SFC proposes to amend the takeovers rules to enhance investor protection

On 19 January 2018, the Securities and Futures Commission (the “SFC”) launched a three-month consultation on proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”). 

The major proposals include, among other things:

• increasing the voting approval threshold for whitewash waivers to 75%;

• empowering the Takeovers Panel to require compensation to be paid to shareholders who have suffered as a result of a breach of certain provisions of the Codes;

• requiring prompt cooperation and assistance, including provision of true, accurate and complete information, from persons dealing with the Takeovers Executive, the Takeovers Panel and the Takeovers Appeal Committee; and

• introducing measures to protect minority shareholders of companies incorporated in jurisdictions with no compulsory acquisition rights (such as the Mainland) to be delisted in Hong Kong through a general offer.

Increasing the voting threshold for whitewash waivers

Current position

The Takeovers Code imposes a mandatory general offer requirement in order to provide shareholders with the opportunity to exit (through acceptance of an offer) in the event of a change or consolidation of control of a company to which the Codes apply.  Where a mandatory general offer obligation is triggered as a result of an issue of new securities as consideration for an acquisition, or a cash subscription, or the taking of a scrip dividend, the Takeovers Executive may waive the mandatory general offer obligation subject to certain conditions, including, among other things, the approval of both the underlying transaction(s) and the grant of waiver by a majority of independent shareholders (i.e. those are not involved in, or interested in, the transaction in question) at a shareholders’ meeting.  This is known as the “whitewash waiver”.  Current market practice varies as to whether resolutions on the underlying transaction(s) and the whitewash waiver are put to shareholders in separate resolutions or a combined resolution.

The SFC notes that the simply majority approval threshold makes it extremely difficult for dissenting shareholders to veto a transaction and that the high level of certainty of obtaining approval from shareholders can lead to abuse by persons looking to obtain or consolidate control.  In cases where new shares are issued at a steep discount, if the whitewash waiver applicant fails to obtain a whitewash waiver, it can still proceed with the underlying transaction coupled with an unattractively priced general offer which would be unlikely to attract acceptances.

Proposed changes – amending Note 1 on dispensations from Rule 26

With a view to addressing the concern of abuse, the SFC proposes to increase the approval voting threshold for a whitewash waiver from a simple majority to 75% of the independent shareholders.  This would be in line with the voting approval threshold applicable to off-market share buy-backs and privatisations.  

Further, it proposes to introduce an explicit requirement to clarify that in a whitewash transaction a separate resolution should be put to shareholders to approve the underlying transaction(s) and the whitewash waiver, and to apply the new 75% voting approval threshold to both the underlying transaction(s) and the whitewash waiver. This would mean that if the whitewash waiver was disapproved by shareholders and the whitewash condition was waivable, a whitewash waiver applicant would be permitted to proceed with the underlying transaction (coupled with a general offer) only if it had obtained separate shareholders’ approval by 75% of the independent shareholders of the underlying transaction.

Empowering the Takeovers Panel to make compensation rulings

Current position

The Takeovers Panel may impose certain sanctions on persons who are found to be in breach of the Codes.  The Codes however do not provide the Takeovers Panel with an explicit power to require compensation to be paid to shareholders who have suffered as a result of a breach of the Codes.

Proposed changes – adding a new section 13.13 to the Introduction to the Codes

In order to provide financial redress to shareholders or former shareholders who have suffered as a result of a breach of the Codes in appropriate cases, the SFC recommends to provide the Takeovers Panel with an explicit power to make compensation rulings against persons who are found to be in breach of some of the provisions of the Codes which relate to the obligation to make an offer on terms prescribed by the Codes.

Clarifying the obligations of persons dealing with the Takeovers Executive, the Takeovers Panel and the Takeovers Appeal Committee

Current position

The SFC has noted that in a number of recent cases parties dealing with the Takeovers Executive have not conducted themselves in an open and co-operative manner.

Proposed changes – adding new sections 5.2, 11.18 and 14.9 in the Introduction of the Codes

It therefore proposes to clarify in the Codes that prompt cooperation and assistance is expected from persons dealing with the Takeovers Executive, the Takeovers Panel and the Takeovers Appeal and they must provide true, accurate and complete information.

