This note is prepared for the directors of the Offeror in connection with the possible acquisition of a controlling interest of at least 30% of the issued shares (“Shares”) of a company (the “Offeree”) by the Offeror from the shareholders of the Company. The purpose of this memorandum is to give a general outline of the practical and legal issues which may arise in connection with the proposed acquisition by the Offeror under the Hong Kong Code on Takeovers and Mergers (“the Takeovers Code”) where the Offeree is primary listed on the Stock Exchange of Hong Kong Limited or is regarded by the Securities and Futures Commission (“SFC”) as a ‘public company’ for the purpose of the Takeovers Code.
2. The Takeovers Code
The Takeovers Code applies to takeovers and mergers affecting companies with a primary listing of their equity securities in Hong Kong and public companies in Hong Kong. In determining whether an Offeree is a “public company” in Hong Kong, the Executive Director of the Corporate Finance Division of the SFC (“Executive”) applies an economic or commercial test, taking into account, primarily, the number of Hong Kong shareholders and the extent of share trading in Hong Kong. Other factors which the Executive will consider are the location of the head office and place of central management, the location of the business and assets, and the existence or absence of protection for Hong Kong shareholders under any statute or code regulating takeovers and mergers outside Hong Kong.
The Takeovers Code is a voluntary Code which depends on the willingness of market participants to comply with it. It is administered by the Executive and operates principally to ensure fair and equal treatment of all shareholders in relation to takeovers. Anyone in breach of the Takeovers Code may be subject to the SFC’s private reprimand, public censure, and/or issuance of a public statement which involves criticism, disciplinary action or suspension. A person who has breached specific provisions of the Takeovers Code may also be ordered to pay compensation to shareholders who suffered loss as a result of the breach.
3. General Principles
The Takeovers Code sets out 10 general principles which provide the acceptable standards of commercial conduct in relation to takeovers and mergers in Hong Kong including the following:-
- all shareholders are to be treated equally;
- if control of an Offeree changes, a general offer to all other shareholders is normally required;
- during the course of an offer or when an offer is in contemplation, information made available to some shareholders must be made available to all shareholders;
- an offer should only be made after careful and responsible consideration;
- shareholders should be given sufficient information, advice and time regarding the offer;
- all persons concerned with takeovers and mergers should make full and prompt disclosure of all relevant information and take every precaution to avoid the creation of a false market and making statements which may mislead shareholders or the market;
- rights of control should be exercised in good faith and the oppression of minority shareholders is unacceptable;
- directors should have regard to the interests of the shareholders as a whole;
- the board of the Offeree must not take actions to frustrate a proposed bona fide offer or deny the shareholders the opportunity to decide on its merits; and
- all parties concerned with takeovers and mergers should co-operate to the fullest extent with the Executive, the Takeovers and Mergers Panel (“Panel”) and the Takeovers Appeal Committee.
4. Mandatory Offer under Rule 26
In addition to the above principles, the Takeovers Code contains 36 rules which implement the general principles. The most important rule is contained in Rule 26 relating to the making of a mandatory offer.
Rule 26 of the Takeovers Code requires a mandatory offer to be made to all the shareholders of the Offeree by the Offeror in the following circumstances, unless a waiver is granted by the Executive:
when any person (or two or more persons acting in concert) acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights of a company; and
when any person (or two or more persons acting in concert) holding not less than 30% and not more than 50% of the voting rights of a company, acquires additional voting rights that increase his or their holding of voting rights by more than 2% from the lowest percentage holding by that person (or the concert group) in the preceding 12 month period. This is commonly referred to as the ‘creeper’ provision.
Conditions of the Mandatory Offer: except with the consent of the Executive, a mandatory offer made under Rule 26 is subject to the following:
it must be made conditional only upon the Offeror having received acceptances in respect of voting rights which, together with voting rights acquired or agreed to be acquired before or during the offer, will result in the Offeror and any person acting in concert with it holding more than 50% of the voting rights. However, where the Offeror holds more than 50% of the voting rights before the offer is made, an offer made under this rule should normally be unconditional;
no acquisition of voting rights which would trigger the obligation to make a mandatory offer under Rule 26 must be made if the making or implementation of the mandatory offer would be subject to the passing of any resolution by shareholders of the Offeror, or any other conditions, consents, arrangements or regulatory approvals. Any regulatory approval required for a mandatory offer must be obtained before the general offer obligation is triggered.
Thus, if the Offeror acquires 30% or more of the voting shares of the Offeree, it must make an offer to all other shareholders for the remaining interest in cash or accompanied by a cash alternative at inot less than the highest price paid by the Offeror, or any person acting in concert with it, for shares of the same class in the Offeree during the offer period and within 6 months prior to its commencement (Rule 26.3).
