Introduction

The Securities and Futures Commission (“SFC”) recently issued a Takeovers Bulletin highlighting, among other points, the importance of ensuring availability of sufficient financial resources in a takeover of a listed company. This article will highlight a few points to note in this regard, including which party bears the responsibility of giving the confirmation of sufficient available financial resources, duty of the party giving such confirmation and until when such duty will last.

Confirmation by financial adviser

Under Rule 3.5 of the Code on Takeovers and Mergers (the “Takeovers Code”) issued by the SFC, before making an announcement of a firm intention to make an offer for takeovers of a listed companies, the offeror should have every reason to believe that it can and will continue to be able to implement the offer. Hence, an offeror is required to have in place the necessary financing arrangements to satisfy full acceptance of the offer when it announces a firm intention to make an offer under Rule 3.5. Responsibility in this connection also rests on the financial adviser to the Offeror.

Rule 3.5 further provides that the announcement of an offer should include confirmation by the financial adviser or by another appropriate third party that resources are available to the offeror sufficient to satisfy full acceptance of the offer. Practice Note 15 reiterates that it is the sole responsibility of financial advisers to ensure sufficient financial resources to satisfy an offeror’s obligations in respect of an offer.

Under note 3 to Rule 3.5 and Practice Note 15, where a mandatory offer obligation will be triggered by an acquisition of shares, it is expected that the confirmation provided by the financial adviser in relation to sufficient financial resources to also cover the necessary resources required to complete the acquisition of shares.

Duty of financial adviser

A financial adviser, in discharging its duties to confirm financial resources, should observe the highest standard of care to satisfy itself of the adequacy of resources, including performance of due diligence.

As a matter of practice, the financial adviser should provide the Executive Director of the Corporate Finance Division of the SFC (or any of his delegate) (“Takeovers Executive”) with a signed letter:

1.       confirming that the financial adviser is satisfied that there are sufficient resources available to satisfy the offer in full;

2.       setting out the basis for the financial adviser’s confirmation and details of the due diligence steps taken by the financial adviser (including but not limited to a list of the documents that it has reviewed) in satisfying itself that sufficient financial resources are and will be available; and

3.       confirming, where relevant, that no subjective conditions are attached to the financing.

The Takeovers Executive may make enquiries or require evidence to support a statement that resources are available to satisfy the offeror’s obligations in respect of the offer. That said, the financial adviser is not expected to provide the Takeovers Executive with copies of related loan documentation or other relevant documents such as bank facility letters relating to the cash required unless requested to do so by the Takeovers Executive.

Practice Note 15 provides an assurance that a financial adviser confirming that resources are and will continue to be available will not be expected to produce the cash itself if, in giving the confirmation, it acted responsibly and took all reasonable steps to assure itself that the cash was available.

Continuous duty until consideration settled

The financial adviser is responsible for ensuring that the offeror has sufficient financial resources to discharge its payment obligations until the consideration due under the offer is settled.

In this connection, the first timing for a financial adviser to give confirmation as to sufficient financial resources is at the announcement of a firm intention to make an offer under Rule 3.5.

Reconfirmation is required prior to despatch of the offer document. Paragraph 11 of Schedule I of the Takeovers Code provides that where the consideration consists of, or includes, cash or any other assets except new securities to be issued by the offeror company, the offer document must include confirmation by a financial adviser or by another appropriate independent party that resources are available to the offeror sufficient to satisfy full acceptance of the offer.

As a matter of practice, the financial adviser should provide the Takeovers Executive with an updated signed confirmation letter of sufficiency of financial resources before the offer document is despatched to the shareholders of the offeree company. This confirmation can be in a form similar to the one mentioned above for the purpose of complying with Rule 3.5.

In the recent Takeovers Bulletin issued by the SFC in March 2024, it supplements that in case there are any changes in circumstances that might affect the financial adviser’s bases for its confirmation, the offeror and its financial adviser should work together to ensure that the offeror continues to have sufficient financial resources to satisfy full acceptance of the offer.

No financing condition allowed in the offer

The last point to note is that the making of offers, whether voluntary or mandatory, must not be subject to financing conditions.

In other words, it would not be acceptable for such an offer to be subject to a condition that the offeror is able to obtain relevant financing to proceed with the offer or any other condition to similar effect.

In cases where an acquisition of shares would trigger a mandatory offer obligation, it will likewise not be acceptable for the sales and purchase agreement in respect of the acquisition to contain a similar condition that the offeror is able to obtain relevant financing to make the mandatory offer following completion of the acquisition or any other condition to similar effect.

Conclusion

The Takeovers Bulletin highlights the importance of ensuring availability of sufficient financial resources in a takeover of a listed company so as to comply with the Takeovers Code. Any party in breach of the Takeovers Code may face public criticism by the SFC and other sanctions listed in the Takeovers Code. If in doubt, you are always advised to consult a compliance lawyer.