29 August, 2019
In relation to a recent case involving an indirect transfer of shares between different levels of the State-owned Assets Supervision and Administration Commission of the People's Republic of China (SASAC) at nil consideration, the Hong Kong Takeovers Panel ruled, in late July 2019, that a waiver of the general offer obligation under the Takeovers Code will not be granted.
The case relates to Maanshan Iron & Steel Company Limited (Maanshan Iron). At the time of the Takeovers Panel's ruling in late July 2019:
- Maanshan Iron was listed in both Hong Kong and Shanghai;
- Magang (Group) Holding Company Limited (Magang Group) held 45.54% of Maanshan Iron; and
- Magang Group was wholly-owned by the State-owned Assets Supervision and Administration Commission of the People's Government of Anhui Province (Anhui SASAC).
Pursuant to PRC state policy concerning the restructuring of its iron and steel industry, Anhui SASAC proposed to transfer 51% of Magang Group, at nil consideration, to China Baowu Steel Group Corporation Limited (China Baowu), which is wholly owned by the State-owned Assets Supervision and Administration Commission of the State Council of the People's Republic of China (Central SASAC).
Upon the completion of the proposed transfer, China Baowu would trigger a mandatory general offer (MGO) under the chain principle (Note 8 to Rule 26.1 of the Takeovers Code). The Takeovers Panel:
- ruled against granting a waiver to China Baowu from its MGO obligation; and
- decided that the applicable offer price should be the volume weighted average price of the H shares of Maanshan Iron on the last trading day prior to its Rule 3.7 announcement.
The Takeovers Panel took account of the following matters in its decision not to grant a waiver:
- China Baowu argued extensively that it and Anhui SASAC were acting in concert (or presumed to be acting in concert), in order to rely on Note 6(a) to Rule 26.1 of the Takeovers Code (acquisition of voting rights by members of a group acting in concert), which sets out certain factors the SFC would take into account when considering whether to waive an MGO obligation. Arguments included:
(i) the proposed transfer was not a commercial transaction, as it involved nil consideration and was conducted pursuant to state policy;(ii) upon completion of the transfer, China Baowu and Anhui SASAC would fall under the definition of "associated company" under the Takeovers Code, and they would be presumed to be concert parties; and
(iii) the proposed transfer at nil consideration would fall under note 10 to the definition of "acting in concert" under the Takeovers Code (transfer of voting rights as a gift).
- The Takeovers Panel did not accept the above arguments, as they mainly rely on future events which would only occur upon the completion of the proposed transaction. There was no evidence that the parties were an existing concert party group, hence Note 6(a) to Rule 26.1 of the Takeovers Code did not apply.
- Even if the Takeovers Panel assumed that China Baowu and Anhui SASAC had been acting in concert, China Baowu would become the new leader of a concert group and there would be a fundamental change in the balance of the shareholding in Maanshan Iron. This would not satisfy one of the factors that the Takeovers Panel would take into account when considering whether to waive an MGO obligation under Note 6(a) to Rule 26.1 of the Takeovers Code.
- Although there were cases in 2007 – 2008 involving transfers between different levels of SASAC at no consideration whereby the SFC granted a waiver from making an MGO, these cases are no longer good precedents following the Haeco decision in 2008. The Takeovers Panel's decision in Haeco laid down clear guidance that waivers should only be granted under Note 6(a) to Rule 26.1 of the Takeovers Code in a narrow range of circumstances.
For further information about the Panel decision, click here.
For further information, please contact:
Chin Yeoh, Partner, Ashurst
chin.yeoh@ashurst.com