An “offer period” commences when an announcement is made of a proposed offer under Rule 3.5 (Announcement of a firm intention to make an offer) or a possible offer under Rule 3.7 and extends until the later of: (i) the date when the offer closes for acceptances; (ii) the date the offer lapses; (iii) an announcement that a possible offer will not proceed; (iv) the date of an announcement of the withdrawal of a proposed offer; and (v) where the offer contains a possibility to elect for alternative forms of consideration, the latest date for making such election.
The Offeror will have to prepare a formal offer document and conduct the offer in accordance with the requirements of the Takeovers Code as discussed below.
5. Voluntary Offers
Unlike a mandatory offer, a voluntary offer may be made subject to conditions other than the acceptance condition except conditions which depend on judgments by the Offeror or the Offeree or the fulfilment of which is in their respective control (Rule 30.1). A voluntary offer may also be made conditional on an acceptance level higher than 50%. Typically, the offer document sets a minimum acceptance condition of either 50% of the issued shares or 90% of the shares not already held by the Offeror and its concert parties
A voluntary offer may be in cash or securities, although there are prescribed situations where a cash offer or a securities offer must be made to all shareholders. If the Offeror or any concert party has acquired for cash shares in the Offeree carrying 10% or more of the voting rights during the offer period or within 6 months before the start of the offer period, the general offer must be in cash, or accompanied by a cash alternative, at not less than the highest price paid for such shares (Rule 23.1(a)). Conversely, a full share offer must be made if the Offeror or any concert party has acquired shares in the Offeree carrying 10% or more of the voting rights in exchange for securities during the offer period or within 3 months before the start of the offer period (Rule 23.2).
Rule 24.1(a) further provides that if the Offeror or any person acting in concert with it has acquired shares in the Offeree in the 3 months before the start of the offer period, the voluntary offer must offer no less than the highest price paid during that period.
If the Offeror or any person acting in concert with it acquires shares in the Offeree at above the offer price during the offer period, the Offeror must increase the offer to not less than the highest price paid for the shares acquired (Rule 24.1(b)).
6. The Offer
The offer will be effected by the Offeror posting a formal offer document to the shareholders of the Company. The formal offer document will be accompanied by a form of acceptance, which shareholders who wish to accept the offer should sign and return to the Offeror. The offer document will set out the conditions of the offer. The offer will be made to acquire all the issued shares of the Offeree other than those currently owned by the Offeror and persons acting in concert with it.
The board of a company involved in a takeover offer will need to seek the advice of the following:-
- 7.1 Financial Advisers
- 7.2 Legal Advisers
- 7.3 Stockbrokers
- 7.4 Auditors
- 7.5 Press Consultants
- 7.6 See advice before any dealing
The principal role of the financial advisers to the Offeror will be to advise on the financial aspects of the offer and whether or not it is fair and reasonable. It is not only the Offeror which will require financial advisers; it is a requirement of the Takeovers Code that an independent committee of board of directors of the Offeree must obtain competent independent financial advice and make the substance of it known to its shareholders. The financial advisers will also assist in negotiating the terms of the offer.
In addition to advising on financial matters, the financial advisers may be responsible for the general conduct of the offer, the timetable, documentation and liaison with the Executive and the Panel, although these additional roles may also be performed, in whole or in part, by the legal advisers.
The legal advisers for both the Offeror and the Offeree will be primarily responsible for advising upon the legal aspects of the offer. In conjunction with the financial advisers, they will also be involved in negotiations, and be responsible for settling documentation and liaison with the Executive and the Panel.
Where they are not appointed as the financial advisers, the Offeror or the Company’s stockbrokers will need to be consulted. They will be responsible for advising upon such matters as the market perception of the offer, and liaison with major shareholders and The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).
The Offeror or the Company’s auditors will be involved in the preparation of financial and other information required to be disclosed in the documentation issued during the course of the offer.
The Offeror or the Offeree may also wish to employ a specialist firm of press or financial public relations consultants to assist in such matters as the drafting and distribution of press releases, liaison with the press and major shareholders.
As a general rule, those involved in an offer (including the directors of the Offeror and the Offeree should not deal in the securities of the Offeree or of the Offeror (including options etc.) except after taking professional advice on the specific deal in question.
8. Offeror Announcements
- 8.1 Announcement of a Firm Intention to make an Offer (Rule 3.5)
- 8.2 Announcement of Number of Relevant Securities in Issue
- 8.3 Announcement of Certain Purchases
- Make a cash offer or securities offer under Rule 23;
- Increase a cash offer under Rule 24; or
- Make a mandatory offer under Rule 26.
Once the formal terms of the offer have been agreed and any required finance put in place, the Offeror will make an announcement of a firm intention to make an offer under Rule 3.5. This announcement does not constitute the offer itself, but, under the Takeovers Code, must contain all of its terms. The announcement must also include confirmation by the financial adviser or another appropriate third party that the Offeror has sufficient resources to satisfy the offer in full. The financial adviser’s confirmation of sufficiency of financial resources must be submitted to the Executive at the same time as the first draft of the announcement of a firm intention to make an offer.
