During a takeover offer for a Hong Kong listed company, Rule 22 of the Takeovers Code requires associates of the listed company and of the offeror to disclose dealings in those parties. “Associate” includes investment managers of funds holding 5% or more of any class of voting shares of the listed company.
Such managers will have separate filing obligations under the substantial shareholder disclosure regime in Part XV of the Securities and Futures Ordinance. However, even amongst managers who comply with Part XV, breaches of the Takeovers Code disclosure requirements are not uncommon. This is in part due to lack of awareness of the requirements, as well as the extremely tight filing deadlines.
In March this year, after lobbying from various market participants, the Securities and Futures Commission (SFC) began publishing “Offer Period Tables” on its website, collating details of all listed companies subject to takeover offers: http://www.sfc.hk/sfc/html/EN/cfd/mergers/dealing_disclose/ disclosure_table.html. As a secondary source to takeover announcements by listed companies, the webpage provides an easy way for investment managers and others to check whether any of the listed companies in which they have an interest are subject to takeover offers. However, the SFC expressly states that provision of the tables does not absolve users of their obligations under the Takeovers Code, and disclaims responsibility for the accuracy of the information. It appears that the SFC established the webpage with some hesitation, perhaps for fear it might impute some responsibility for assisting firms with their disclosure obligations.
Having now taken the trouble to publish the tables, the SFC recently has shown an assertive approach towards those who fail to use them properly. On 7 November, the SFC publicly criticised the Hong Kong office of a large global investment manager for late disclosure of its funds’ dealings in Little Sheep Group Limited during the takeover offer period. The dealings accounted for only 0.01% of the issued share capital and the SFC appears to have accepted that they were not conducted with a view toward obtaining control of Little Sheep. Moreover, the manager self-reported to the SFC after becoming aware of its mistake.
This disciplinary action follows public censure by the SFC of another large global investment manager on 14 December 2010: http://www.sfc.hk/sfc/doc/EN/cfd/mergers/panel/ Executive%20Statement%20Eng%20Final%2020101214.pdf. In that case, the manager executed 6,439 trades in Denway Motors Limited shares during the takeover offer period, increasing its control from 13.96% to 15.47%. The manager filed the necessary Part XV disclosure notices but was not aware of the reporting requirements under the Takeovers Code, and only filed the takeovers dealing disclosures after being contacted by the SFC.
Although the Takeovers Code does not have the force of law, the SFC may impose various sanctions against persons who do not comply. Aside from public censure, the SFC may issue “cold shoulder” orders (requiring SFC licensees not to act for a person who breaches the Code), and report non-compliance to other regulatory authorities or professional bodies. In both the Little Sheep and Denway Motors cases, non-compliance by the investment managers was inadvertent. But the unintentional breach and consequent SFC criticism is a considerable embarrassment, especially as the disciplinary actions appear indefinitely and publicly against the investment managers’ names on the SFC’s register of licensed persons.
In light of recent breaches, on 25 November the SFC issued a letter to licensed fund managers reminding them of their disclosure obligations under the Takeovers Code, and asking them also to alert fund managers in their overseas offices. To facilitate better compliance, the letter suggests a number of measures including regular monitoring of the Offer Period Tables and HKEx announcements, as well as routine review of takeovers-related articles in the media. It also suggests regular and on-going staff training, in particular in relation to the meaning of “associate” and the rules concerning dealing disclosures.
Given the SFC’s recent close attention, fund managers would do well to review their position monitoring and reporting systems, and staff training procedures, to ensure they are sufficiently robust to ensure compliance with disclosure obligations under the Takeovers Code.