SFC censured a financial adviser for breaches of the Takeovers Code as a result of breakdown in compliance procedures

The Securities and Futures Commission (the “SFC”) yesterday (2 February 2016) publicly censured a major international financial institution, Goldman Sachs (Asia) L.L.C. (“GS”), for breaching various provisions of the Code on Takeovers and Mergers (the “Takeovers Code”) whilst acting as a financial advisor to Wing Hang Bank, Limited (the “Bank”) in relation to a voluntary general offer for the Bank launched in April 2014 (the “Offer”) as a result of its failure to:

• disclose its dealings in the relevant securities of the Bank during the offer period (in breach of Rule 22);
• seek, during an offer period, the SFC’s consent prior to dealing in principal trades in the relevant securities of the Bank which fell outside the scope of dealings covered by the exempt principal trading and exempt fund manager status granted to the various GS entities (in breach of Rule 21.5);; and
• comply with the restrictions on issue and distribution of research reports on the Bank (in breach of Note 4 to Rule 8.1 and Rule 10).

The SFC noted that the breaches were attributed to a breakdown in the compliance policies and procedures of GS in relation to takeover transactions.

The SFC’s news release on this disciplinary sanction and the Executive Statement are available on the SFC website.

Background

On 16 September 2013, an offer period commenced for the Bank when it announced, amongst other things, that its board of directors had been informed by its substantial shareholders that they had been approached by independent third parties in relation to the possible sale of all of their shareholdings in the Bank. On 8 November 2013, GS was verbally engaged as one of the financial advisors to the Bank in relation to the Offer.  

Breaches of relevant provisions under the Takeovers Code

Rule 22 of the Takeovers Code requires GS, as an “associate” of the Bank within the meaning of the Takeovers Code by virtue of its capacity as its financial advisor, to disclose its dealings in the relevant securities of the Bank during the offer period either publicly or privately depending on the nature of the dealings.  Between 8 November 2013 and 6 January 2014, GS executed 111 trades in the relevant securities of the Bank but did not disclose such dealings in accordance with Rule 22 until 13 and 14 January 2014.

Rule 21.5 of the Takeovers Code restricts GS, as the financial advisor to the Bank, from dealing in principal trades in the relevant securities of the Bank during the offer period which falls outside the scope of dealings covered by the exempt principal trading and exempt fund manager status granted to the various GS entities, except with the consent of the SFC.  26 of the 111 trades mentioned above were GS’s principal trades falling outside the scope of dealings covered by the exempt principal trading and exempt fund manager status granted to the various GS entities and were carried out without seeking the SFC’s consent.

Note 4 to Rule 8.1 of the Takeovers Code requires GS, as the financial advisor to the Bank, to stop issuing research reports on the Bank after the commencement of the offer period except with the SFC’s prior consent and to remove the research reports distributed earlier from the website. During the same period between 8 November 2013 and 6 January 2014, GS issued one research report and one research commentary on the Bank; and prior to that period, GS issued two research reports on the Bank but did not remove them from its research portal immediately upon its appointment as the financial advisor to the Bank. 

Rule 10 of the Takeovers Code requires that information constituting profit forecast under that rule contained in documents to shareholders must be reported on by an accountant and financial adviser. All the four research reports/commentary contained information relating to the Bank‘s earnings that constituted profit forecasts under Rule 10 of the Takeovers Code, but no reports on the profit forecasts were prepared by an accountant and financial adviser.

The SFC considered the breaches of the rules mentioned above to be serious and in deciding the present disciplinary sanction, the SFC took into account GS’s cooperation and self-reporting of the breaches.

Factors attributing to the breaches

The SFC noted that the breaches of the Takeovers Code in this case were primarily attributable to two factors:

• GS’s Investment Banking Team failed to inform its Global Compliance Control Room of the commencement of the offer period for the Bank.
• After the Global Compliance Control Room had been informed that GS had been verbally mandated, it failed to take appropriate action to ascertain whether the offer period for the Bank had already commenced, in particular, it did not enquire with the Investment Banking Team whether an offer period had commenced or if an announcement had been issued.  The procedures in place at the Global Compliance Control Room then required it to monitor news sources for potential transaction announcements. Notwithstanding that there was wide press coverage on the possible offer for the Bank and the procedures and policies in place, the Global Compliance Control Room failed to follow up with the Investment Banking Team to verify whether an offer period had commenced for the Bank.

Timely reminder to financial and professional advisers involved in takeovers transactions

This disciplinary action serves as a timely reminder to financial and professional advisers involved in takeovers transactions to review and enhance their compliance policies and procedures, and to ensure their staff appreciate and abide by them, with a view to ensuring due compliance with the Takeovers Code.

In particular, market participants should appreciate the importance of dealing disclosure obligations under Rule 22 of the Takeovers Code and dealing restrictions under Rule 21 of the Takeovers Code. 

Market participants should take note of the “Guidelines to fund managers on dealing disclosure obligations under Rule 22 of the Code on Takeovers and Mergers” issued by the SFC in December 2011, which sets out some practical guidance with regards to compliance with the dealing disclosures requirements, including the following:

• Review regularly the Offer Period Tables under “Regulatory functions – Listings & takeovers – Takeovers & Mergers – Offer period tables” on the SFC website for details of current offer periods under the Takeovers Code. Subscribe to the SFC’s Subscription Service on “Takeovers & mergers” to receive email alerts which will include updates on the Offer Period Tables.
• Monitor regularly HKEXnews on the HKEX website to see whether an announcement has been issued by, or in relation to, a relevant company that has commenced an offer period. Subscribe to the News Alerts service on the HKEX website to receive relevant information.
• Monitor regularly media sources such as newspaper and financial news services to identify takeovers-related articles.
• Conduct regular and on-going training for the relevant staff on the relevant provisions of the Takeovers Code.
• Compliance personnel should keep themselves fully up-to-date on changes to the Takeovers Code. They may subscribe to the SFC’s Subscription Service to receive notifications about Takeovers-related news such as news items relating to the issuance of the Takeovers Bulletin and market consultations on amendments to the Takeovers Code.
• Ensure that adequate and proper compliance systems are in place to enable them to fully discharge their obligations under the Takeovers Code.