Hong Kong Takeovers Code Amendments 2018
Amendments to Hong Kong's Codes on Takeovers and Mergers and Share Buy-backs (Codes) took effect on 13 July 2018 with the publication by the Securities and Futures Commission (SFC) of its Consultation Conclusions on proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs (Consultation Conclusions). This follows a 3-month public consultation on proposals set out in a Consultation Paper released in January 2018. For more information on the Consultation Paper, please see Charltons' February 2018 newsletter. The 26 responses received were, in general, supportive of the proposals.
The amendments which took effect on 13 July include:
increasing the threshold for independent shareholder approval of a whitewash waiver to 75% (from a simple majority);
an explicit requirement for separate resolutions to be put to independent shareholders for the underlying transaction(s) and the whitewash waiver. The voting approval threshold for underlying transactions is a simple majority;
the Takeovers and Mergers Panel (Panel) is given power to require a person in breach of specific provisions of the Codes to compensate current and former shareholders;
the definition of "associate" has been amended to remove unnecessary overlap and potential inconsistences arising from similarities with the definition of acting in concert;
companies incorporated in jurisdictions without compulsory acquisition rights (e.g. the PRC) that seek delisting through a general offer are now required to put in place arrangements to protect minority shareholders in order to obtain a waiver from the compulsory acquisition rights' condition;
the scope of disclosure of holdings and dealings in relevant securities has been clarified, in particular where the offeror is offering securities of another company as consideration in an offer. Other requirements have been relaxed, including the timing of dealing disclosures; and
various miscellaneous amendments to the Codes to codify existing practices and to effect a number of "housekeeping" amendments.
Voting Threshold for Whitewash Waivers
1.1 Raising the voting threshold
The voting approval threshold for a whitewash waiver from the obligation to make a mandatory offer on a change or consolidation of control under Rule 26 has been increased from a simple majority of independent votes to 75% of independent votes. Independent votes are those of shareholders who are not involved in, or interested in, the transaction in question.
This higher approval threshold is intended to enhance investor protection and address the SFC's concerns that whitewash waiver approval from independent shareholders had become a "virtual certainty" and regarding cases of organised systemic warehousing of shares by friendly non-independent shareholders voting in favour of transactions.
Whitewash waivers significantly impact shareholders since they involve a change or consolidation of control of the company, a dilution of shareholders' interests in the company and do not afford shareholders the opportunity to exit from their investment in the offeree company.
The SFC in the Consultation Conclusions notes the Executive's discretion to withhold a grant of a whitewash waiver in appropriate circumstances, and that the Executive may refuse to grant a whitewash waiver where the circumstances justify such action.
1.2 Voting on single or separate resolutions
The whitewash waiver and the underlying transaction(s) are now required to be subject to separate shareholder votes. Previously, market practice varied as to whether the whitewash waiver and the underlying transaction(s) were voted on through separate resolutions or a combined resolution.
1.3 Separate voting thresholds
Whitewash waivers are now subject to a higher 75% voting threshold, whilst underlying transaction(s) continue to be subject to a simple majority vote. The original proposal to also increase the voting threshold for underlying transactions to 75% was dropped because this may have resulted in an anomaly between the simple majority requirement under the Listing Rules and the threshold under the Takeovers Code. Thus, where transactions are coupled with a whitewash waiver application, the whitewash waiver applicant can only proceed to completion if both the underlying transaction and the whitewash waiver of the mandatory offer obligation are approved. Where minority shareholders approve the underlying transaction(s) but disapprove the whitewash waiver, provided that the whitewash waiver condition is waivable, the underlying transaction would be able to proceed, coupled with a general offer.
1.4 Changes to Note 1 on Dispensations from Rule 26
The wording of Note 1 on dispensations from Rule 26 has been amended to provide that in cases involving the underwriting of an issue of shares, the requirement for a mandatory offer will normally be waived, provided there has been an independent vote of shareholders. The addition of the word "normally" is intended to ensure that it is understood that a whitewash waiver will not be granted automatically even if all relevant Takeovers Code requirements have been met. The Takeovers Bulletin, Issue No. 37 (June 2016) provided that the Executive may not grant a whitewash waiver if the transaction does not comply with all other applicable rules and regulations (including the Listing Rules) nothwithstanding that all Takeovers Code requirements have been met.
Approval of Delistings by Independent Shareholders
Pursuant to Rule 2.2 of the Takeovers Code, the resolution to approve a delisting from the Stock Exchange following a general offer must be subject to certain conditions, including the offeror being entitled to exercise, and exercising, its rights of compulsory acquisition under Rule 2.2(c).
