Takeovers – Small Code Companies Exemption 2015

After some spirited lobbying by elements within the SME sector, the Takeovers Panel has granted a class exemption that applies to allotments of shares by small unlisted companies. The purpose of the exemption is to lower disproportionate cost barriers to capital-raising by these companies. These costs include the costs of holding a shareholders’ meeting to approve an allotment, obtaining an independent adviser’s report, and obtaining legal advice to facilitate the process.

The effect of the exemption is to allow unlisted companies with total assets of $20million or less to opt out of Code compliance – for the relevant transaction. The exemption applies only to share issues and only if the company first meets 2 main requirements:

• company’s Board must resolve that, in its opinion, opting out is in the best interests of the company; and
• the company must have given shareholders a disclosure document and an opportunity to object to the opt-out and require full Code compliance.

This exemption will allow small code companies to issue new shares without being constrained by 20% ‘no fly zone’ in the Takeovers Code.

Scope for objections

The effect of the exemption is to overcome the problem that is a feature of the SME landscape, whereby SMEs that are Code companies (having 50 or more shareholders and 50 or more share parcels) are constrained in their ability to raise capital in circumstances where the allotment of the new shares would result in a shareholder (together with his or her associates) from holding or controlling more than 20% of the voting rights in a code company, unless:

• shareholder approval is obtained; or
• a takeover offer is made.

However, a feature of the new exemption is that within 28 days of the Board resolution (to opt-out), a disclosure document must be sent to shareholders – who then have an objection period (of 21 days starting on the date the disclosure document is sent) to object in writing to the opting-out.

If objections are received from the holders of 5% or more of the company’s free float (which excludes the voting rights of those who will rely on the exemption to increase their holdings in the company, together with their associates) – then the Code must be complied with. Typically, this would require a shareholder meeting to be convened and an independent adviser’s report obtained.

If the threshold number of objections are not received in the 21-day period – then the allotment may proceed, but must be completed before the end of 90 days of the Board resolution.

Observations

Whilst the new exemption will reduce the costs of capital-raising for some SMEs that are code companies, the combined effect of the need to:

• prepare a disclosure document; and
• wait for the expiry of the objection period,

still limits the usefulness of the exemption. In particular, it hampers the ability of small code companies to raise capital quickly – such as in an emergency.

There will also be some disappointment that the Panel did not treat some broadly comparable transactions in the SME space as equally deserving of an exemption (particularly share buy-backs) so that capital restructurings by SMEs did not received similar concessionary treatment.

At the same time, the Panel seems to freely acknowledge that the constraints and costs imposed on SMEs by the Takeovers Code mean that (to pick one high-profile example) the burgeoning number of new companies attracting investment via crowd-funding will seek to avoid the application of the Code by using non/limited voting shares or nominee structures.

This seems illogical and looks to some observers as though the Panel is prepare to turn a blind eye to the allegation that participants in what is an exciting new development in small-scale fund-raising are being deprived of the protections of the Takeovers Code through the use of structures that may (arguably) be the subject of some complaint and risk jeopardising confidence in crowd-funding as an avenue for raising ‘stepping-stone’ capital.

As a result, whilst the Panel should be applauded for taking this first step to liberalisation – I hope that it is quickly followed by further extensions of the policy grounds that underpin the exemption.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.