SFC amends the Hong Kong Takeovers Code
Amendments made to the Takeovers Code effective from 29 September 2023.
Background
On 19 May 2023, the Securities and Futures Commission (SFC) published its consultation paper on its proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs (Takeovers Code) (Consultation Paper). The amendments were mainly to reflect and codify existing practices of the SFC, taking into account the clarifications sought from the SFC on the Takeovers Code in recent years.
On 21 September 2023, the SFC announced its consultation conclusions on the Consultation Paper (Consultation Conclusions). The SFC adopted all the proposals outlined in the Consultation Paper, with some modifications reflecting the responses received. The amendments will take effect on 29 September 2023.
We set out below a high-level overview of the key amendments to the Takeovers Code, which is not intended to be a full summary of the Consultation Conclusions.
Key amendments to the Takeovers Code
1. Voting rights
Previously, "voting rights" was defined under the Takeovers Code as voting rights currently exercisable at a general meeting of a company, whether or not attributable to the share capital of the company. The phrase "currently exercisable" has caused uncertainty - for example, where a person's shares are subject to voting restrictions, it is unclear whether or not his shares are "currently exercisable", and therefore constitute "voting rights" for the purpose of the Takeovers Code.
The SFC has now removed the term "currently" from the definition of "voting rights". This is to make clear that voting rights, even those subject to restrictions in their exercise (whether by agreement, by operation of law and regulations, or pursuant to court orders), would be still regarded as voting rights exercisable at a company's general meeting, and thus be subject to the implications of the Takeovers Code.
2. "Close relatives" as concert parties
The SFC expanded the definition of "close relatives" to catch a wider group of individuals. In addition to the existing classes of individuals, a new definition of "close relatives" has been introduced to include the person's grandparents and grandchildren, spouse, de factor spouse and children of the person's siblings, and parents and siblings of the person's spouse or de facto spouse.
The SFC clarified in its Consultation Conclusions that the new definition is to reflect on common understanding in the market and does not seek to raise the bar for concert party rebuttals. It also reminded the market that the presumptions under the definition of "acting in concert" (including the presumptions in relation to "close relatives") are rebuttable by the facts and circumstances of the case.
3. Attendance and voting at the meeting to approve a scheme
Considering whether the concert parties of the offeror in privatisation by way of a scheme of arrangement are allowed to vote at the shareholders' meeting ordered by the court, the SFC note from recent judgements of the Hong Kong courts 1 that there are two differing views. The SFC has decided to endorse the "Non-Prohibition View", which means that an offeror and its concert parties will be allowed to vote at a shareholders' meeting held to consider the scheme of arrangement. Details of the "Non-Prohibition View" considered in Re Cosmos Machinery Enterprises Ltd can be found in our earlier article "Schemes of arrangement: voting in court meetings". 2
Rules 2.2 and 2.10 were amended to allow an offeror and its concert parties to attend and vote at the meeting, to the extent that their votes are not counted towards the required percentage of the disinterested shares. The form of the meeting shall be governed by the offeree company's constitutional documents and the law of its place of incorporation.
4. Irrevocable undertakings
Previously, the SFC must be consulted before an offeror approaches a shareholder for irrevocable undertakings, except for approaching a very restricted number of sophisticated investors who have a controlling shareholding in the offeree company. 3
Following the amendments, no prior consultation with the SFC is required when approaching a shareholder with a "material interest" (i.e., a shareholder who controls, with any concert parties, directly or indirectly, 5% or more of the voting rights of the offeree company) for an irrevocable undertaking. However, an offeror will still need to consult the SFC for approaching a shareholder without a "material interest" in the offeree company for such undertakings. The number of shareholders that an offeror can only approach to gather irrevocable undertakings is limited to six (including shareholders with and without a material interest, and in the case of concert group, each concert group member is treated as one shareholder).4
5. Chain principle
A chain principle offer 5 is to be made, if a person or group of persons, as a result of acquiring statutory control of a company (First Company), that person or group of persons may in turn obtain or consolidate control over another company (Second Company) because the First Company holds 30% or more of the voting rights of the Second Company.
To assess whether the chain principle offer is triggered, the SFC has previously specified that it will consider, amongst other factors, the assets and profits of the two companies involved (Substantiality Test) and whether one of the main purposes of acquiring the First Company was to secure control of the Second Company (Purpose Test).
The SFC has made the following amendments on the Substantiality Test:
Market capitalisation has been added as a parameter for comparison when determining the Substantiality Test, with such parameter applicable where both companies are listed.
