Takeover Panel addresses dual class share structures

The Takeover Panel is proposing the introduction of a framework for offers for companies with dual class share structures (DCSS).

This follows from the amendments to the UK Listing Rules a year ago, which permitted DCSS companies seeking a UK listing to list in the segment for equity shares of commercial companies.

The Takeover Panel is also proposing to codify existing practices relating to IPOs as well as treating tender offer share buybacks as Takeover Code offers.

What is a dual class share structure?

A DCSS company has, in addition to a class of voting ordinary shares, a class of shares (i.e. “Class B" or “special" shares) with an enhanced level of voting rights or control as compared to the ordinary shares. Typically, such shares would be held by a founder or major shareholder in order to provide some level of protection against a change of control of the company, and will be converted into ordinary shares or extinguished if specified “trigger events" occur – for example, a transfer of such shares, death of the holder, retirement/resignation of the founder, or passage of time (a so-called “time sunset").

The consultation identifies the three main types of DCSS company seen in the UK market to date:

• DCSS 1: Class B shares with multiple votes per share (on all resolutions).
• DCCS 2: A single special share conferring majority/veto rights on some or all resolutions from the point of issue.
• DCCS 3: A single special share conferring majority/veto rights on some or all resolutions from the point of a third party obtaining control of a majority of the ordinary shares.

The proposed new provisions are principles-based, to allow the Takeover Panel to apply them flexibly to different types of DCSSs.

Proposals

Mandatory offers

• The Takeover Panel proposes that if a shareholder's proportional voting rights increase  following a trigger event which results in the conversion or extinguishing of Class B shares, , this will be treated as an “acquisition" of shares by such shareholder. Consequently, this could result in an obligation to make a mandatory offer. However, it is proposed that the Takeover Panel would normally grant a dispensation from a mandatory offer obligation unless:
  • the trigger event is the expiry of a “time sunset": or
  • the shareholder had reason to believe that a trigger event (other than a time sunset) would occur when it acquired its shares in the company.

Acceptance condition

• The Takeover Panel is proposing that the acceptance condition to a contractual offer for a DCSS 1 company is subject to two tests, taking into account the voting rights position immediately before, and immediately after, the relevant Class B or special shares convert or are extinguished. Both tests would need to be satisfied for an offer to become or be declared unconditional.
• In the case of an offer for a company with an effective majority or veto right type structure (i.e. a DCSS 2 or DCSS 3 company), the special share should not be taken into account for the purposes of the acceptance condition. This is because the holder of the special share does not hold a specific and identifiable percentage of voting rights which can be counted towards the satisfaction of the acceptance condition. The Takeover Panel notes that, in practice, a person would be unlikely to make an offer for a DCSS 2 or DCSS 3 company unless it could be certain either of acquiring the special share or that the special share would be cancelled or extinguished. This is on the basis that, even if the offer was successful, the holder of the special share (and not the bidder) would be able to control the blocking and/or passing of the relevant shareholder resolutions.
• No change is proposed for takeovers structured as a scheme of arrangement. In such circumstances, the scheme will normally require separate class approvals of each class of shares.

Other Takeover Code Rules relevant to DCSS companies

• Rule 21.1 restrictions on frustrating action will not normally be triggered by an issue of Class B or special shares unless the issue takes place during a “relevant period" (i.e., following an approach or offer announcement), nor by the exercise by a shareholder (including a director) of their rights as a holder of such shares.
• Any offer to acquire or cancel the Class B or special shares is likely to constitute a special deal with favourable conditions in breach of Rule 16.1 if:
  • where the Class B shares will convert into ordinary shares upon transfer to the bidder, the price offered is above the amount derived from the applicable conversion ratio; or
  • where the enhanced voting rights of the Class B or special shares will be extinguished or cannot transfer to the bidder, the price offered is above the nominal value of the shares.
• The Takeover Panel must be consulted in such circumstances.
• Disclosures made under Rule 2.9 (announcement of numbers of relevant securities in issue) and Rule 17 (announcement of acceptance levels) in respect of an offer for a DCSS 1 company should explain the voting rights attaching to each class of the company's shares. In the case of Rule 17, a bidder should also disclose the percentage of voting rights of the company in addition to the percentage shareholdings.
• The requirement for a comparable offer under Rule 14 is unlikely to apply in many offers for DCSS companies.

IPOs

• At the time of a company's IPO that would result in it becoming subject to the Takeover Code:
  • Codification of existing practice of the requirement for a company to make appropriate disclosure in relation to the Takeover Code in its admission document. This includes an explanation of the application of the mandatory offer rule and disclosure of any person(s) that is or may become interested in shares carrying 30% or more of the voting rights of the company. The Takeover Panel must be consulted for guidance on that disclosure.
  • Codification of existing practice under which the Takeover Panel may grant a Rule 9 dispensation by disclosure to a specific shareholder in certain circumstances, provided that appropriate disclosure is made in the admission document. A Rule 9 dispensation by disclosure relates to an issue of new shares or securities in the context of a specific future event that is expected to occur, such as the exercise of share options, and is not intended as a general means of permitting a shareholder to acquire additional interests in shares in the future without incurring mandatory offer consequences.

Share buybacks

• Amending the provisions relating to the “disqualifying transactions" which prevent a “Rule 9 waiver" in relation to a share buyback, which can operate in an overly restrictive manner for companies that would otherwise wish to carry out a share buyback under their normal annual shareholder authority.
• Introduction of a requirement to disclose the maximum percentage of shares carrying voting rights in which the relevant person, or a concert party, might become interested where a company is proposing to carry out a share buyback in which the voting rights of an “innocent bystander" might be increased through a Rule 9 threshold. An “innocent bystander" for these purposes is a person who comes to exceed the limits in Rule 9.1 in consequence of a share buyback who will not normally incur an obligation to make a mandatory offer (unless that person is a director, or the relationship of the person with any one or more of the directors is such that the person is, or is presumed to be, acting in concert with any of the directors).
• Codification of the Takeover Panel's existing practice of treating a share buyback (rather than a contractual offer or scheme of arrangement) as an “offer" for Takeover Code purposes if it could result in all or substantially all of the company's shares being held by one person or a group of persons acting in concert.

Next steps

The consultation ends on 26 September 2025, with a view to a response being published by the end of 2025 and amendments coming into effect in the first quarter of 2026.

Click here for the consultation paper.