Introducing measures to protect minority shareholders of companies incorporated in jurisdictions with no compulsory acquisition rights to be delisted in Hong Kong through a general offer

Current position

Where a company is to be delisted from the Hong Kong Stock Exchange following a proposed offer, the Takeovers Code provides that in addition to the two-limb shareholders’ approval requirements (i.e. at least 75% approval and not more than10% disapproval by disinterested shareholders), the resolution to approve the delisting must also be subject to a third limb, namely the offeror being entitled to exercise, and exercising, its rights of compulsory acquisition.

Where the offeree company is incorporated in Hong Kong, the offeror may compulsorily acquire the remaining shares of the offeree company when it has acquired 90% of the shares for which the offer is made while at the same time, an independent shareholder may have the right to require the offeror to acquire his shares. Compulsory acquisition rights are also available in many other overseas jurisdictions such as Bermuda and Cayman Islands, which are common places of incorporation of listed companies in Hong Kong. 

For companies incorporated in jurisdictions which offer no compulsory acquisition rights (such as the Mainland), the SFC has in previous years granted a number of waivers from compliance with the third limb requirement on the basis that it was technically impossible to comply with the relevant local laws.   However, without the protection of the third limb requirement, passive minority shareholders may find themselves holding illiquid shares in an unlisted and potentially non-public company that is not protected by the Takeovers Code.  There is also a concern that waivers of the third limb requirement would effectively make it easier for such companies to delist through a general offer without achieving 90% acceptances and an uneven playing field may be created.

Proposed changes – adding a new note to Rule 2.2

In light of the above concerns, the SFC believes appropriate measures should be introduced to protect minority shareholders of companies incorporated in jurisdictions which do not afford compulsory acquisition rights to an offeror.  It proposes that in considering whether to grant a waiver of the third limb requirement, the Takeovers Executive will take into account, among other things, whether the offeror has or will put in place arrangements such that:

• the offer should remain open for acceptance for a longer period;

• all shareholders who have not yet accepted the offer will be notified in writing of the closing date and the implications if they choose not to accept the offer; and

• the resolution to approve the delisting to be subject to the offeror having received valid acceptances amounting to 90% of the disinterested shares.

Other proposed amendments

Other proposed amendments also include:

• Compliance rulings -To add new sections 7.2 and 13.12 to the Introduction to the Codes and to amend section 13.10 to the Introduction to the Codes to clarify the Takeovers Executive’s and the Takeovers Panel’s existing power to give directions to restrain certain actions being taken or otherwise to secure compliance with Code requirements.

• Disciplinary proceedings and remedial / compliance rulings – To amend section 12.2 of the Introduction to the Codes to allow the Takeovers Panel to impose appropriate sanctions and/or remedial measures in all disciplinary matters.

• Definition of associate – To delete or amend classes (1) to (5) of the definition of associate in order to eliminate the overlapping with classes of presumption of acting in concert and potential inconsistencies arising from that overlap. To delete Class (7) of the definition of associate (i.e. companies with a material trading arrangement).

• Announcement of number of relevant securities in issue – To amend Rules 3.8 and 22 and Note 1 to paragraph 4 of Schedule I and paragraph 12 of Schedule I to clarify that the scope of disclosure of holdings and dealings in relevant securities covers relevant securities of the company whose securities (instead of the offeror’s securities) are to be offered as consideration for the offer.

• Disclosure of shareholdings and dealings in the offeree board circular of REITs – To add new paragraph 3(p) in Schedule IX to extend the disclosure obligations to the trustee and management company of the offeree company which is a REIT.

• Timing of submission of dealing disclosures -To amend Note 5 to Rule 22 to extend the deadline for disclosure from 10:00 a.m. to 12:00 noon on the business day following the date of the transaction (or 12:00 noon on the second business day following the date of the transaction for dealings in time zones of the United States).

• Method of dealing disclosure -To amend Note 6 to Rule 22 to dispense with the requirement to make separate disclosures to the offeror, offeree company or their financial advisers.

• Class (5) of the presumption of acting in concert – To amend Class (5) of the presumption of acting in concert by adding express exclusion of exempt fund managers.

• Certificates of truth, accuracy and completeness – To amend section 8.3 of the Introduction to the Codes to include reference to the filing form (introduced in September 2016) that contains a statement by the applicant certifying the truth, accuracy and completeness of statements contained in the submission application.

