bona fide transaction for lending of money or provision of other financial services that does not have any purpose of circumventing the Code (clauses 11 and 12).

There are consequential exemptions for those who control lenders, their associates and associates of lenders or receivers.

Proxies and Corporate Representatives

Subject to certain conditions (including that no consideration is paid to the appointer), persons who are appointed as corporate representatives or as proxies for meetings of Code companies are exempted from the fundamental rule (clauses 13 to 16). There are consequential exemptions for those who control proxies, their associates and associates of proxies or corporate representatives.

Sharebrokers

Subject to certain conditions, sharebrokers are exempted from the fundamental rule when, in the ordinary course of their business, they acquire control over Code company voting rights, so long as they exercise those rights only in accordance with the instructions of their clients. There are consequential exemptions for those who control sharebrokers and associates of sharebrokers (clauses 17 and 18).

Underwriters

If bona fide underwriters (or those who control them) increase their voting control because they are required to acquire securities under an underwriting arrangement entered into in the ordinary course of business, they are exempted from the fundamental rule so long as the increased voting control is eliminated (wholly or, in some cases, in part only) within six months and the additional voting rights are not exercised before that elimination (clause 19)

Executors and Trustees

Persons whose voting rights in Code companies increase to a level which would otherwise put them in breach of the fundamental rule are exempted from the fundamental rule if the increase results from:

  • their acting as trustee or executor of a will; or
  • their being left property in a will; or
  • their acting as an administrator of an intestate estate; or
  • an acquisition on intestacy (clauses 20 to 22).

There are consequential exemptions for those who control executors and trustees and for their associates

Nominee Companies and Bare Trustees

Nominee companies and bare trustees are exempted in the same way as executors and trustees if they hold Code company voting rights as a result of acquisitions in the ordinary course of their business and they do not control those voting rights (clauses 23 and 24).

There are consequential exemptions for associates of nominee companies and bare trustees.

Intra-group Transfers

Clause 25 exempts intra-group transfers within wholly-owned groups from the fundamental rule.

Documentation Requirements - Share Registers

The target company in a takeover is required under rule 42(2) of the Takeovers Code to provide the offeror with a copy of its securities register. This exemption provides that there is no requirement on the target company to also send a copy to the Takeovers Panel, provided that certain conditions are complied with.

 

Disclaimer 
T
his is a broad summary of the class exemptions. If you wish to rely on the Takeovers Code (Class Exemptions) Notice 2001 you must refer to the specific exemption that is applicable.