Once an announcement of a firm intention to make an offer has been made, the Offeror must, except with the consent of the Executive, proceed with the offer unless the offer is subject to the fulfilment of a specific condition which has not been satisfied (Rule 5).
An Offeror or potential Offeror must announce details of all classes of relevant securities of the Offeror (and, if relevant, the relevant securities of the company whose securities will be offered as consideration for the offer) following any announcement identifying it as an Offeror or potential Offeror (Rule 3.8). The announcement is required for both cash offers and securities exchange offers as its purpose is to allow shareholders of the Offeror to determine whether they are “associates” of the Offeror by virtue of holding 5% or more of its relevant securities and thus subject to Rule 22 dealing disclosure requirements.
An announcement must be made immediately after any acquisition of voting rights in the Offeree by the Offeror or any person acting in concert with it which gives rise to an obligation to:
The announcement must state the number of voting rights acquired and the price paid and the information required by Rule 3.5 if it has not previously been announced.
9. The Offer Document
The offer document is usually posted as soon as practicable after the formal announcement has been made and, in any event, is required by the Takeovers Code to be posted within 21 days or 35 days in the case of a securities exchange offer. The offer document will normally include the following:-
- 9.1 The Formal Offer
- 9.2 A Letter from the Offeror
- 9.3 Terms and conditions
The offer document will also set out the formal terms and conditions of the offer. As noted above, a mandatory offer under Rule 26 may only be made conditional upon the offeror obtaining shares carrying 50% or more of the voting rights in the target company. If the offeror and persons acting in concert with it hold more than 50% of the voting rights before the offer is made, an offer made under Rule 26 should normally be unconditional.
A voluntary offer may however be made subject to other conditions and may specify an acceptance level higher than 50%. In practice, in the case of a voluntary offer, the most important conditions are likely to relate to the level of acceptances required, consents and other authorisations and material changes.
Acceptances – Under the Takeovers Code, an offer must usually be made conditional upon the offeror receiving acceptances which, together with those shares already held or agreed to be acquired by it, represent 50% of the voting rights in the offeree company. In a voluntary offer, a higher acceptance level may be specified but with the ability for the Offeror to waive this if it wishes.
Consents – The offer will usually be expressed to be conditional upon obtaining various consents. Some of these may be imposed by external requirements. In addition, the conditions may refer to a number of other general regulatory requirements which the Offeror may wish to be satisfied, but will usually reserve the right to waive.
Other conditions – the Offeror will usually wish to be able to withdraw its offer if there has been a material adverse change in the Company; again this condition is likely to be waivable by the Offeror.
The Takeovers Code prevents the Offeror from framing conditions subjectively or from invoking a condition (other than the acceptance condition) that causes the offer to lapse unless the issue is material.
Other information – Finally, the offer document will contain other detailed information and terms, mainly in compliance with the Takeovers Code, but also, where the Offeror or the Offeree is listed in Hong Kong, as required by the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange. This further information will include information on the Offeror’s intentions concerning the Offeree and its employees, financial information on the Offeree, including information on how the offer is to be financed, details of shareholders and dealings by the parties and their associates, verification of profit forecasts, etc. In the case of a securities exchange offer, the offer document will need to contain additional information in relation to the securities offered for exchange and the nature and details of the company whose shares are being offered for exchange.
This will be set out in the form of a letter, usually from the Offeror’s stockbroker or merchant bank. It will include the offer price, information on the business of the Offeror and of the Company, taxation advice and the procedure for acceptance.
There will be a letter from the Board of Directors of the Offeror explaining the reasons for the offer.
10. The Offeree Board Circular
The Offeree is required to send a circular to its shareholders setting out the views of its board or of the independent committee of the board on the offer and the written advice of its independent financial adviser as to whether the offer is fair and reasonable. In an agreed offer, the Offeror and the Offeree are encouraged to combine the offer document and the offeree board circular in a composite document. If the offeree board circular is sent separately, it must be sent within 14 days of the formal offer document.
11. Offer Period
The offer must be open for a minimum period of 21 days. In addition, unless it is wholly unconditional from the outset, it must be open for a further 14 days after the first closing date on which it becomes or is declared unconditional as to acceptances. This is so that the Offeree’s shareholders who have not accepted the offer by such date have a second chance to accept the offer. The maximum period for which an offer may be open before it becomes or is declared unconditional as to acceptances is 60 days. In practice, a recommended offer is usually declared unconditional well within this timetable, although a hostile one may well be drawn out to the very end. To ensure that shareholders are given enough time to consider the merits of an offer before it finally closes, the Takeovers Code also stipulates the 39th day as the last time by which the Offeree can announce material new information (including trading results, profit or dividend forecasts, asset valuations or proposals for dividend payments or for any material acquisition or disposal or major transactions). The Takeovers Code also stipulates the last time by which the Offeror can increase its offer (the 46th day).