The Hong Kong Takeovers Panel recently ruled that, in relation to the possible mandatory general offer by Broadford Global Limited (Broadford) for the H shares in Dalian Port (PDA) Company Limited (Target), Broadford was not permitted to deduct the final dividend approved by the Target from its offer price.
Background
At the time of the Takeovers Panel’s ruling:
- Broadford was indirectly wholly-owned by China Merchants Group Limited (CMG), which was a state-owned enterprise that was under the direct control of the State-owned Assets Supervision and Administration Commission of the State Council of the PRC (SASAC). CMG held around 21.05% of the Target’s shares;
- Broadford indirectly held a 49.9% interest in Liaoning Port Group Limited (Liaoning Port), and the remaining 50.1% interest in Liaoning Port was held by the State-owned Assets Supervision and Administration Commission of the Liaoning Provincial Government (Liaoning SASAC); and
- Liaoning Port indirectly held 46.78% of the Target’s shares.
The Target announced on 2 June 2019 (the First Announcement) that, subject to various pre-conditions, it was proposed that Liaoning SASAC would transfer, at nil consideration, a 1.1% interest in Liaoning Port to Broadford (the Transfer). Upon completion of the Transfer, Broadford was obliged to make a mandatory general offer for the Target under the chain principle of the Takeovers Code. Broadford published its Rule 3.5 Announcement on 4 June 2019 (the Rule 3.5 Announcement).
Prior to the publication of the First Announcement and the Rule 3.5 Announcement, the Target had announced on 26 March 2019 that its directors proposed to distribute a final dividend, and a circular dated 10 May 2019 was subsequently published, setting out the timetable for the distribution of the final dividend. The circular stated that, subject to the passing of a shareholder’s resolution on 27 June 2019 to approve the final dividend, the H shares of the Target were to be traded without the entitlement to the final dividend starting on 3 July 2019, and the dividend was to be paid out on 16 August 2019.
It was envisaged that it would take some time before the pre-conditions to the Transfer would be satisfied. Hence, at the outset, it was likely that the mandatory general offer to be made by Broadford would be for the Target’s H shares which would be trading without the entitlement to the final dividend.
Rule 3.5 Announcement
As the Transfer involved no consideration, the offer price was determined with the agreement of the Takeovers Executive. It was agreed that the offer price would be the volume weighted average price of the Target’s H shares on 31 May 2019, which was the last trading day before any announcement was made about the Transfer and the possibility of a mandatory general offer obligation. The share prices used on that date were cum the final dividend. The agreed offer price was used in the Rule 3.5 Announcement dated 4 June 2019.
Broadford also stated in its Rule 3.5 Announcement that:
“The H Shares to be acquired under the Possible H Shares Offer shall be fully paid and free from all liens, charges, encumbrances, rights of pre-emption and any other third party rights of any nature and together with all rights attaching to them as at the date of this announcement, including the right to receive in full all dividends and other distributions, if any, declared, made or paid on or after the date of this announcement.” (the Relevant Statement)
Although the Target had declared a final dividend on 26 March 2019, however, there was no reference to it in the Rule 3.5 Announcement, nor how Broadford intended to exercise its right to receive dividends. After the Rule 3.5 Announcement was published, Broadford contacted the Takeovers Executive for confirmation that it could deduct the final dividend from the offer price.
Broadford argued that the Relevant Statement meant it was entitled to the final dividend, and a reduction in the offer price was the only feasible way to implement the offer. It also argued that the offer price was agreed with the Takeovers Executive, and at that time, the H shares were trading cum the final dividend. Broadford also sought to rely on Note 3 to Rule 26.3 to reduce the offer price as a result of the payment of a dividend.
Panel decision
In its decision dated 30 September 2019, the Takeovers Panel decided that Broadford could not deduct the final dividend from the offer price. The Relevant Statement could not be interpreted to mean that way as it was silent on that point, especially since there was no reference to the final dividend in the Rule 3.5 announcement.
As the Takeovers Code requires all statements made during an offer to satisfy the highest standards of accuracy, investors should be confident that the offer price stated in an announcement would not be reduced unless there is an explicit statement to the contrary.
Note 3 to Rule 26.3 applies specifically to the determination of the highest price paid by the offeror, when accepting shareholders are entitled under the offer to retain a dividend declared by the offeree. It does not give an offeror a general right to deduct a dividend from its offer price in any other circumstance other than in establishing the highest price paid by an offeror.
Conclusion
As Broadford was not permitted to deduct the final dividend from the offer price, this meant that its cost of making its offer was higher than it had expected. This problem could have been avoided if Broadford had considered this issue earlier and raised it with the Takeovers Executive before making its Rule 3.5 Announcement.
It was mentioned in the panel decision that, had Broadford consulted with the Takeovers Executive before publishing its Rule 3.5 Announcement, the Takeovers Executive would have agreed to an offer price which had deducted from it the Target’s final dividend.
For further information, click here for the panel decision.
For further information, please contact:
Frank Bi, Partner, Ashurst
frank.bi@ashurst.com
