Hong Kong Takeovers and Mergers Panel decision: Preliminary offer announcement must expressly allow offeror to deduct a final dividend from the offer price

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Introduction

The Takeovers and Mergers Panel (the “Panel”) has made a ruling on 30 September 2019 in relation to a referral by the Takeovers Executive of the Securities and Futures Commission (the “SFC”) under the Codes on Takeovers and Mergers and Share Buy-backs (the “Takeovers Code”).

In this particular case, the Panel was asked to consider whether Broadford Global Limited (“Broadford”) is permitted under the terms of its possible mandatory general offer for the H Shares in Dalian Port (PDA) Company Limited (the “Company”) to deduct the final dividend approved by shareholders of the Company from its offer price.


Background and facts

The Company is a joint stock company incorporated in the People’s Republic of China (the “PRC”). The Company’s H Shares are listed on the Main Board of the Stock Exchange of Hong Kong Limited, while its A shares are listed on the Shanghai Stock Exchange.

Broadford is a company incorporated in Hong Kong and is indirectly wholly-owned by China Merchants Group Limited (“CMG”, together with its subsidiaries, “CMG Group”), which is a state-owned enterprise under the direct control of the State-owned Assets Supervision and Administration Commission of the State Council of the PRC (“SASAC”).

Approximately 21.05% of the shares in the Company are held by the CMG Group, while a 46.78% shareholding interest is held indirectly by Liaoning Port Group Limited. In turn, Broadford indirectly owns a 49.9% interest in Liaoning Port Group Limited, while the remaining 50.1% interest of Liaoning Port Group Limited is owned by the State-owned Assets Supervision and Administration Commission of the Liaoning Provincial Government (“Liaoning SASAC”).

The Company, together with Broadford, announced (the “First Announcement”) on 2 June 2019 that, subject to various pre-conditions, Liaoning SASAC would transfer a 1.1% equity interest in Liaoning Port Group Limited to Broadford for a nil consideration (the “Equity Transfer”).  Upon completion of the Equity Transfer, Broadford was obliged to make a mandatory general offer for the Company under the chain principle of the Takeovers Code. Broadford and the Company published a joint announcement on the possible offer pursuant to Rule 3.5 of the Takeovers Code (the “Rule 3.5 Announcement”) on 4 June 2019.

With the Equity Transfer, Broadford will hold a 51% shareholding interest in the Liaoning Port Group Limited, achieving statutory control of the Liaoning Port Group Limited.  The Equity Transfer will then have the effect of increasing CMG Group’s indirect voting interest in the Company to 67.83% of the total issued share capital of the Company (CMG Group’s original shareholding interest of 21.05% plus Liaoning Port Group Limited’s shareholding interest of 46.78%).  If the Equity Transfer is completed, it will trigger a mandatory general offer obligation pursuant to Rule 26.1 of the Takeovers Code (the “Possible H Shares Offer”).  Rule 26.1 of the Takeovers Code stipulates that a mandatory offer is required in certain circumstances, including when any person acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights of a company.

The Rule 3.5 Announcement stated that subject to the completion of the Equity Transfer, Broadford would implement the Possible H Shares Offer at the offer price (the “Offer Price”) of HK$1.0127. As the Equity Transfer involved no consideration, the Offer Price was determined with the agreement of the Takeovers Executive and with reference to the volume weighted average trading price of the H Shares as at 31 May 2019, being the date of signing of the agreement regarding the Equity Transfer.

Prior to the publication of the First Announcement and the Rule 3.5 Announcement, the Company has disclosed in the annual results announcement on 26 March 2019 that its directors proposed to distribute a final dividend of RMB1.9 cents per share (circa HK2.163 cents). On 10 May 2019, the Company published a circular setting out the timetable for the distribution of the final dividend. A resolution was to be proposed at the Company’s annual general meeting on 27 June 2019. Subject to the passing of the resolution, the H Shares were to be traded ex the entitlement to the final dividend starting on 3 July 2019 and the dividend was expected to be paid out on 16 August 2019.

