XXIII. THE HONG KONG TAKEOVERS CODE
The Takeovers Code is concerned with:
- offers for, and takeovers and mergers of, all relevant companies; and
- partial offers, offers by a parent company for shares in its subsidiary and certain other transactions where control (as defined) of a company is to be obtained or consolidated.
The provisions of the Takeovers Code are detailed, but the most significant provisions are as follows:
Mandatory Offer Requirement: Rule 26
Except where a waiver has been granted, Rule 26 of the Takeovers Code requires a mandatory offer to be made to all the shareholders of the company in the following circumstances:
- 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 shares of a company; or
- when any person (or two or more persons acting in concert) who holds between 30% and 50% of the voting shares of a company, acquires additional voting shares that increase his or their holding of voting shares by more than 2% from the lowest percentage holding by that person (or the concert group) in the previous 12 month period.
“Persons acting in concert”
A person will be taken to be acting in concert with an offeror if, pursuant to an agreement or understanding, he is actively co-operating through the acquisition of voting rights, to obtain or consolidate control of the offeree. In the absence of proof to the contrary, certain categories of persons are presumed to be acting in concert with others in the same category. The categories of persons presumed to be acting in concert include:
- a company, its parent, its subsidiaries, its fellow subsidiaries, associated companies of any of the foregoing, and companies of which such companies are associated companies; and
- a company with any directors (together with their close relatives, related trusts and companies controlled by any of the directors, their close relatives or related trusts) of it or its parent company.
Offers made under Rule 26 must be made in cash or be accompanied by a cash alternative at not less than the highest price paid by the offeror (or any person acting in concert) for shares of the offeree in the previous 6 months.
Requirements of the Takeovers Code
Rules 1 and 2 of the Takeovers Code set out the steps which should be taken by the boards of directors of the offeree and offeror companies in the course of takeover and merger transactions.
They require firstly that any offer of takeover of a listed issuer should be put in the first instance to the board of the listed issuer or its advisers before the offer is announced to the public. The identity of the offeror must also be disclosed. The board of the listed issuer must establish an independent committee of the board to make a recommendation: (i) as to whether or not the offer is fair and reasonable; and (ii) as to acceptance and voting. The board must also retain an independent financial adviser to advise the independent board committee as to those matters.
XXIV. THE CODE ON SHARE BUY-BACKS
Hong Kong has a separate Code on Share Buy-backs.
The Share Buy-backs Code distinguishes between 4 types of share buy-backs:
- On Market – this is the most usual method and is normally carried out pursuant to the 10% general mandate normally granted at the AGM.
- Off-Market – Off-market share buy-backs must be approved by the Executive Director of the Corporate Finance Division of the SFC under Rule 2 of the Share Buy-backs Code. Approval is normally conditional on the approval of at least three-quarters of the votes cast by “disinterested shareholders”.
- Exempt – exempt share buy-backs include an employee share buy-back; a share buy-back made in accordance with the terms attached to the shares; and a share buy-back that is required by the law of the jurisdiction in which the offeror is incorporated or established.
- By General Offer – this usually takes the form of a tender offer of a certain percentage of all shareholders’ holdings. A share buy-back by General Offer requires approval by at least 50% of shareholders in general meeting. A shareholder with a material interest in the share buy-back will not be allowed to vote. If the buy-back will result in privatisation or de-listing of the issuer, the approval of 75% of shareholders is required.
1. On-market share buy-backs
Main Board Rules 10.5 and 10.6 set out the relevant requirements in relation to on-market buy-backs. An issuer whose primary listing is on the Exchange may only purchase shares on the Exchange in the following circumstances:
- the shares proposed to be repurchased are fully-paid up;
- an Explanatory Statement complying with the detailed contents requirements of Main Board Rule 10.06(1)(b) is issued to the shareholders; and
- its shareholders have given specific approval or a general mandate to make the buy-back(s) by way of an ordinary resolution passed at a general meeting of the issuer duly convened.
The Explanatory Statement must contain all information reasonably necessary to enable the shareholders to make an informed decision on whether to vote for or against the ordinary resolution to approve the share buy-back. Such information includes, in summary, the following:
- total number and description of the shares to be repurchased, and reasons for the buy-back;
- the proposed source of funds for making the proposed buy-back;
- any directors or any associates of the directors who have an intention to sell shares to the issuer, or an appropriate negative statement;
- consequences arising under the Takeovers Code of which the directors are aware, if any;
- details of any purchases by the issuer of shares made in the previous 6 months (whether on the Exchange or not);
- whether or not any core connected persons of the issuer have notified the issuer that they have an intention to sell their shares to the issuer; and
- the highest and lowest prices at which the relevant shares have traded on the Exchange during each of the previous 12 months.