• Meetings and materials used in meetings – To amend Note 2 to Rule 8.1 to provide that the safeguards and disciplines in Note 3 to Rule 8.1 (i.e. requiring the presence of a financial adviser and a confirmation to the Takeovers Executive as to whether any material new information had been disclosed) also apply equally to information released to the media.

  To amend Note 3 to Rule 8.1 to (a) make it clear that the term "meetings" encompasses meetings held by telephone and other electronic means, as well as in-person meetings; and (b) clarify that materials that are distributed at meetings with shareholders, analysts, brokers or other persons interested in the offer, or with the media, would not be regarded as "documents" for the purposes of Rule 12.1, but the financial adviser would need to confirm that the materials do not contain any material new information or significant new opinions and that the information therein is fairly presented.

• Confirmation as to publication, no material change and translation – To add new Notes 4 and 5 to Rule 12, new Note to Rule 8.6 and new Note 6 to Rules 9.3 and 9.4 to codify the existing practice set out in Practice Note 20 to require written confirmation by the party issuing the document or its advisers that (a) the document has been published and the time and date of publication and (b) (where applicable) there has been no material change to the version of the document in respect of which the Takeovers Executive has confirmed that it has no further comment; and to require the directors of the issuer of a Code document to confirm that the Chinese version of the document is a true and accurate translation of the English version (or vice versa).

• References to the Telecommunications Ordinance -To delete the definition of "CA" (i.e. Communications Authority) in the Definitions section of the Codes.

  To amend Note 3 to Rule 15.5 and Note 4 to Rule 26.2 such that (a) such provisions apply to regulatory approvals required for transactions under the Codes; and (b) the new Note 3 to Rule 15.5 will require the expected timetable for the relevant regulatory approval process be set out in the offer document.

• Setting aside "no extension" and "no increase" statements – To amend Note 2 to Rule 18 to clarify that the offeror is not just free to extend its offer, but is also free to increase its offer if a competitive situation arises.

  To amend Note 4 to Rule 18 such that an offeror’s right to set aside a “no extension” or “no increase” statement is not limited to the circumstances set out in Notes 2 and 3 to Rule 18, but may be extended to any situation which cannot be determined or controlled by the offeror.

• Results announcements -To amend Rule 2.9 and add a new Note to Rule 19.1 to (a) require disclosure in poll results announcements of not just the numbers of shares of each class voted for and against a resolution, but also the percentage of the relevant class of share capital which those numbers represent; and (b) in the case of a scheme or arrangement, provide that (i) the requirement to disclose the number of shareholders voting for and against only applies to a scheme subject to the headcount test, and (ii) the number of CCASS Participants instructing HKSCC Nominees Limited to vote for and against the resolution and the number of shares voted by such CCASS Participants should be disclosed in the poll results announcements of schemes of arrangements subject to the headcount test.

• Conditions should not be subjective – To amend Rule 30.1 to remove reference to “subjective” in the heading and to provide that it is not acceptable for an offer to be made subject to conditions which depend on judgements by the offeree company.

• Six-month delay before acquisition above offer price – To amend Rule 31.3 to reflect the interpretation set out in Practice Note 18 that Rule 31.3 applies equally to offers that are unconditional at the outset, but not just offers that have become or been declared unconditional after the posting of the offer document.

• Views of offeree board – To amend Paragraph 1 of Schedule II and the related Note 4 to reflect the current practice that the offeree board circular should include (a) the advice of the independent committee of the offeree company board established in accordance with Rules 2.1 and 2.8; and (b) the advice of the independent financial adviser appointed in accordance with Rule 2.1.

• Financial information – To add a new Note 5 to paragraph 12 of Schedule I, new note to paragraph 6 of Schedule II and a new note to paragraph 16 of Schedule III to allow offeree companies or offerors (as the case may be) which are listed on the Hong Kong Stock Exchange to make reference to their financial information published in accordance with the Listing Rules (instead of reproducing the same information) in the offeree board circulars or offer documents (as the case may be).

  To bring the relevant accounting terminology used in the Schedules I, II and III to the Codes in line with the latest accounting standards and conform to certain amended requirements of the Listing Rules.