CODEWORD

Where an exemption from the Code relates to ongoing increases of voting control over a period of time, the exemption may contain ongoing disclosure conditions that must be fulfilled throughout the duration of the increase period.

Section 2(2) of the Takeovers Act 1993 provides that a contravention of a term or condition of an exemption from the Code is a contravention of the Code. This means that a Code company’s failure to comply with any ongoing disclosure condition results in the Code company breaching the Code.

In addition, any person who has relied on the exemption to increase their voting control in the Code company, may also be in breach of the Code. This includes any increases of voting control made in reliance on the exemption prior to the breach.

An example of ongoing disclosure conditions

The Takeovers Code (Class Exemptions) Notice No 2 (2001) provides an exemption from rule 6(1) of the Code for every person who increases their voting control as a result of a Code company’s acquisition of its own voting securities (the Buybacks Exemption). Clause 4(2) provides that the Buybacks Exemption is subject to the conditions in Schedule 1 of the Class Exemptions Notice.

Clause 7 of Schedule 1 of the Class Exemptions Notice states that if the buyback takes place over a period of more than 12 months, every annual report of the company issued during the buyback must include disclosures such as a summary of the terms of the buyback, a statement as to the number of voting securities acquired by the company under the buyback, the number of voting securities that are held or controlled by the person who is increasing their voting control under the exemption (person P), and the percentage of all voting securities on issue that that number represents, etc.

Clause 8(3) of Schedule 1 provides that if the buyback takes place over a period of more than 12 months and the company has a website, then during the buyback period and up to the issue of the first annual report after the end of the buyback, the company must:

“announce on its website any aggregate increase of 1% or more in the voting securities held or controlled by person P since the date of the last disclosure or, where no prior disclosure has been made, since the date of the first aggregate increase of 1% or more in the voting securities held or controlled by person P; and maintain every such announcement on its website in a prominent position”

Failure to comply with an exemption condition is a breach of the Code

If a Code company conducting a buyback does not comply with the annual report or website ongoing disclosure conditions, the Code company will breach the Code.

Further, when an exemption condition is breached, the exemption ceases to apply and can no longer be relied upon by any person P. All increases in voting control by person P purported to be made in reliance on the exemption both before and after condition breach would result in a breach of rule 6(1) of the Code.

This is clear from the words of the Buybacks Exemption. For example, clause 8(3)(a) of the Buybacks Exemption states that during the buyback period, any aggregate increase of 1% or more must be announced on the company’s website. If any increase at any time during the buyback period is not announced on the website, the condition as a whole has not been fulfilled. As such, the Buybacks Exemption can no longer be relied on by person P at all, and any past increases by person P made in reliance on the Buybacks Exemption become breaches of rule 6(1) of the Code.

Even if person P decides to stop increasing under a buyback, but the buyback period under the exemption continues, clause 7 requires the company to continue to make the annual report disclosures, whether or not any increases took place in that year.

There are several other ongoing conditions that are required to be met during the buyback period, and in the Code itself, ongoing allotments under rule 16 and rule 19B have similar requirements, and consequences for failure to meet them, as discussed above.

Remedies

As with any breach of the Code, the Panel will take into account all relevant facts when deciding on an appropriate remedy for a breach of an exemption condition or the Code, including where a person breaches the Code as a result of the actions (or inaction) of a third party. The Panel executive is available to discuss any issues that may arise out of such a breach.