Guidance Note – Rule 7(E) of the Code and Joint Holders or Controller of Voting Rights

Published 1 July 2010

The Panel wishes to clarify the application of rule 7(e) of the Code to joint holders or controllers of voting rights in a Code company (for example, trustees of a family trust, or ‘upstream’ arrangements whereby a ‘holding’ company holds or controls the voting rights in a Code company while two or more persons jointly hold or control the shares in the holding company).

The fundamental rule of the Code contained in rule 6 is that no person can:

(a) increase their control percentage to more than 20% (together with their associates) of the voting rights in a Code company; or 

(b) increase an existing control percentage of 20% or more of the voting rights in a Code company.

Rule 7 of the Code provides a number of mechanisms that enable a person, who would otherwise be prevented by rule 6 from doing so, to increase their control percentage.

One of the mechanisms is “creeping” in accordance with rule 7(e) of the Code. Rule 7(e) provides that a person may become the holder or controller of an increased percentage of voting rights in a Code company if:

“(i) the person holds or controls more than 50%, but less than 90%, of the voting rights in a Code company; and 

(ii) the resulting percentage of the total voting rights in the Code company that is held or controlled by the person does not exceed by more than 5 the lowest percentage of the total voting rights in the Code company that was held or controlled by the person in the 12-month period ending on, and inclusive of, the date of the increase.” 

In other words, a person whose control percentage is between 50%-90% may make small acquisitions of shares (or other forms of increases) in a Code company. The acquisitions are limited to no more than 5% of the Code company’s voting rights within any 12-month period.

The Panel considers that where more than 50% (but less than 90%) of the voting rights in a Code company are jointly held or controlled by two or more persons, those persons may together rely on rule 7(e) in respect of an increase in the percentage of voting rights that they hold or control jointly in a Code company. However, it is only in respect of their jointly held or controlled shares that they can together creep under rule 7(e).

Example 1:

Person A and person B joint hold as trustees of a family trust 51% of the voting rights in XYZ Limited (a Code company). 

A and B may jointly acquire a further 5% of shares in XYZ Ltd (over any 12-month period, counting back from the date of the increase). 

However, if A acquired, for example, a further 1% of shares on its own account, A would breach the fundamental rule by virtue of being an associate with B (i.e. because B holds or controls 51% of the XYZ shares). A cannot alone rely on rule 7(e) because A does not alone hold or control more than 50%, but less than 90%, of the voting rights in XYZ Ltd. 

Example 2:

C and D form a company (HoldCo), which acquires(in compliance with the Code) 51% of the shares in FGH Limited, a Code company. C and D control HoldCo through their each holding 50% of HoldCo’s shares and both being HoldCo’s directors. 

HoldCo may acquire a further 5% of shares in FGH Ltd under the creep rule because it holds the relevant percentage of voting rights in FGH Ltd. As a result of HoldCo’s creeping, C and D also increase their control of voting rights in FGH Ltd. Rule 7(e) allows them to do so. 

Alternatively, C and D, as the joint controllers (through HoldCo) of the 51% of the voting rights in FGH Ltd may jointly acquire a further 5% of shares directly, as holders. However, neither C nor D can alone increase their holding or controlling of FGH Ltd voting rights under rule 7(e) because they are associates of each other and, as joint controllers of 51% of FGH Ltd, they are each considered to control 51% of the FGH Ltd voting rights.
 

The Panel considers that where more than 50% (but less than 90%) of the voting rights in a Code company are jointly held or controlled by two or more persons, those persons may together rely on rule 7(e) in respect of an increase in the percentage of voting rights that they hold or control jointly in a Code company. However, it is only in respect of their jointly held or controlled shares that they can together creep under rule 7(e).