On 13 July 2018, the Securities and Futures Commission (SFC) released its conclusions on the consultation paper on proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs (Codes) published in January 2018 (see our previous client alert of 24 January 2018).
The amended Codes, which have adopted most of the proposals, have taken immediate effect following release of the conclusions paper on 13 July 2018.
The amendments include, among other things:
- increasing the voting approval threshold for whitewash waivers to 75% (but this new 75% voting threshold will not be applied to the underlying transactions as originally proposed);
- empowering the Takeovers Panel to require compensation to be paid to shareholders who have suffered as a result of a breach of certain provisions of the Takeovers Code;
- introducing measures to protect minority shareholders of companies incorporated in jurisdictions with no compulsory acquisition rights (such as the Mainland) to be delisted in Hong Kong through a general offer;
- changes to the definition of “associate”; and
- changes to the timing and method of dealing disclosures.
Increasing the voting threshold for whitewash waivers
As a whitewash waiver would result in a person obtaining or consolidating control without making a general offer, the SFC believes that a higher voting threshold should be adopted. Therefore, the independent shareholders’ approval threshold for whitewash waivers has been increased from a simple majority to 75%. This new threshold would be in line with the voting approval threshold applicable to off-market share buy-backs and privatisations.
The Takeovers Code has also been amended to include an explicit requirement that separate resolutions should be put to vote by independent shareholders for approving the underlying transaction(s) and the whitewash waiver. It was originally proposed that the new 75% voting approval threshold would also apply to the underlying transaction(s). However, having recognised that this might give rise to a possible anomaly between the voting requirements in the Listing Rules and the Takeovers Code, the SFC decided to allow the underlying transaction(s) to remain subject to a simple majority vote. That means, if independent shareholders approve the resolution in relation to the underlying transaction but disapprove the whitewash waiver resolution, the underlying transaction would still be able to proceed coupled with a general offer.
Empowering the Takeovers Panel to make compensation rulings
A new provision has been added to the Introduction to the Codes to provide the Takeovers Panel with an explicit power to make compensation rulings against persons who have breached some of the provisions of the Takeovers Code which relate to the obligation to make an offer on terms prescribed by the Takeovers Code in order to provide financial redress to shareholders or former shareholders who have suffered as a result of the breaches.
Introducing measures to protect minority shareholders in delistings through general offer
If an offeror intends to delist the offeree company following a general offer, in addition to the shareholders’ approval requirements, there is a requirement that a delisting cannot become effective until the offeror is able to exercise, and exercises its right of compulsory acquisition. This requirement ensures that passive minority shareholders will not find themselves holding illiquid shares in an unlisted and potentially non-public company that is not protected by the Takeovers Code. The SFC has granted waivers from compliance with this requirement in cases involving offeree companies incorporated in jurisdictions which do not afford compulsory acquisition rights to an offeror (such as the Mainland).
With a view to protecting minority shareholders of such companies, the SFC amended the Takeovers Code to provide that in considering whether to grant a waiver of the requirement, the SFC will normally require the offeror to put in place arrangements such that:
- the offer will remain open for acceptance for a longer period;
- all shareholders who have not yet accepted the offer will be notified in writing of the extended closing date and the implications if they choose not to accept the offer; and
- the resolution to approve the delisting is subject to the offeror having received valid acceptances amounting to 90% of the disinterested shares.
Changes to the definition of ‘associate”
The definition of “associate” has been amended to eliminate overlap and potential inconsistencies that arise from similarities between the definition of associate and the definition of acting in concert. The changes include:
- Class (1) (group companies): Amended to “any person acting in concert with the offeror, potential offeror or the offeree company”.
- Class (2) (banks, financial advisers and other professional advisers): Scope narrowed so that it covers only financial advisers and other professional advisers of companies in the same group as an offeror, potential offeror or the offeree company.
- Class (3) (directors): Scope narrowed to remove the reference to directors of associated companies.
- Class (4) (pension funds etc): Scope narrowed so as to cover only pension funds, provident funds and employee share schemes of the parent, subsidiaries and fellow subsidiaries of an offeror, potential offeror and the offeree company.
- Class (5) (fund managers): Replaced by a new class covering exempt principal trader and exempt fund manager which is controlling, controlled by or under the same control as the financial and other professional adviser (including a stockbroker) of an offeror, potential offeror or the offeree company, its parent, subsidiaries and fellow subsidiaries.
- Class (7) (company having material trading arrangement with an offeror or the offeree company): Deleted.
Changes to the timing and method of dealing disclosures
The deadline for submitting dealing disclosures has been extended from 10:00 a.m. to 12:00 noonon the business day following the date of the transaction (or 12:00 noon on the second business day following the date of the transaction for dealings in the US time zones).
