12. Communication with shareholders, the press and the public
- 12.1 Profit forecasts
- 12.2 Other statements
- 12.3 Meetings and telephone calls
- 12.4 Statements to the Press
- 12.5 Summary: seek advise
The Takeovers Code sets out detailed requirements to ensure that profit forecasts and valuations made by either side during an offer are properly verified. These rules apply not only to the more usual form of forecasts and valuations set out in a document, but may also apply to any informal or unguarded statement, for example “profits have grown this year”. Where such statements cannot be properly verified, the Executive will usually insist that they are withdrawn. For this reason great care should be taken not to make a statement which may, unintentionally, be treated as a profit forecast or valuation.
Those involved in an offer must take care not to issue statements which might mislead shareholders or the market or create uncertainty.
The Takeovers Code restricts the extent to which parties to an offer may contact the Offeree’s shareholders to induce them to accept or reject the offer. Proposed meetings or telephone calls should therefore be carefully discussed in advance with professional advisers.
The directors of the Offeror and the Offeree should exercise great care when having any conversations with journalists. There is always the risk that remarks may be misunderstood or misattributed, which may lead to a requirement to clarify or withdraw by the Executive. In particular, discussions relating to sensitive subjects, such as future profits, prospects, and asset values should be avoided.
Given the importance of the above issues, it is vital that the directors of the Offeror or the Offeree consult their advisers before speaking to shareholders or to the press.
13. Duties of the Board
The directors of the Offeror and the Offeree will, under Hong Kong company law, owe various duties to the relevant company and to its shareholders. In addition, the directors will have specific responsibilities under the Takeovers Code.
- 13.1 Legal responsibilities
- 13.2 General Takeovers Code responsibilities
- 13.3 Preparation of documentation
- 13.4 Responsibility statements
- 13.5 Independent committee of the board
- 14.1 Legal responsibilities
- 14.2 Restrictions on dealings during the offer
- 14.3 Restrictions on dealings during securities exchange offers
- 14.4 Dealings after termination of discussions
- 14.5 Disclosure of dealings
- relevant securities of the Offeree: and
- in the case of a securities exchange offer only, relevant securities of the Offeror or of another company whose securities will be offered as consideration for the offer.
any person acting in concert with an Offeror, potential Offeror or Offeree;
any financial and other professional adviser (including a stockbroker) of the parent, subsidiaries and fellow subsidiaries of an Offeror, potential Offeror or Offeree, including persons controlling, controlled by or under the same control as such financial and other professional advisers (other than exempt fund managers and exempt principal traders covered in class (5) below). A holding of 30% or more of the voting rights of a company is the normal test of “control”;
- the directors (together with their close relatives, related trusts and companies controlled by any of the directors, their close relatives and related trusts) of any subsidiary or fellow subsidiary of an Offeror, potential Offeror or Offeree;
- the pension funds, provident funds and employee share schemes of the parent, subsidiaries and fellow subsidiaries of an Offeror, potential Offeror or Offeree;
- any exempt principal trader or 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 Offeree ; and
- a person who, or who as a result of a transaction, owns or controls 5% or more of any class of the relevant securities of an Offeror, potential Offeror or Offeree.
- the Offeree’s securities which are the subject of the offer or which carry voting rights;
- equity shares of the Offeree;
- in a securities exchange offer, equity shares of the Offeror or of another company whose securities are to be offered as consideration;
- securities of the Offeror or of a company whose securities are to be offered as consideration having substantially the same rights as any securities to be issued as consideration for the offer; and
- securities carrying conversion or subscription rights into any of the foregoing; and
- options and derivatives in respect of any of the foregoing.
The duties owed by directors of the Offeror or the Offeree in law can be summarised as: to act bona fide in the interests of the company (the interests of the company being a question on which the directors are generally free to decide); to act for proper, and not “collateral” purposes; to avoid conflicts of interest with the company, not to make secret profits and to exercise skill and care in performance of their duties. In addition to their duties to the company, the directors have a duty to be honest and not to mislead the shareholders of the company when giving advice.
