1 February, 2018
Last Friday, the SFC published a consultation paper on proposed amendments to the Takeovers Code . It has been over 10 years since substantive amendments were made to the Takeovers Code in 2007. The amendments proposed in this latest consultation paper span numerous aspects of the Codes, including to reform the powers of the Executive and Panel, narrow the definition of “associate” and revise the requirements for whitewash waivers and delistings; in addition, several more administrative and clarificatory changes are proposed. The consultation period will close on 19 April 2018.
We summarise below four key proposed changes.
Additional powers of the Executive and Panel Compensation rulings
The SFC proposes to give the Panel new power to require a person found to be in breach of the Codes to pay compensation to shareholders. For example, where an offeror has failed to make a mandatory offer as required by the Takeovers Code, rather than requiring a general offer to be made, the Panel may consider that it is more appropriate to require the persons found to be in breach to pay compensation to shareholders. The power to grant such a ruling will be limited to a breach of certain Rules, including:
1. Rules 13 and 14 – appropriate offers and comparable offers;
2. Rule 24 – purchases resulting in an obligation to offer a minimum level of consideration;
3. Rule 26 – mandatory offer obligation; and
4. Rule 31.3 – 6-month delay before acquisition above offer price.
Compliance rulings
The SFC proposes to codify the existing practice of the Executive in issuing pre-emptive rulings when it has become aware of proposed actions that would amount to a breach of the Codes and to warn the relevant parties that if they were to proceed with such action they may be subject to disciplinary action under the Codes. The policy rationale of introducing this ruling aligns with the recent incentive of the SFC to regulate the securities market by taking early actions to pre-empt a mishap.
The proposed changes are consistent with the Panel’s approach in previous cases, as well as the takeovers codes in London and Singapore.
Definition of “associate”
The SFC proposes to narrow the definition of “associate” so that, where appropriate, the classes of associate will be aligned with the classes of parties presumed to be acting in concert. The term “associate” is most relevant to the disclosure of dealings under Rule 22, and the proposed change would therefore serve to avoid unnecessarily wide requirements which may not provide meaningful disclosure in the context of an offer.
Raising the voting approval threshold for whitewash waivers
There is a concern that the independent shareholders voting requirement to approve whitewash transactions may not be acting as the “gatekeeper” that it was intended to be. The SFC proposes to increase the approval threshold 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 takeprivate transactions. The consultation paper notes the similar concerns raised by the HKEX with regards to capital raisings by listed issuers which involve a change in control of the issuer.
Approval of delistings by independent shareholders
Where the local law of an issuer does not afford compulsory acquisition rights to an offeror (e.g., the PRC), it is technically not possible for the offeror to comply with Rule 2.2(c), which requires that any resolution to approve a delisting must be subject to “the offeror being entitled to exercise, and exercising, its rights of compulsory acquisition.” The SFC has in the past granted waivers from compliance with this requirement to H-share issuers. However, without the protection of Rule 2.2(c), there are concerns that 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 or the Hong Kong Listing Rules.
The SFC therefore proposes effectively to require an offeror that wishes to make a take-private offer for an H-share issuer (or an issuer in any other jurisdiction that does not afford compulsory acquisition rights) to put in place a mechanism to give disinterested shareholders more opportunities to exit. Such mechanisms may include:
1. keeping the offer open for acceptance for a longer period than normally required;
2. notifying all shareholders who have not yet accepted the offer of the closing date and the implications if they choose not to accept the offer (i.e., that these shareholders may end up holding an interest in an unlisted company); and
3. making the resolution to approve the delisting subject to the offeror having received valid acceptances amounting to 90% of the disinterested shares.
For further information, please contact:
Robert Cleaver, Partner, Linklaters
robert.cleaver@linklaters.com
