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Status: You are viewing the version of the handbook as on 2009-03-31.

LR 10.2 Classifying transactions

Classifying transactions

LR 10.2.1GRP

A transaction is classified by assessing its size relative to that of the listed company proposing to make it. The comparison of size is made by using the percentage ratios resulting from applying the class test calculations to a transaction. The class tests are set out in LR 10 Annex 1 (and modified or added to for specialist companies under LR 10.7).

LR 10.2.2R

Except as otherwise provided in this chapter, transactions are classified as follows:

  1. (1)

    Class 3 transaction: a transaction where all percentage ratios are less than 5%;

  2. (2)

    Class 2 transaction: a transaction where any percentage ratio is 5% or more but each is less than 25%;

  3. (3)

    Class 1 transaction: a transaction where any percentage ratio is 25% or more; and

  4. (4)

    Reverse takeover: a transaction consisting of an acquisition by a listed company of a business, an unlisted company or assets where any percentage ratio is 100% or more or which would result in a fundamental change in the business or in a change in board or voting control of the listed company.

Certain reverse takeovers to be treated as class 1 transactions

LR 10.2.3R

A reverse takeover is to be treated as a class 1 transaction if all of the following conditions are satisfied in relation to the transaction:

  1. (1)

    none of the percentage ratios resulting from the calculations under each of the class tests in LR 10 Annex 1 (as modified or added to by LR 10.7 where applicable) exceed 125%;

  2. (2)

    the subject of the acquisition is in a similar line of business to that of the acquiring company;

  3. (3)

    the undertaking the subject of the acquisition complies with all relevant requirements of LR 6;

  4. (4)

    there will be no change of board control of the listed company; and

  5. (5)

    there will be no change of voting control of the listed company.

Indemnities and similar arrangements

LR 10.2.4RRP
  1. (1)

    Any agreement or arrangement with a party (other than a wholly owned subsidiary undertaking of the listed company):

    1. (a)

      under which a listed company agrees to discharge any liabilities for costs, expenses, commissions or losses incurred by or on behalf of that party, whether or not on a contingent basis;

    2. (b)

      which is exceptional; and

    3. (c)

      under which the maximum liability is either unlimited, or is equal to or exceeds an amount equal to 25% of the average of the listed company's profits (as calculated for classification purposes) for the last three financial years (losses should be taken as nil profit and included in this average);

    is to be treated as a class 1 transaction.

  2. (2)

    Paragraph (1) does not apply to a break fee (see LR 10.2.7 R which deals with break fees).

LR 10.2.5GRP

For the purposes of LR 10.2.4R (1), the FSA considers the following indemnities not to be exceptional:

  1. (1)

    those customarily given in connection with sale and purchase agreements;

  2. (2)

    those customarily given to underwriters or placing agents in an underwriting or placing agreement;

  3. (3)

    those given to advisers against liabilities to third parties arising out of providing advisory services; and

  4. (4)

    any other indemnity that is specifically permitted to be given to a director or auditor under the Companies Act 20061.

    1
LR 10.2.6GRP

If the calculation under LR 10.2.4R (1) produces an anomalous result, the FSA may disregard the calculation and modify that rule to substitute other relevant indicators of the size of the indemnity or other arrangement given, for example 1% of market capitalisation.

LR 10.2.7RRP
  1. (1)

    A break fee or break fees payable in respect of a transaction are to be treated as a class 1 transaction if the total value of the fee or the fees in aggregateexceeds:

    1. (a)

      if the listed company is being acquired, 1% of the value of the listed company calculated by reference to the offer price; and

    2. (b)

      in any other case, 1% of the market capitalisation of the listed company.

  2. (2)

    For the purposes of paragraph (1)(a):

    1. (a)

      the 1% limit is to be calculated on the basis of the fully diluted equity share capital of the listed company;

    2. (b)

      any VAT payable is to be taken into account in determining whether the 1% limit would be exceeded (except to the extent that the VAT is recoverable by the listed company); and

    3. (c)

      for a securities exchange offer, the value of the listed company is to be fixed by reference to the value of the offer at the time the transaction is announced (and is not to be taken as fluctuating as a result of subsequent movements in the price of the consideration securities after the announcement).

Issues by major subsidiary undertakings

LR 10.2.8RRP

If:

  1. (1)

    a major subsidiary undertaking of a listed company issues equity shares for cash or in exchange for other securities or to reduce indebtedness;

  2. (2)

    the issue would dilute the listed company's percentage interest in the major subsidiary undertaking; and

  3. (3)

    the economic effect of the dilution is equivalent to a disposal of 25% or more of the aggregate of the gross assets or profits (after the deduction of all charges except taxation) of the group;

the issue is to be treated as a class 1 transaction.

LR 10.2.9RRP

LR 10.2.8 R does not apply if the major subsidiary undertaking is itself a listed company.

Aggregating transactions

LR 10.2.10RRP
  1. (1)

    Transactions completed during the 12 months before the date of the latest transaction must be aggregated with that transaction for the purposes of classification if:

    1. (a)

      they are entered into by the company with the same person or with persons connected with one another;

    2. (b)

      they involve the acquisition or disposal of securities or an interest in one particular company; or

    3. (c)

      together they lead to substantial involvement in a business activity which did not previously form a significant part of the company's principal activities.

  2. (2)

    Paragraph (1) does not apply in relation to break fees.

  3. (3)

    If under this rule aggregation of transactions results in a requirement for shareholder approval, then that approval is required only for the latest transaction.

LR 10.2.11GRP

The FSA may modify these rules to require the aggregation of transactions in circumstances other than those specified in LR 10.2.10 R.

Note: If an issuer is proposing to enter into a transaction that could be a Class 1 transaction or reverse takeover it is required under LR 8 to obtain the guidance of a sponsor to assess the potential application of LR 10.