CODEWORD

The Takeovers Code is concerned with transactions that cause a person to become the holder or controller of an increased percentage of voting rights in a Code company. The Code would be ineffectual if it concentrated only on voting rights held or controlled by a particular company or individual. The Code includes the concept of “association” so that when two or more associated parties acquire ownership of, or control of, voting rights above 20% in a Code company the fundamental rule is triggered. It is an anti-avoidance mechanism.

Key rules of the Code relating to association

The key rules of the Code relevant to association are rule 4 (association) and rule 6 (the fundamental rule).

Rule 6(1)(a) provides that a person may not become the holder or controller of an increased percentage of voting rights in a Code company other than by using one of the exceptions in rule 7 unless, after that event that person and that person’s associates hold or control in total not more than 20% of the voting rights in the Code company.

The relevant person has to become the holder or controller of an increased percentage of voting rights in a Code company before rule 6(1) is triggered. The most common method by which a person becomes the holder or controller of voting rights is an acquisition of shares. However, there are other methods which do not involve an acquisition transaction, such as an agreement where a Code company shareholder gives another person control over its voting rights.

“Associate” is defined in rule 4(1) of the Code. Under rule 4(1) one shareholder (“A”) will be an associate of another shareholder (“B”) if:

• A and B act jointly or in concert; or
• A acts, or is accustomed to act, in accordance with the wishes of B; or
• A and B are related companies; or
• A and B have a business relationship, personal relationship, or an ownership relationship such that they should, under the circumstances, be regarded as associates; or
• A is an associate of a third person who is an associate of B and the nature of the relationships between A, the third person and B (or any of them) is such that, under the circumstances, shareholder A should be regarded as an associate of shareholder B.

Other than in the case of related companies (which is a term defined in the Companies Act 1993) the definition of associate is an open-ended rule that turns on the particular facts and the surrounding circumstances.

When determining whether an association is created by any arrangement or agreement, the Panel considers all facets of the relationship between the parties. These may include, but are not limited to:

• the parties’ relationship before entering into the arrangement;
• the circumstances around the negotiation of, and entry into, the arrangement;
• the existence of any other agreements, commitments, understandings or expectations; and
• any relevant common interests of the parties.

A relationship is particularly likely to be considered one of association for Code purposes where it concerns the future control of voting rights of the Code company.

Individual elements on their own may not constitute an associate relationship. For example a relationship of trust and co-operation may not in itself determine associate status. However the combined elements of a relationship may strongly support a finding that in the circumstances parties should be regarded as associates. The Panel considers each element separately and then as a whole to assess the combined impact.

Associate status cannot be negated merely by a contractual acknowledgement that a particular party will not control the voting rights of another party.

Some situations which the Panel has considered show the Panel’s interpretation of the term “associate”. These are outlined below.