It is clear from some recent queries that it would be useful for us to clarify the application of Guidance Note 3, “Non-controlling Interests in a Merged Business effected through a Dual Headed Structure”.
GN3 was introduced to deal with merged businesses jointly managed and controlled by two or more listed parent companies, one of which is listed overseas. The key feature of such dual headed structures (DHSs) is that the UK listed issuer could hold only a non-controlling interest in the merged business. The assets of the UK listed company could accordingly comprise simply a minority interest in the combined business, which will normally be equity accounted in the issuer’s financial statements. The requirements of GN3 seek to ensure that the UK listed company always exercises a minimum level of control over the merged business. So, it must hold at least 30% of the merged business, and must also demonstrate that it has joint control at the operational level through, for instance, a deadlocked board or a shareholder agreement. The DHSs contemplated by GN3 are now very rare, and seem to have been largely superseded by dual listed companies (DLCs). In a DLC, the two companies enter into an equalisation agreement and, following the transaction, will each have identical boards. The UK-listed limb of the DLC does not own a defined stake in a single merged business, and therefore the requirement for a minimum 30% interest does not arise. The equalisation agreement does serve to ensure that shareholders in each company have equivalent voting and dividend rights over all the assets of both companies. The interests of both sets of shareholders are accordingly aligned, and are protected by a single body of directors constituting the boards of both companies. DLCs are very different from DHSs and it is not appropriate to apply GN3 in these circumstances. Besides, each new DLC structure we have considered to date has had unique features that have required detailed consideration. So, it is not possible to provide a useful guidance note about DLCs and each will be considered case by case. We would urge anyone contemplating either a DLC or a DHS to contact us at an early stage to discuss the detail of the transaction. http://www.fsa.gov.uk/pubs/ukla/list_may03.pdf