When calculating the relative values of assets and profits, parties shall use at least the three latest audited financial period results and/or alternative tests to provide further calculations in the event the most recent audited financial statements produce an anomalous result.
6. Offer period and timetable
The major amendments affecting the length of an offer period under the Takeovers Code are set out below:
The definition of "offer period" has been amended to provide the SFC with the explicit power to end an offer period.
The SFC has codified its current practice on "Day 60" (i.e., the deadline on which an offer must be declared unconditional as to its acceptance) under Rule 15.5, such that any consent to extend Day 60 shall not exceed four months after the despatch of the initial offer document. It should be noted that the 4-month period under Rule 15.5 should start from the date of the initial offer document.
7. "Put up or shut up" order
As a matter of practice, the SFC may upon application by an offeree company during an offer period issue a "put up or shut up" order (PUSU Order), which requires a potential offeror to either (i) "put up" and announce its firm intention to make an offer within a specified time period; or (ii) "shut up" and announce that it will no longer proceed with the offer.
The SFC has introduced a new Rule 3.9 to codify the existing practice and allow the SFC to issue a PUSU Order in exceptional circumstances, regardless of whether the offeree company made such an application. When a PUSU order is made, the SFC will publish the statement on its website and set out the deadline by which the offeror must make its intention known. Failure to comply with a PUSU order will amount to a breach of the Takeovers Code.
Factors to be considered by the SFC for issuing a PUSU Order and determining the time limit to be imposed include 6:
the current duration of the offer period;
the reason(s) for the offeror's delay in issuing a firm intention announcement;
the proposed offer timetable (if any);
any adverse effects the offer period has on the offeree company; and
the conduct of the parties to the offer.
8. Offer requirements
The SFC has introduced new Notes 3 and 4 to Rule 3.7 in relation to the disclosure of offer prices in "talk announcements":
In the event that a potential offeror makes a statement in relation to the terms of the possible offer before an announcement of a firm intention to make an offer (Rule 3.5 Announcement) , the potential offeror will be bound by the statement, if an offer for the offeree company is subsequently made, unless (i) the right not to be bound in certain circumstances has been specifically reserved at the time and those circumstances subsequently arise; or (ii) there are wholly exceptional circumstances. 7
Unless under exceptional circumstances, the disclosure of an indicative offer price is not normally permitted prior to a Rule 3.5 Announcement. As suggested in the consultation conclusions, some of the exceptional circumstances include (i) the need to clarify an incorrect market rumour or incorrect statement in the media which may be creating a false market in the shares of the offeree company; or (ii) where an offeror or an offeree company is required by overseas regulatory requirements to disclose the offer price prior to the announcement of a firm intention to make an offer.8
The SFC also made amendments to Note 11 to Rule 23.1 and Note 3 to Rule 26.4 by codifying the Takeovers Executive to the Takeovers and Merger Panel's decision in Dalian Port (PDA) Company Limited (2019):
The offeror will not be permitted to deduct from its offer price any dividend or other distribution unless the offeror specifically reserves its rights in an announcement.
If the payment of dividends or other distributions is subject to withholding tax, the SFC will only allow a reduction to the offer price based on the gross amount received or receivable by the offeree company shareholders. 9
9. Going Green
The SFC introduced several green initiatives to enhance efficiency and reduce environmental impacts in the process of document submission, include:
Giving an option to the offeror and an offeree company to despatch documents under the Takeovers Code by electronic means, to the extent permissible under relevant rules and law. 10
Allowing the submissions of documents to the SFC to be done by electronic means, unless otherwise specified by the same. 11
Conclusions
Market participants have responded positively to the Consultation Paper, which, by codifying the SFC's current practices, has brought about increased clarity and confidence in interpreting the Takeovers Code. Additionally, the SFC has seized this opportunity to introduce environmentally conscious initiatives, which pave the way for a more sustainable and responsible approach to document submission in the financial industry.
1Re Cosmos Machinery Enterprises Ltd (HCMP 601/2021, [2021] HKCFI 2088) and Re Chong Hing Bank Limited (HCMP 968/2021, [2021] HKCFI 3091)
3Note 4 to Rules 3.1, 3.2 and 3.3
4Section titled “Rule of six” in Practice Note 12 (Gathering of irrevocable commitments)
5Note 8 to Rule 26.1
6Note to Rule 3.9
7Note 3 to Rule 3.7
8Note 4 to Rule 3.7
9Note 11 to Rule 23.1, Note 3 to Rule 26.3
10Rule 8.7
11Rule 12.1