The purpose of Rule 2.2(c) is to ensure that a delisting can only become effective after a general offer when an offeror is able to exercise and exercises its right of compulsory acquisition. This ensures that passive minority shareholders are not left holding illiquid shares in an unlisted company which may be a non-public company which is not protected by the Takeovers Code. The three conditions to Rule 2.2, together, have the effect of making it more difficult for an offeror to use a delisting resolution to pressurise minority shareholders to accept a general offer. For Hong Kong incorporated companies, the right of compulsory acquisition arises when the offeror receives acceptances amounting to 90% of the disinterested shares.
2.1 Offeree companies incorporated in jurisdictions with no compulsory acquisition rights
The laws of certain jurisdictions (such as Mainland China) do not provide compulsory acquisition rights to an offeror. The Executive has thus granted a number of waivers from compliance with Rule 2.2(c) for privatisations of Mainland companies as compliance is technically impossible given the lack of compulsory acquisition rights in the PRC.
2.2 Amendment to protect minority shareholders of offeree companies
Rule 2.2 has been amended to include a Note which provides that in cases where the offeree company is incorporated in a jurisdiction that does not afford compulsory acquisition rights to an offeror, the Executive may be prepared to waive the requirement of Rule 2.2(c). In considering whether to grant such a waiver, the Executive will normally require the offeror to put in place arrangements such that:
where the offer becomes or is declared unconditional in all respects, the offer will remain open for acceptance for a longer period than normally required by Rule 15.3;
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.
The amendments strengthen minority shareholder protection by ensuring that where an offeror makes a general offer for the shares of a company incorporated in a jurisdiction that does not provide compulsory acquisition rights with a view to privatising it, shareholders are given the greatest opportunity to exit if they wish to do so.
The minimum 90% acceptance condition provided for in the amendments means delisting through a general offer is not easier for companies incorporated in jurisdictions without compulsory acquisition rights.
The requirements under the new note to Rule 2.2 also apply to all real estate investment trusts (REITs) subject to the Codes.
Dealings with and Powers of the Executive, Panel and Takeovers Appeal Committee
3.1 Dealings with the Executive, Panel and Takeovers Appeal Committee
Sections 5.2, 11.18 and 14.9 to the Introduction to the Codes have been added and section 7.2 of the Introduction has been amended in order to make it clear that parties are required to disclose to the Executive, the Panel and the Takeovers Appeal Committee all relevant information of which they are aware, and to correct or update the information if it changes. There is a positive obligation on parties to provide true, accurate and complete information, which is subject to a reasonable care test.
According to Section 5.2, persons dealing with the Executive must do so in an open and co-operative way. Prompt co-operation and assistance are expected from persons dealing with the Executive as well as from those to whom enquiries and other requests are directed. In such dealings, a person is required to disclose any information known to him/her and relevant to the matter, as well as correct or update that information if it changes. A person dealing with the Executive or to whom enquiries or requests are directed must take all reasonable care to provide true, accurate and complete information. Where a matter has been determined by the Executive and a person becomes aware that the information provided to the Executive was not true, accurate or complete, that person must promptly contact the Executive to correct the position. Further, where a determination of the Executive has continuing effect (such as the grant of exempt status or a concert party ruling), the party or parties to that determination must promptly notify the Executive of any new information applicable to that determination.
Sections 11.18 and 14.9 provide that the obligations set out in section 5.2 of the Introduction apply equally to a person dealing with the Panel and the Takeovers Appeal Committee, respectively. Section 7.1 on rulings by the Executive has been amended to provide that particular attention should be paid to the obligations under section 5.2 of the Introduction. The SFC stated in the Consultation Conclusions that it considers that it is not necessary to expressly refer to professional privilege in section 5.2, as it is an overriding right under the law.
3.2 Compliance rulings
Sections 7.2 and 13.12 to the Introduction to the Codes have been adopted to clarify the Executive's and the Panel's existing power to make compliance rulings as a pre-emptive measure so as to prevent breaches and to enhance protection of shareholders and the market generally. In particular, section 7.2 provides that where the Executive is satisfied that:
there is a reasonable likelihood that a person will contravene a requirement imposed by or under the Codes; or
a person has contravened a requirement imposed by or under the Codes,
the Executive may give any direction that appears to it to be necessary in order to:
restrain a person from acting (or continuing to act) in breach of a relevant requirement under the Codes; or
restrain a person from doing (or continuing to do) a particular thing, pending determination of whether that or any other conduct of his/her is or would be a breach of a relevant requirement under the Codes; or
otherwise secure compliance with a relevant requirement under the Codes.
Pursuant to section 13.12, the Panel may also give directions of the nature described in section 7.2.
According to the Consultation Conclusions, the phrase "a reasonable likelihood that a person will contravene a requirement" means more likely than not that there will be a breach if a particular action is taken. The SFC does not consider that it could issue useful guidance as different factors may or may not be relevant to different cases, or introduce conditional rulings as they may cause uncertainty and confusion. However, the SFC provides an example in the Consultation Conclusions that where an offeree board refuses to issue a response document to shareholders in a hostile offer, there would be a reasonable likelihood that if the offeree company did not produce the response document, it would be in breach of the Codes. Here, the Executive/Panel could give a direction compelling the offeree board to issue a response document to shareholders.