The requirement of making separate disclosures to the offeror, offeree company or their financial advisers has been removed. That means, persons making dealing disclosures are only required to file the disclosure forms with the SFC using the Rule 22 Dealing Disclosure Online Submission system which can be accessed from the SFC website. The prescribed disclosure forms have been revised in light of the changes to, among other things, the definition of associates as mentioned above. The revised forms should be used for submissions made from 13 July 2018 onwards.
Other miscellaneous amendments
- Dealings with the Takeovers Executive, Takeovers Panel and Takeovers Appeal Committee - Clarify that parties must provide the Takeovers Executive, the Takeovers Panel and the Takeovers Appeal Committee with all relevant information which they are aware of, and correct or update the information if it changes, to facilitate informed decision making.
- Compliance rulings - Clarify the power of the Takeovers Executive and the Takeovers Panel to give directions to restrain certain actions being taken or otherwise to secure compliance with Code requirements.
- Disciplinary proceedings and remedial / compliance rulings - Allow the Takeovers Panel to impose remedial measures as well as appropriate sanctions in all disciplinary matters.
- Announcement of number of relevant securities in issue - Clarify the scope of disclosure of holdings and dealings in relevant securities to cover relevant securities of the company whose securities (instead of the offeror’s securities) are to be offered as consideration for the offer.
- (For REITs) Disclosure of shareholdings and dealings in the offeree board circular - Extend the disclosure obligations to the trustee and management company of the offeree company which is a REIT.
- Class (5) of the presumption of acting in concert - Add express exclusion of exempt fund managers.
- Certificates of truth, accuracy and completeness -Include reference to the filing form that contains a statement by the applicant certifying the truth, accuracy and completeness of statements contained in the submission application.
- Meetings and materials used in meetings - (1) Provide that the safeguards and disciplines in Note 3 to Rule 8.1 (i.e. requiring the presence of a financial adviser and a confirmation to the Takeovers Executive thereafter as to whether any material new information had been disclosed) also apply equally to information released to the media; (2) make it clear that the term "meetings" encompasses meetings held by telephone and other electronic means, as well as in-person meetings; and (3) clarify that materials that are distributed at meetings with shareholders, analysts, brokers or other persons interested in the offer, or with the media, should be fairly presented. Such materials would not be regarded as "documents" for the purposes of Rule 12.1, but the financial adviser would need to confirm that the materials do not contain any material new information or significant new opinion.
- Confirmation as to publication, no material change and translation - Codify the existing practice of requiring submission of written confirmations of publication and translation following the publication of a Code document.
- References to Telecommunications Ordinances - (1) The definition of "CA" (i.e. Communications Authority) in the Definitions section of the Codes is deleted; and (2) references to CA consents are replaced by regulatory approvals.
- Setting aside "no extension" and "no increase" statements - (1) Clarify that the offeror is not just free to extend its offer, but is also free to increase its offer if a competitive situation arises; and (2) extend an offeror’s right to set aside a “no extension” or “no increase” statement to other situations provided that the reservation of the right to set aside these statements does not depend solely on subjective judgements by the offeror or its directors.
- Results announcements - (1) Require disclosure in poll results announcements of not only the numbers of shares of each class voted for and against a resolution, but also the percentage of the relevant class of share capital which those numbers represent; and (2) provide that, in the case of a scheme of arrangement, (i) the requirement to disclose the number of shareholders voting for and against only applies to a scheme subject to the headcount test, and (ii) the number of CCASS Participants instructing HKSCC Nominees to vote for and against the resolution and the number of shares voted by such CCASS Participants should be disclosed in the poll results announcements of schemes of arrangements subject to the headcount test.
- Conditions should not be subjective - Remove reference to “subjective” and provide that it is not acceptable for an offer to be made subject to conditions which depend on judgements by the offeree company.
- Six-month delay before acquisition above offer price - Reflect the interpretation set out in Practice Note 18 that Rule 31.3 applies equally to offers that are unconditional at the outset, but not just offers that have become or been declared unconditional after the posting of the offer document.
- Views of offeree board - Reflect the practice that the offeree board circular should include (a) the advice of the independent committee of the offeree company board; and (b) the advice of the independent financial adviser.
- Financial information - (1) Allow offeree companies or offerors (as the case may be) which are listed on the Hong Kong Stock Exchange to make reference to their financial information published in accordance with the Listing Rules in the offeree board circular or offer document (as the case may be); and (2) bring the relevant accounting terminology used in the schedules to the Codes in line with the latest accounting standards and conform to certain amended requirements of the Listing Rules.