The consultation period for Consultation Paper PCP2015/2 published by the Panel on Takeovers and Mergers (the "Panel") on 14 July 2015 ended on 11 September 2015, with the rule changes expected to become effective shortly (subject to any issues arising from the consultation exercise).

The Consultation Paper is proposing amendments to widen the definition of "voting rights" in the City Code on Takeovers and Mergers (the "Code") to include restrictions and suspensions of voting rights.

"Voting rights" are currently defined in the Code as "all the voting rights attributable to the share capital of a company which are currently exercisable at a general meeting".

The Panel is proposing to make amendments to clarify that shares (other than treasury shares), which are subject to voting restrictions or to a suspension of voting rights, should still be regarded for the purposes of the Code as having voting rights which are currently exercisable at a general meeting.

Background

The definition of voting rights is particularly relevant to the Code's mandatory offer provisions (a Rule 9 offer). In brief, a person must make a mandatory offer for a company if it becomes interested in shares which carry 30% or more of the voting rights of that company, or if a person already holds an interest in shares carrying at least 30% of the voting rights and increases that interest to between 30% and 50%.

This obligation to make a mandatory offer can be waived if it arises as a result of the issue of new shares and is approved by a vote of independent shareholders in general meeting.

The Code Committee has expressed concern that the current definition of "voting rights" creates the scope for a company to issue suspended voting rights as a means of avoiding the normal application of Rule 9. The Committee has also noted that even if suspended voting rights were considered to be a legitimate means of avoiding having to make a mandatory offer, it could give rise to potential confusion in calculating percentage voting rights held by other shareholders, as well as the need for increased analysis of each such case by the Panel.

The Panel therefore wishes to make it clear that the term "voting rights" should not be regarded as a reference to whether a particular shareholder can exercise the voting rights attaching to particular shares, but to the rights attaching to the shares themselves.

Treasury shares, non-voting shares and convertible shares

The Code Committee has made it clear that it intends to exclude treasury shares from the new definition.

It has also been confirmed that the proposed amendments would have no impact on the treatment of shares which do not carry voting rights in any circumstances (or in the hands of any person), even if those shares are convertible at any time into ordinary voting shares.

Implications

If any companies to which the Takeover Code applies currently have shares in issue to which restrictions on voting rights have been applied (either set out in the articles of association, by contract or by law) or have suspended voting rights, they should consult the Panel for a ruling as to how to comply with the proposed Code changes.

This may arise, for example, if a company has issued shares with restricted voting rights (for whatever reason) which keep the relevant interest below the 30% trigger point (or even, in the case of some funds, below a lesser percentage for internal reasons), but with the terms providing that when such shares are transferred to another person the voting rights revert to a one vote per share basis.