In addition, an amendment to section 13.10 of the Introduction clarifies that the Chairman of a hearing is empowered to issue a compliance ruling of the nature described in section 7.2 if it relates to a preliminary or procedural direction.
3.3 Compensation rulings
The Codes have been amended so that the Panel is empowered to require a person who is in breach of specific provisions of the Codes to pay compensation to current and former shareholders. Compensation rulings will be issued to provide financial redress to shareholders who have suffered as a result of a breach. For example, where an offeror fails to make a mandatory offer as required by Rule 26.1 of the Takeovers Code, rather than requiring the making of a general offer, the Panel could require the person(s) in breach of Rule 26.1 to pay compensation to shareholders who should have received an offer at the time the Rule 26.1 obligation was triggered.
New section 13.13 to the Introduction provides that where any person has breached the requirements of certain Rules, the Panel may make a ruling requiring the person to pay, within a specific period, to the holders, or former holders, of securities of the offeree company such amount as the Panel thinks just and reasonable in order to ensure that such holders receive what they would have been entitled to receive if the relevant Rule had been complied with. Further, the Panel may make a ruling requiring simple or compound interest to be paid at a rate and for a period (including for any period before the date of the ruling and until payment) to be determined. The Panel's power to make a ruling under section 13.13 may be exercised irrespective of whether any sanction under section 12.2 is imposed.
The right to compensation will apply to breaches of the following Rules:
- Rules 13 and 14 - the appropriate offers and comparable offers requirement which requires offers to be made for other classes of relevant securities;
- Rule 16 - the entitlement to revised consideration. Rule 16.1 requires that when an offer is revised, all shareholders are entitled to receive the revised offer irrespective of whether they accepted the original offer;
- Rule 23 - the nature of consideration and the situations in which a cash offer or securities offer is required;
- Rule 24 – purchases resulting in an obligation to offer a minimum level of consideration. Shareholders of the same class are entitled to no less favourable terms if a certain level of acquisition has been made during specified offer periods;
- Rule 25 – special deals. Rule 25 prohibits transactions between an offeror, or potential offeror, or parties acting in concert with it and a shareholder of the offeree company which are on favourable terms that are not extended to other shareholders;
- Rule 26 - the mandatory offer obligation which requires a general offer to be made to all shareholders if certain ownership levels are exceeded;
- Rule 28 – partial offer requirements;
- Rule 30 - offer conditions - offers must not normally be made conditional on matters that depend on judgements of the offeror or the fulfilment of which is in its hands; and
- Rule 31.3 - prohibits the offeror and its concert parties purchasing further securities at above the offer price in the 6 months after the close of the offer.
The SFC will not issue guidance on how, when or on whom a compensation order should be issued and the calculation of compensation. The guiding principle should be that a careful examination of all the circumstances of the matter should be carried out so as to arrive at a decision that is just and reasonable in all the circumstances. The SFC does not intend to be over-prescriptive, but rather the Panel should have discretion on such matters. In relation to public comments that applying section 13.13 to all breaches of Rule 30 may be too wide, the SFC stated that section 13.13 should include a broad reference to Rule 30 as the Panel would not be limited from imposing a compensation order if the circumstances justify one.
In response to various queries raised during the consultation, the SFC stated in the Consultation Conclusions that it is satisfied that the new section is consistent with Article 80 of the Basic Law, and that the Panel is well-qualified to make determinations in relation to compensation payments. Further, the Panel may seek advice from an independent professional adviser or an expert in any relevant area.
3.4 Disciplinary proceedings and remedial/compliance rulings
Section 12.2 of the Introduction to the Codes has been amended as there were concerns that the Panel may not have been able to issue remedial rulings in disciplinary matters under the previous drafting. The Panel is now empowered to impose both remedial measures and sanctions in disciplinary measures under revised section 12.2, which provides that where the Panel finds that there has been a breach of either of the Codes or of a ruling, it may impose any of the following sanctions:
issuance of a public statement which involves criticism;
requiring licensed corporations, licensed representatives, registered institutions, or relevant individuals, for a specific period, not to act or continue to act in any or a specific capacity for any person who has failed to comply, or has indicated that he/she does not intend to comply, with either of the Codes or a ruling;
banning advisers from appearing before the Executive or the Panel for a specific period; and/or
requiring further action to be taken as the Panel thinks fit.
Further, the Executive or the Panel may report a person to other regulatory authorities or professional bodies (even where there is no finding of a breach), where (i) the person is governed by rules, regulations or standards of professional conduct of the relevant regulatory authority or professional body, and (ii) the Executive or the Panel has reasonable grounds for believing that such person may have contravened such rules, regulations or standards of professional conduct.