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15 August, 2018
Further to the SFC's consultation paper published in January 2018, the SFC published its consultation conclusions on its proposed amendments to the Takeovers Code on 13 July 2018. The amendments to the Takeovers Code took effect on the same day (13 July 2018).
The proposals set out in the consultation paper have been largely adopted by the SFC. The changes to the Takeovers Code are numerous and cover a wide range of areas, and include both significant changes and other housekeeping amendments. The changes have been welcomed by many market participants, as many of the key amendments strengthen shareholder protections and aim to ensure a fair and informed market.
Set out below are the key changes to the Takeovers Code.
Compensation rulings
The amended Takeovers Code now gives explicit power to the Panel to make a compensation ruling. This change brings the Hong Kong position in line with London and Singapore.
A compensation ruling will require a person found in breach of certain provisions in the Takeovers Code (which relate to an obligation to make an offer) to pay compensation (which may also include interest) to the shareholders or former shareholders of the offeree company, so that these shareholders would receive what they would have been entitled to receive if the relevant rule, requiring an offer to have been made, had been complied with. The amended Rules do not provide details on how, when or on whom a compensation order should be imposed by the Panel, as the SFC has stated that it would prefer to leave this to the discretion of the Panel.
Compliance rulings
This amendment clarifies the Executive's and the Panel's existing power to make compliance rulings on a pre-emptive basis to prevent breaches and to protect shareholders and the market. If the Executive / Panel is satisfied that there is a reasonable likelihood that a person will breach the Takeovers Code, it may issue an order restraining that person's action or to secure compliance with a requirement of the Takeovers Code.
This amendment is in line with the SFC's approach of preferring to take pre-emptive action to prevent a breach, which may help avoid disciplinary proceedings, which are often time consuming and resource intensive for the SFC and the parties involved.
Voting threshold for whitewash waivers
Under the Takeovers Code, the SFC may waive an obligation to make a general offer under limited circumstances – this is known as the "whitewash waiver". Prior to these changes, whitewash waivers were normally granted conditional upon approval by a simple majority vote of independent shareholders. The SFC found that in most cases in the past where the vote of independent shareholders was sought, simple majority approval was virtually inevitable, and on this basis, saw that the simple majority independent shareholder approval requirement was an insufficient "gatekeeper". In addition, the SFC has found evidence to suggest organised systemic warehousing of shares by friendly non-independent shareholders who vote in favour of the transaction.
In order to address these concerns, the SFC has decided to raise the voting threshold for whitewash waivers. Under the amended Takeovers Code, approval by 75% of the independent shareholders is required.
However, the SFC has decided that the underlying transaction will remain subject to the simple majority rule, in order to align it with the requirements under the Listing Rules. This would mean that if the minority shareholders approve the underlying transaction but do not approve the whitewash waiver resolution, as long as the whitewash waiver condition is waivable, the underlying transaction would still be able to proceed, provided that it is coupled with a general offer.
Delistings of companies with no compulsory acquisition procedures
Rule 2.2(c) of the Takeovers Code provides that a resolution to delist a company must be subject to the offeror being entitled to exercise, and exercising, its rights of compulsory acquisition (for Hong Kong incorporated companies, this arises when an offeror obtains acceptances in respect of 90% of the shares for which the offer is made). Previously, the SFC was asked to waive Rule 2.2(c) in the case of companies incorporated in jurisdictions which do not have statutory rights of compulsory acquisition (such as the PRC). This created a concern that if waivers from Rule 2.2(c) were granted without imposing a minimum 90% acceptance condition, it would become easier for companies incorporated in jurisdictions without compulsory acquisition rights to delist as they could do so without securing 90% of acceptances, and this would lead to minority shareholders holding illiquid shares in a de-listed company.
Pursuant to the amendments to the Takeovers Code, in the case of companies incorporated in jurisdictions without compulsory acquisition rights, the SFC would normally require these companies to make additional arrangements in respect of the offer before considering granting a waiver from Rule 2.2(c). The arrangements include: i) allowing the offer to remain open for acceptance for a longer period of time; ii) sending notices to shareholders who have not accepted the offer to notify them of the implications of not accepting the offer; and iii) requiring the resolution to approve the delisting to be subject to the offeror receiving valid acceptances amounting to 90% of the disinterested shares.
Definition of associate
The definition of "associate" has been narrowed to eliminate overlap and potential inconsistencies with the definition of "acting in concert". In particular, the definition of "associate" will no longer extend to associated companies within an offeror or offeree company's group, and will not include a company having a material trading arrangement with an offeror / offeree. The amended definition will avoid unnecessarily wide disclosures which do not provide meaningful information in the context of an offer, in particular, under Rule 22 (Disclosure of dealings during offer period).
Dealings with the SFC
The Takeovers Code has been amended to clarify that all parties dealing with the Executive, the Panel and the Takeovers Appeal Committee must do so in an open and cooperative manner. A person must provide all relevant information which they are aware of. The obligation to provide true, accurate and complete information is subject to a reasonable care test, and parties should promptly correct and / or update the information if it changes. This amendment was made as there have been a number of recent cases where parties dealing with the Executive had not done so in an open and cooperative manner. The amendment is also broadly consistent with the requirement set out in the UK Takeover Code.
Disclosure matters
Disclosure in securities exchange offers: If securities other than those issued by the offeror are offered as consideration for an offer (Third Party Securities), the Takeovers Code now requires disclosure of details of and dealings in the Third Party Securities.
Deadline for filing dealing disclosures: The Takeovers Code has been amended so that the deadline for filing dealing disclosures has been extended from 10.00 a.m. to 12 noon on the business day following the date of the transaction; for transactions that take place in U.S. time zones, the deadline has been extended to 12 noon on the second business day following the date of the transaction.
Method of dealing disclosure: In terms of public disclosures required under Rule 22, the requirement to make separate disclosures to the offeror, offeree or their financial advisors has been removed. The requirement has been simplified because once the SFC receives the prescribed form for dealing disclosures, it would be posted on both the SFC's website and the Stock Exchange's website.
Various miscellaneous amendments have also been made to the Takeovers Code; please refer to the consultation conclusions for details.
For further information, please contact:
Frank Bi, Partner, Ashurst
frank.bi@ashurst.com
