25 January, 2018
The SFC has launched a three-month consultation exercise on proposed amendments to the Takeovers Code. The proposals in the consultation paper cover a wide range of areas of varying significance. The proposals include reforms to the Executive’s powers in administering the Takeovers Code and changes to the shareholder approval requirements for whitewash transactions and delistings, as well as less noteworthy “housekeeping” amendments which codify existing practice and update accounting terminology. In this bulletin, we summarise the key proposals.
Enhanced powers of the Executive and Panel – compensation, compliance rulings and co-operation Compensation
In line with the position under the equivalent codes in London and Singapore, the SFC is proposing that the Panel is given the power to order compensation to be paid to shareholders for certain breaches of the Takeovers Code. This power would only apply to breaches of specified rules relating to the obligation to make a takeover offer or its terms (such as the mandatory offer obligation under Rule 26, Rule 23 on the nature of the consideration to be offered and Rule 24 on the minimum level of consideration required). The intent behind this proposal is to give the Panel the power to order compensation where it believes it to be “just and reasonable” to put shareholders in the position they would be have been in if the Takeovers Code had been complied with.
It should be noted that the Takeovers Code is non-statutory and therefore a compensation ruling could not be pursued through the courts. However, the ultimate sanction for breach of the Takeovers Code is a cold shoulder order. The consultation paper cites previous Panel decisions where cold shoulder orders have been made, to be lifted upon payment of compensation. It appears that this is the approach the Panel may follow to enforce compensation rulings if this proposal is ultimately adopted.
Compliance rulings
Expanding upon the existing provisions of the Takeovers Code which enable the Executive to make a ruling of its own volition, the consultation paper proposes adding specific provisions to make it clear that the Executive and the Panel can issue pre-emptive compliance rulings where satisfied that a person has, or there is a reasonable likelihood that a person will, breach the Takeovers Code.
Co-operation
The proposals also enhance the requirements in the Takeovers Code for parties to cooperate with the Takeovers Executive and the Takeovers Panel and to provide true, accurate and complete information.
The proposals include requirements to correct any information which was, or becomes, incorrect and to promptly notify any new information where relevant to a determination which has continuing effect.
Section 8.3 of the Introduction to the Takeovers Code is also to be amended to refer to the requirement to submit the SFC’s prescribed form with any application specifying the truth, accuracy and completeness of the information and confirming the authority for it to be filed.
Increased voting approval threshold for whitewash waivers
The consultation paper proposes increasing the voting approval threshold for whitewash waivers. Currently the Takeovers Code includes a dispensation from the requirement to make a mandatory general offer under Rule 26 in certain limited circumstances where a “whitewash waiver” is granted. The whitewash waiver currently requires majority independent shareholders’ approval of the transaction (ie only those shareholders not involved or interested in the transaction). In the consultation paper, the SFC is proposing to increase the voting approval threshold from a majority to at least 75% of the independent vote at the meeting. Additionally, the SFC is proposing that the underling transaction and the whitewash waiver are separately approved (each with at least 75% of the votes of the independent shareholders).
This would provide additional safeguards to minority shareholders and enable shareholders to vote in favour of a transaction but not the whitewash waiver if this is what they want.
These proposals have been driven by the SFC’s concern that whitewash waivers have become viewed as inevitable and that majority shareholder approval does not enable any effective veto by dissenting shareholders such that these transactions are open to potential abuse. Separately, the SFC has also recently raised concerns about questionable capital raisings which may be potentially unfair to minority shareholders. These issues are being addressed through a Stock Exchange consultation (see our previous e-bulletin for further information).
Additional requirements for delistings for companies with no compulsory acquisition procedures
The consultation paper proposes adding a note to Rule 2.2 of the Takeovers Code on delistings to deal with companies from jurisdictions that do not have a compulsory acquisition procedure, such as the PRC. Under Rule 2.2, one of the requirements for delisting following a takeover offer is that the resolution to approve it be subject to the offeror being entitled to exercise, and having exercised its rights of compulsory acquisition. For jurisdictions where the company law does not include this right, the SFC is asked to waive this requirement. The consultation paper proposes measures to protect minority shareholders as a condition for granting any waiver. The consultation paper proposes that such measures include (i) keeping the offer open for acceptances for a longer period than normally required; (ii) notifying shareholders who have not yet accepted the offer of the extended closing date and the implications for not accepting the offer; and (iii) requiring the delisting resolution to be conditional on having received 90% acceptances from disinterested shareholders.
Adjustments to the definition of “associate”
The consultation paper proposes amendments to the term “associate” in the Takeovers Code to eliminate the overlap and potential inconsistencies with the definitions of equivalent classes of persons under the definition of “acting in concert”. These changes will narrow the definition of associate in certain respects and eliminate unnecessarily wide disclosures.
Amendments to disclosure requirements of shareholdings and dealings
Various amendments to the disclosure requirements in respect of shareholdings and dealings are proposed in the consultation paper. In particular, the proposed amendments clarify the disclosures required in a securities exchange offer where the securities being offered as consideration are not in the offeror and the disclosures where the target company is a REIT.
For dealing disclosures under Rule 22, the consultation paper proposes extending the timing for filing disclosures under note 5 to Rule 22. The existing requirement for disclosure to be made no later than 10 a.m. is proposed to be extended to 12 noon on the business day following the date of the transaction, or, for dealings in US time zones, 12 noon on the second business day. The SFC is also proposing simplifying the filing requirements for public disclosures by dispensing with the need to notify in writing the offeror and offeree companies and their financial advisers. Filing with the Executive will suffice, with the Executive publishing the disclosure on the SFC and Stock Exchange’s websites.
Other proposals
Other miscellaneous proposals covered in the consultation paper include:
- Amending class (5) of the presumption of acting in concert relating to financial advisers to exclude exempt fund managers from this class;
- Amending the notes to Rule 8.1 on availability of information during an offer to clarify that the safeguards applicable to meetings are extended to media interviews and communications;
- Clarifying that “meetings” in Rule 8.1 extends to those held by telephone or other electronic means;
- Codifying the requirements of Practice Note 20 as regards (i) the confirmation required that the document has been published and that no material change has been made since the SFC’s no comment confirmation and (ii) the confirmation of the accuracy of the translation;
- Replacing the references to approvals of the Communications Authority with general references to regulatory approvals;
- Clarifying that the provisions that provide for an offeror not to be bound by a no extension statement in a competitive situation also apply to a no increase statement;
- Clarifying that an offeror’s right to set aside a no extension or no increase statement where they reserve the right to do so should not be limited to competitive situations or the offeree board recommending the increased or improved offer. Of importance is that the reservation is not dependent solely on subjective judgements by the offeror;
- Specifying the shareholder vote information needed in a results announcement in respect of jurisdictions requiring approval by a majority in number;
- Adjusting Rule 30.1 to make it clear that conditions to an offer must not be subjective, neither depending on the judgement of the offeror nor the offeree;
- Clarifying the application of Rule 31.1 in respect of offers which are unconditional at the outset;
- Clarifying the disclosure requirements in the offeree board circular on the views of the independent committee of the offeree board and the independent financial adviser;
- Permitting inclusion of historical financial statements by reference in the offeree board circular; and
- Aligning accounting terminology with current accounting standards and the Listing Rules.
The proposals in the consultation paper are aimed at enhancing investor protection and ensuring the fair treatment of shareholders participating in the Hong Kong market. The consultation paper is open for comments until 19 March 2018.
For further information, please contact:
Matt Emsley, Partner, Herbert Smith Freehills
matt.emsley@hsf.com
