Introduction

1. The Panel is reviewing its policy regarding the use of its exemption powers to facilitate changes of control of code companies resulting from schemes of arrangement under Part XV of the Companies Act 1993 ("schemes of arrangement").
2. The Code provides that a person may not become the holder or controller of more than 20% of the voting rights in a code company unless one of the mechanisms in rule 7 is utilised. Under rule 7 the means by which changes of control can be effected are takeover offers and acquisitions or allotments approved by non-interested shareholders. Under these mechanisms shareholders are given the opportunity to participate in or approve a change of control.
3. Any scheme of arrangement that would result in a person becoming the holder or controller of more than 20% of the voting rights of a code company comes within the scope of the fundamental rule of the Code. Sometimes such schemes will encompass the use of a Code mechanism, such as an allotment, but in other cases they will not. There is no statutory exemption from the provisions of the Code in respect of such schemes, whether or not they utilise an existing Code mechanism.
4. The Panel recognised that the application of the Code to schemes of arrangement under the Companies Act means that some mergers by way of a scheme of arrangement are unlikely to be possible without the assistance of some form of exemption from the Code. The Panel's existing policy on exemptions for schemes, published in July 2003, is aimed at permitting mergers by way of schemes in limited circumstances, subject to conditions which provide a balance between the objectives of both the Code and the Companies Act.
5. The Panel considers that there are two areas where the policy should be revised:
   • the threshold which must be satisfied in order for an exemption to be granted; and
   • the conditions relating to shareholder approval which the Panel will be likely to impose, particularly for the purpose of protecting minority shareholders.
6. This paper sets out the Panel's proposed changes to its policy and seeks comment from market participants.
7. In addition this paper discusses the legislative framework regarding changes of control of companies and the relationship between the Code and the Companies Act in this context. We also seek market comments on this issue.

Exemption policy threshold

8. The Panel's existing published policy on schemes arrangement states that:

   (a)

   If an exemption application relates to a scheme of arrangement that is for all intents and purposes a takeover, particularly one involving expulsion of minorities, then for the purposes of considering an exemption the Panel will treat the transaction as a takeover. The Panel is likely to decline such applications so that target company shareholders are not denied the benefit of the full protections of the Code; and

   (b)

   it may be appropriate to provide exemptions to facilitate the use of a scheme of arrangement where there are clear and compelling reasons why the proposed transaction should not be structured as a takeover or completed using one of the mechanisms permitted under the Code.

9. Having considered a number of applications for exemption under the published policy, the Panel considers that application of the threshold provisions referred to in (a) and (b) above are not the most appropriate thresholds for the granting of an exemption.
10. Although a scheme may appear for all intents and purposes to be a takeover, there may be a number of reasons why a scheme is the best and most appropriate mechanism for a particular takeover transaction. The requirement for "clear and compelling reasons" referred to in paragraph (b) above is a difficult test to apply. It requires the Panel to assess the suitability of the mechanism that parties have chosen to use to give effect to a change of control in particular circumstances. The Panel is not comfortable in determining that issue, particularly given that a scheme is a legitimate statutory process.
11. The Panel considers that instead of applying the threshold provisions referred to in (a) and (b) above it should focus solely on how the Code applies to the particular scheme of arrangement that the parties have elected to use and consider any proposed exemption in accordance with the Panel's guidance note The Takeover Panel's Exemption Power (January 2005). As stated in the Panel's guidance note, the Panel will in deciding whether an exemption is appropriate consider whether compliance with the Code is possible and whether compliance would create an inappropriate, unreasonable or unintended result.
12. In the context of the Panel's approach to exemptions for schemes of arrangement it is important to note that the Panel's policy is aimed at schemes which cannot proceed without some form of exemption. The policy is not aimed at schemes which can proceed without the benefit of an exemption. In those situations an exemption would not be consistent with the objectives of the Code and would not be granted.