Given the Equity Transfer was subject to pre-conditions which were expected to take time to fulfil, the Possible H Shares Offer would very likely be traded without the entitlement to the final dividend.

However, in the Rule 3.5 Announcement, no reference was made to the final dividend or if and how Broadford intended to exercise its right to receive dividends and distributions. Instead, there is a statement in the Rule 3.5 Announcement as follows:

“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”)

On 14 June 2019, Broadford’s advisers contacted the Takeovers Executive to seek its confirmation that Broadford could deduct the final dividend from the Offer Price so that it would be reduced from HK$1.0127 to HK$0.99107. A number of written submissions were then made by Broadford to the Takeovers Executive which resulted in the matter being referred to the Panel.


Provisions of the Takeovers Code relevant to the issue in question

General Principle 6 of the Takeovers Code requires all persons concerned with a takeover offer or possible offer to make full and prompt disclosure of all relevant facts and take every precaution to avoid the creation or continuance of a false market. Parties involved in the takeover offer or possible offer must take care that the statements made would not mislead shareholders or the market.

Rule 9.1 of the Takeovers Code provided that any announcement made in relation to an offer or possible offer or during an offer period must satisfy the highest standard of accuracy and the information given must be adequately and fairly presented.

There is no provision in the Takeovers Code that specifies how an offeror should describe how any dividend declared or paid during an offer period will impact on the price being offered.

The only reference related to potential alteration of an offer price resulting from the payment of a dividend, which is retained by assenting shareholders, is in Note 3 to Rule 26.3 (the “Note”) which states:

“When accepting shareholders are entitled under the offer to retain a dividend declared by the offeree company but not yet paid, the offeror, in establishing the level of the cash offer, may deduct from the highest price paid the net dividend to which offeree company shareholders are entitled.”

While the Note refers only to a specific circumstance when an offeror is permitted to deduct a dividend from the price paid for shares in an offeree company to determine the highest price paid for the shares in order to establish the level of a cash offer, the Note does support the notion that there may be other circumstances when the deduction of a dividend from the offer price may be appropriate, although the Takeovers Code does not particularise what those circumstances might be.


Analysis

The case of the Takeovers Executive

The Takeovers Executive considered the Relevant Statement in the Rule 3.5 Announcement was ambiguous as to the right to receive dividends. While the Relevant Statement referred to the offeror’s right to receive all dividends, it did not mention how the offeror would exercise the right and the possibility that the Offer Price might be reduced. The Takeover Executive found no circumstantial evidence before the publication of the Rule 3.5 Announcement that Broadford had considered the consequences of the final dividend on its Offer Price even though it was almost certain that, when its offer was made, the H Shares would be trading without the entitlement to the final dividend.

The Takeover Executive also found it illogical for Broadford to claim its entitlement to dividends which have been paid before it had become a shareholder of the Company. As stated, the Equity Transfer was subject to pre-conditions which were expected to take time to fulfil, so the offer document was only expected to be published in October 2019, which is three months after the H Shares had traded ex-dividend. This would be unfair to shareholders who had acquired the H Shares ex-dividend in the expectation of the Offer Price as stated in the Rule 3.5 Announcement to find that it had been reduced by the amount of a dividend the shareholder had not received.

The Takeover Executive believed that the trading in the H Shares on the day of publication of the Rule 3.5 Announcement, the last day the H Shares traded cum entitlement to the final dividend and the ex-dividend date supported its view that the market was trading in the expectation that the Offer Price would be as originally stated and the final dividend would not be deducted from it.

It is the Takeover Executive’s view that unless the possibility of a reduction is specifically mentioned in the preliminary announcement of the offer in accordance with Rule 3.5, the Offer Price cannot be reduced. If shareholders are not warned of the possibility of a reduction in the Offer Price, they would be making investment decisions based on what had been announced but unaware that a reduction could be made. Further, the Takeovers Executive did not believe that the ambit of the Note can be extended to permit such a reduction.