In addition to these legal responsibilities, the Takeovers Code requires each director of a company involved in an offer to ensure, so far as he is reasonably able, that the Takeovers Code is complied with during the conduct of an offer. The Takeovers Code recognises that a board of directors may delegate the day to day conduct of an offer to individual directors or to a committee of directors. However, the board as a whole must ensure that proper arrangements are in place to enable it to monitor the conduct of an offer so that each director fulfils his obligations under the Takeovers Code.
Documents and advertisements issued in connection with an offer must be prepared with the highest standards of care and accuracy. It is a specific requirement of the Takeovers Code that the directors take responsibility for each document and that the document itself contains a statement to that effect (Rule 9.3). Directors cannot, of course, be expected to know personally that all the detailed information contained in the offer documentation is accurate in all material respects. In relation to much of the detail, it may be sufficient for directors to avoid any liability, both under the law and under the Takeovers Code, if they ensure that an appropriate procedure has been established and followed for checking the accuracy of the information concerned. When detailed supervision of any document or advertisement has been delegated to a committee of the board of the Offeror or the Offeree, each of the remaining directors must reasonably believe that the persons to whom supervision has been delegated are competent to carry it out. Moreover, the directors should be satisfied that, where any employee or adviser has been instructed to check the accuracy of any part of the offer documentation, it is reasonable for that person to be given the task having regard to the nature of information concerned and to the extent to which it may require special knowledge of the company’s affairs. Further, the person concerned must be given access to any necessary documents, and the opportunity to discuss any points arising with any of the company’s officers and advisers. Although the company’s financial and legal advisers will co-ordinate the preparation of the offer documentation generally, it is important that the directors should appreciate their own responsibility to satisfy themselves that the procedure for ensuring the accuracy of the contents is in order.
Each director will be asked to sign a form of responsibility statement addressed to the Offeror or the Offeree, as appropriate, and its financial advisers. Under this responsibility statement, the director will take responsibility, as required by the Takeovers Code, for an “approved document” that is, a document or announcement which has been approved by the board or a committee of the board and of which he has not expressed disapproval.
The board of an Offeror must obtain independent advice on an offer being made which is a reverse takeover or when the directors face a conflict of interest (Rule 2.4). The advice should be as to whether or not the offer is in the interests of the Offeror’s shareholders and must be obtained before the offer is announced. The advice is required to be sent to the Offeror’s shareholders as soon as practicable, and if a general meeting of the Offeror is to be held to approve the offer, at least 14 days before the date of the meeting.
A conflict of interest may exist where there are significant cross-shareholdings between the Offeror and Offeree, when the companies have a number of directors in common or a common substantial shareholder. The Executive will normally waive the requirement for independent advice where a substantial shareholder is not acting in concert with the Offeror or the directors of the Offeree.
Dealings in securities by parties to an offer and their associates during the course of an offer, or even when one is in contemplation, may have a number of consequences. Some may simply require disclosure; others may have important consequences for the offer itself; some may be prohibited and amount to a breach of the Takeovers Code by the parties and their advisers and any persons acting in concert with any of them.
During an offer period, the Offeror and persons acting in concert with it must not sell any securities of the Offeree except with the prior consent of the Executive and following the giving of 24 hours public notice that such sales may be made. The Executive will not normally grant consent for sales particularly where a mandatory offer is being made under Rule 26. Sales below the value of the offer are not permitted. The Offeror and persons acting in concert with it will not be able to make further purchases after an announcement that sales may be made.
Where the consideration under an offer includes securities of the Offeror or a person acting in concert with it, neither the Offeror nor any person acting in concert may deal in such securities or conduct an on-market buy-back of such securities during the offer period.
If discussions are terminated or the Offeror decides not to proceed with an offer after an announcement has been made that offer discussions are taking place, or that an offer or approach is contemplated, no dealings in securities (including convertible securities, warrants, options and derivatives of such securities) of the Offeree may be made by the Offeror or persons acting in concert with it before an announcement of the termination of discussions or the Offeror’s decision not to proceed (Rule 21.4).
