Takeover Panel finalises rules on DCSS, IPOs and share buybacks

The Changes

A company with a dual class share structure (“DCSS”) typically has, alongside voting ordinary shares, a class of shares (eg. Class B or special shares) with enhanced voting rights to maintain control over key decisions. The new framework is focused primarily on structures in which the enhanced voting shares carry multiple votes per share from issue and are extinguished or convert into ordinary shares on specified trigger events (for example, a time sunset, transfer of the enhanced voting shares, or the resignation, retirement or death of the holder).

Rule 9 mandatory offer

New provisions clarify how the mandatory offer requirement in Rule 9.1 applies where a shareholder’s percentage of voting rights increases as a consequence of a trigger event in a DCSS company (the “Affected Shareholder”).  Although an Affected Shareholder may incur a Rule 9 obligation, the Affected Shareholder may not in practice be required to make a mandatory offer because:

• on a trigger event other than a time sunset, the Panel will normally grant a dispensation if the Affected Shareholder is an “innocent bystander”.  However, the Panel will not normally grant a dispensation if the trigger event is the expiry of a time sunset; and the Panel will also not grant a dispensation where, at the time the Affected Shareholder acquired interests in shares, it had reason to believe that a trigger event (other than a time sunset) would occur; and
• in the context particularly of a time sunset, a Rule 9 dispensation by disclosure can be granted at IPO to a specific shareholder or concert party, provided the admission document (i) discloses the maximum percentage of voting rights that the shareholder would hold following the trigger event (based on the IPO share capital) and (ii) except with the consent of the Panel, there are no acquisitions of interests in shares by that shareholder or its concert parties between admission and the trigger event.

In other cases, the Panel may consider a dispensation at the time the obligation arises, typically  subject to the Affected Shareholder selling down interests to fall below the relevant Rule 9 threshold.

Acceptance condition

For a contractual offer, the acceptance condition is now subject to two tests, both of which must be satisfied:

• a “pre-unconditional” test, i.e. whether shares carrying more than 50% of the voting rights immediately before the enhanced voting shares convert or are extinguished have been acquired by the bidder or accepted to the offer; and
• only if the test above is passed, a “post-unconditional” test, i.e. whether shares which would carry more than 50% of the voting rights immediately after the enhanced voting shares convert or are extinguished have been acquired by the bidder or accepted to the offer.

These provisions ensure both the majority under the current voting structure and the majority under the post‑conversion structure support the offer.  For schemes of arrangement, Rule 10.1 does not apply; the position will be addressed through the scheme and court process.

Other DCSS changes

The Panel:

• must be consulted on special deals with favourable conditions under Rule 16.1 where an offer is made for a DCSS company; and
• can consent to a single combined offer for more than one class where a comparable offer would otherwise be required (Rule 14.2).

IPO disclosures

The Code will now codify that, in the context of an IPO (or admission to trading) that brings the company within the Code, the admission document must include appropriate disclosure on the application of the Code, including an explanation of Rule 9 and details of any person, or group of persons acting in concert, that will be, or is expected to become, interested in shares carrying 30% or more of the voting rights.  The Panel must be consulted for guidance on that disclosure. 

The Code also codifies the availability, at IPO, of a Rule 9 dispensation by disclosure in the circumstances described above (including DCSS time‑sunset scenarios).

Share buybacks

Changes have been adopted to make the rules clearer, more concise and consistent with the DCSS proposals.  In particular to amend the “disqualifying transactions” regime to remove restrictions on a company carrying out a share buyback under their normal annual shareholder authority.