Dealing restrictions for on-market buy-back
On-market buy-backs are subject to the following dealing restrictions:
- no shares may be repurchased if the purchase price is higher by 5% or more than the average closing market price for the 5 preceding trading days;
- shares cannot be repurchased for non-cash consideration;
- the issuer must not knowingly purchase its shares from a core connected person;
- the issuer must not repurchase its shares on the Exchange at any time after inside information has come to its knowledge until the information is made public. In particular, buy-backs are not allowed during the period of one month immediately preceding the earlier of: (i) the date of the board meeting to approve the annual or interim financial results; and (ii) the deadline for publishing any such results under the Listing Rules, and ending on the date of the results announcement; and
- no shares may be repurchased if that purchase will result in the number of listed shares held by the public falling below the prescribed minimum percentage.
2. Off-market share buy-backs
Off-market buy-backs must be approved by the SFC before a repurchasing company acquires any shares. Such approval will normally be conditional upon:
- approval being given by at least 75% of votes cast on a poll by disinterested shareholders in attendance in person or by proxy at a general meeting of the issuer;
- notice of the shareholders’ meeting being accompanied by a circular containing:
- details of the proposed offeree(s);
- terms and conditions of the agreement between the issuer and the proposed offeree(s); and
- advice of an independent financial adviser and the recommendation of an independent committee of the board in relation to the off-market share buy-back;
- a certified copy of the shareholders’ resolution approving the share buy-back being filed with the SFC within three days of the general meeting; and
- a copy of the agreement(s) for the off-market share buy-back being available for inspection by the shareholders.
3. Buy-back by general offer
A share buy-back by general offer must be approved by a majority of the votes cast by independent shareholders in attendance in person or by proxy at general meeting. The notice of meeting must be accompanied by the offer document.
If the share buy-back will result in the delisting and privatisation of the issuer:
- the directors of the offeror and any persons acting in concert will not be considered to be independent and therefore may not vote at the general meeting; and
- the share buy-back must be approved by at least 75% of votes attaching to the shares owned by independent shareholders cast in person or by proxy, and the number of votes cast against the resolution must not be more than 10% of the votes attaching to the shares owned by independent shareholders.
4. Reporting requirements for repurchases
The issuer must submit for publication to the Exchange through HKEx-EPS a next day disclosure return no later than 30 minutes before the commencement of the morning trading session (or any earlier pre-opening session) on the business day following the repurchase showing the number of shares repurchased and the purchase price paid per share (or the lowest and highest prices paid).
Listed issuers must also include in their annual report and accounts a monthly breakdown of purchases of shares made during the financial year under review showing the number of shares purchased each month (whether on the Exchange or otherwise), the purchase price paid per share (or the lowest and highest prices paid) and the aggregate price paid. The directors’ report must refer to the purchases made during the year and the directors’ reasons for making such purchases.
5. Status of purchased shares
The listing of the repurchased shares will be automatically cancelled upon purchase and the issuer must apply for listing of any further issues of that type of shares. The issuer must ensure that the documents of title of the repurchased shares are cancelled and destroyed as soon as reasonably practicable.
6. Restriction on new issue of shares following repurchase
An issuer whose primary listing is on the Exchange cannot issue, or announce a proposed new issue of shares, in the 30 days after its repurchase of shares (whether on the Exchange or otherwise), without the Exchange’s prior approval. Exchange approval is not required for issues of securities pursuant to the exercise of warrants, share options or similar instruments which were outstanding before the share repurchase.
7. Takeovers Implications of Share Repurchases
The takeovers implications of share buy-backs are set out in Rule 32 of the Takeovers Code. Under Rule 32.1 of the Takeovers Code, a share buy-back is considered to be an acquisition by shareholders whose shares are not repurchased. This is because their percentage holding of shares increases even though the actual number of shares held does not. As a result, a shareholder, or group of shareholders acting in concert, could obtain control of the issuer and become obliged to make a mandatory general offer obligation under Rule 26. The Executive will normally grant a whitewash waiver in the case of general offer obligations triggered by off-market share buy-backs or share buy-backs by general offer.
Effectively the Rule 32 whitewash mechanism applies only to a shareholder who is a director or a person who is acting in concert with a director of the company. An unconnected shareholder would not normally be regarded as having triggered a mandatory bid obligation under Rule 26 if the increase in his shareholding is solely due to share buy-backs by the company (Note 2 to Rule 32).
This note contains a summary only of certain obligations of companies listed on the Hong Kong Stock Exchange. It is intended for information and educational purposes only and should not be treated as a substitute for legal advice.