Securities and Futures Ordinance
Part XV of the Securities and Futures Ordinance (the SFO) requires an acquisition of an interest of 5% or more in the voting shares of a Hong Kong listed company to be disclosed to the Hong Kong Stock Exchange and the company within 3 business days. An “interest” in shares includes an interest in the underlying shares of equity derivatives. Disclosure is also required if a notifiable interest increases or decreases across a percentage level (e.g. from 6.9% to 7.1%). Once the 5% threshold is reached, the acquisition or disposal of a short position of 1% or more in the voting shares of a listed company and a change in the percentage level of a short position must also be disclosed.
The Takeovers Code
Once an announcement has been made of a proposed or possible offer, disclosure must be made of all dealings during the offer period by parties to an offer and their associates for their own account or for their investment clients in:
If a potential Offeror has been the subject of an announcement that talks are taking place (irrespective of whether or not the potential Offeror has been named) or has announced that it is considering making an offer, the potential Offeror and persons acting in concert with it must disclose dealings under Rule 22 which include the identity of the potential Offeror. (Note 13 to Rule 22).
Dealings by the Offeror, the Offeree and their respective associates for their own account or on behalf of their investment clients must be disclosed to the Executive by 12.00 noon on the business day following the date of the transaction (Rule 22). If dealings have taken place in the time zones of the United States, the deadline for disclosure is 12.00 noon on the second business day following the transaction. Disclosure must be made to the Executive in electronic form using the prescribed forms available on the SFC’s website.
Dealings by the Offeree, the Offeror, and their respective associates for their own account and for their discretionary investment clients are published by the Executive on the websites of the SFC and the Hong Kong Stock Exchange. Dealings on behalf of non-discretionary investment clients (other than the Offeree, the Offeror, and their respective associates) must also be disclosed to the Executive but the disclosure is private – it is not made publicly available.
Dealings by associates do not however need to be disclosed during the period between the date when the offer becomes or is declared unconditional in all respects and the end of the offer period.
Definition of “associates”
The associates of an Offeror, a potential Offeror and an Offeree normally include:
Definition of “relevant securities”
Relevant securities for the purposes of Rule 22 are:
The disclosure obligation relates to all dealings during the offer period.
Announcement of Number of Relevant Securities in Issue
Once an announcement of a proposed or possible offer has been made, the Offeree must publish an announcement giving details of all classes of its “relevant securities” and the number of such securities in issue (Rule 3.8).
An Offeror or potential Offeror must also announce the same details of the 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. The announcement of details of the relevant securities of the Offeror is required for both cash offers and securities exchange offers: 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 by an Offeree, Offeror or potential Offeror under Rule 3.8 must include a reminder of the requirement for associates to disclose their dealings in any securities of the Offeree. In a securities exchange offer, the Offeree, Offeror or potential Offeror must also remind their associates to disclose their dealings in any relevant securities of the Offeror or potential Offeror (or of the company whose securities will be offered as consideration for the offer).
15. Restrictions Following Offers
Where an offer has been withdrawn or has lapsed, neither the Offeror nor any person who acted in concert with the Offeror nor any person who subsequently acts in concert with any of them, may within 12 months from the date of withdrawal or lapse of such offer do either of the following, without the consent of the Executive:
make an offer for the Offeree; or
acquire any shares of the Offeree resulting in an obligation to make a mandatory offer under Rule 26.
16. Compulsory Purchase Requirements under the Companies Ordinance
- 16.1 Purchase of the Minority’s Shareholding
- 16.2 The Minority’s Right to be Bought Out
Section 693 of the Companies Ordinance (Cap. 622) allows an Offeror to compulsorily acquire the remaining shares following a takeover offer made for all the shares of the Offeree (or all the shares of a particular class) not already held by the Offeror.
Section 693 enables an Offeror who has acquired (or contracted unconditionally to acquire) at least 90% in number of the shares to which the offer relates within 4 months of posting the initial offer document, to give notice to the remaining shareholders that it desires to acquire their shares (“squeeze out notice”). The Offeror must give this notice before the earlier of: (i) three months after the end of the offer period of the takeover offer; and (ii) 6 months from the date of the takeover offer (section 694(1) Companies Ordinance).
