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 threshold for whitewash waivers
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
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
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
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:
Other proposed amendments
Other proposed amendments also include:
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.
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.
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.
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.
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