The Takeovers Executive did not think it has compelled the offeror to increase its offer as the Offer Price was stated clearly in the announcement and the market has traded on this basis. While the Takeovers Executive understands that this will increase the cost of Broadford’s offer, this could have been avoided had Broadford considered the issue and raised it with the Takeovers Executive before it published the Rule 3.5 Announcement.

The case of Broadford

Broadford submitted that the Relevant Statement was clear in expressing that the offeror was entitled to the final dividend declared by the Company. It is of Broadford’s view that a reduction in the Offer Price was the only feasible way to implement the Possible H Shares Offer in accordance with its stated terms when the H Shares were to be acquired ex the entitlement to the final dividend.

Instead of deciding through purchases or negotiation which is how an offer price is generally determined, the Offer Price was derived by a formula as directed by the Takeovers Executive, being the weighted average trading price of the H Shares on 31 May 2019. At that time, the H Shares were trading cum the final dividend so that was how the Offer Price was determined.

Broadford viewed that the Note permits an offeror to reduce an offer price as a result of the payment of a dividend by the net amount of that dividend. Unlike many provisions in the Takeovers Code, there was no requirement to consult the Takeovers Executive to make such an adjustment. It is Broadford’s view that all Broadford was asking was to use an established mechanism to reflect what it had intended from the outset as set out in the Relevant Statement.

Broadford also submitted that the Relevant Statement was a contractual term of the Possible H Shares Offer, rather than an assertion of a shareholder’s rights, and the only practical way of enforcing the contractual right to dividends was by making the deduction to the Offer Price. It is of their view that the pattern of trading in the H Shares which had settled in a narrow band of HK$0.99 to HK$1.01 confirmed the expectation that the Possible H Shares Offer would be at a price net of the final dividend.


The Panel’s ruling and reasoning

The Panel ruled that a deduction of the final dividend from the Offer Price is not permitted and its reasons are as follows:

  1. Although the Note may indicate that a dividend may be deducted in certain circumstances when determining an offer price, it does not give an offeror any general right to deduct a dividend from its offer price and it certainly does not permit such a deduction without prior consultation with the Takeovers Executive. Broadford could not, therefore, rely on the provisions of the Note to justify the reduction of its stated offer price by deducting from it the Company’s final dividend payment.
  2. In the Rule 3.5 Announcement, there was no reference to the Company’s final dividend or the possibility that the Offer Price might be subject to reduction to reflect the payment of the final dividend. The Panel views that it is difficult to see how shareholders and potential investors could have understood the Relevant Statement to mean that the offeror is permitted to reduce the Offer Price by the amount of the final dividend.
  3. In the Rule 3.5 Announcement, prominence is given to the Offer Price in the summary section and in a number of places in the full text. The expectation of anyone reading the Rule 3.5 Announcement would have been that shareholders will be offered HK$1.0127 per H Share irrespective of what is stated in the Relevant Statement and when payment of the final dividend was made.
  4. Given the requirement of the Takeovers Code that all statements made during the course of an offer must satisfy the highest standards of accuracy, shareholders and potential investors in normal circumstances should be confident that the offer price stated in an announcement made in accordance with the provisions of Rule 3.5 should not be reduced unless there is an explicit statement to the contrary.

Accordingly, the Panel has determined that, if the Equity Transfer is completed, Broadford must make the H Shares Offer on the basis of the Offer Price of HK$1.0127 as stated in the Rule 3.5 Announcement and that it is not permitted to deduct the Company’s final dividend from the Offer Price.


Conclusion

The Takeovers Executive of the SFC made it clear that had Broadford consulted with it on the issue of the final dividend before the publication of the Rule 3.5 Announcement, it would have agreed to a price which had deducted from it the Company’s final dividend.

Market participants are therefore advised and recommended to consult the Takeovers Executive on all issues in doubt before making announcements in relation to a possible offer, since once an announcement was made, it will be expected to satisfy the highest standard of accuracy and must not contain any information that may mislead shareholders or the market.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2019