Within 2 months of receiving such notice, a shareholder can apply to court for an order that the Offeror is not entitled to acquire the shares or for an order varying the terms of the acquisition. If there is no such application, the Offeror is bound to acquire the shares on the terms of the takeover offer and must, within two months from the date of compulsory acquisition notice, send a copy of the compulsory acquisition notice to the Offeree together with the necessary instruments of transfer and the consideration; the Offeree must then register the Offeror as holder of those shares.
Where an Offeror is unable to achieve the 90% threshold for giving squeeze-out notices due to it being unable to trace one or more shareholders related to the offer, it can apply to court for authorisation to give squeeze out notices (section 693(4) and (5)). The court will need to be satisfied that the Offeror made reasonable enquiries in its efforts to trace relevant shareholders and that the consideration offered was fair and reasonable. The court will grant authorisation only if it considers it just and equitable to do so, having regard, in particular, to the number of shareholders who have been traced but not accepted the takeover offer.
Alternatively, the holder of any shares to which the offer relates may require the Offeror to acquire their shares. Section 700 of the Companies Ordinance provides that where the Offeror has by virtue of acceptances of the takeover offer, acquired or contractually agreed to acquire at least 90% in number of the shares in the Offeree before the end of the offer period, a holder of shares who has not accepted the offer may by letter addressed to the Offeror require it to acquire his shares.
Where shareholders are entitled to require the Offeror to acquire their shares under section 700, the Offeror must give notice to relevant shareholders of their rights under that section and of the period during which those rights are exerciseable, unless it has given notice that it wishes to acquire the shares under section 693 (section 701 Companies Ordinance). That notice must be given within one month of the section 700 rights arising. A shareholder must exercise his right to require the Offeror to purchase his shares within 3 months after the later of: (i) the end of the offer period; and (ii) the date of the Offeror’s notice.
Where the shareholder exercises his right to be bought out, the Offeror is entitled and bound to acquire the shares on the terms of the offer or on such terms as it may agree with the shareholder.
17. Delisting following a general offer
Where it is proposed that an Offeree will be delisted following a general offer, the resolution to approve the delisting must be approved by 75% of the votes of disinterested shareholders and the number of shares voted against the resolution must not exceed 10% of the votes of all disinterested shareholders. A further condition to a delisting from the Hong Kong Stock Exchange is that the Offeror must be entitled to exercise, and must exercise, its rights of compulsory acquisition. (Rule 2.2) The purpose of the latter condition is to ensure that passive minority shareholders are not left holding illiquid shares in an unlisted company.
Where companies incorporated in jurisdictions that do not afford compulsory acquisition rights to an Offeror (such as the PRC) seek delisting following a general offer, the Executive will require them to put in place arrangements to protect minority shareholders in order to obtain a waiver from the compulsory acquisition rights condition. The arrangements required to be put in place are intended to provide shareholders with the greatest opportunity to exit their investment and require that:
when the offer becomes or is declared unconditional in all respects, the offer must remain open for a longer period than normally required by Rule 15.3;
shareholders who have not yet accepted the offer must 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 must be subject to the Offeror receiving valid acceptances amounting to 90% of the disinterested shares.
Any offer will involve the full participation of the boards of the Offeror and the Offeree and their advisers. It is important that, during the offer, the board of each Offeree should be fully aware of the progress of matters and of their responsibilities under the Takeovers Code and under the general law. They should also ensure that their advisers are consulted at all stages, and in particular before entering into any dealings or similar transactions. In addition, full advice should be sought before any statements are made to the public, shareholders or the press.
This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.
 The right to compensation applies to breaches of Rules 13, 14, 16, 23, 24, 25, 26, 28, 30 and 31.3.
 Section 13.13 of the Introduction to the Takeovers Codes.
Note 4 to Rule 26.
iPractice Note 20 – Guidance note on announcements and documents under the Codes on Takeovers, Mergers and Share Buy-backs at paragraph 18.
Hong Kong Code on Takeovers and Mergers
Securities and Futures Commission (SFC)
Rules 26 of the Hong Kong Takeovers Code
Persons acting in concert
Hong Kong Companies Ordinance
Takeovers and Mergers Panel of the SFC of Hong Kong
Takeovers Appeal Committee of the SFC of Hong Kong
The Stock Exchange of Hong Kong