Introduction

On 29 June 2016, the Securities and Futures Commission (“SFC”) publicly censured Bank of America, National Association (“BANA”) and Merrill Lynch International (“MLI”), both members of the Bank of America Merrill Lynch Group (the “BofA Group”), for their failure to comply with their disclosure obligations under the Code of Takeovers and Mergers (the “Takeovers and Mergers Code”) for their dealings in securities in two listed companies in 2015 (the “Transactions”). In its statement, alongside with the censures against BANA and MLI’s non-compliance, the SFC made general comments and advice on compliance with the disclosure obligations under the Takeovers and Mergers Code.

The disclosure obligations under the
 Takeovers and Mergers Code

General Principle 6 and Rule 22 of the Takeovers and Mergers Code set out the disclosure obligations in transactions governed by the Takeovers and Mergers Code. In general, a person who has an interest in a takeover or merger transaction to which the Takeovers and Mergers Code applies (a “Takeover Offer”) shall disclose the details of each of his dealings in the securities of the offeror or the offeree company of the Takeover Offer.

Disclosure requirements

Among the others, the following have to be disclosed in writing by a person having an interest in a Takeover Offer, to the offeror and offeree company of the Takeover Offer, their financial advisers, as well as the SFC:

• number of relevant securities purchased or sold;
• prices received or paid;
• the person’s identity;
• how the person is taken as having an interest in the Takeover Offer; and
• the total amount and percentage of relevant securities the person will control.

The information would be publicly available on the SFC’s website.

The time of disclosure is no later than 10 a.m. on the business day following the date of the relevant dealings or transactions in respect of the relevant securities.

Exempt principal trader

“Exempt principal traders” are traders permitted by the Takeovers Executive to trade as a principal with their clients in a Takeover Offer and, among the others, to conduct hedging activities regarding securities in relation to a Takeover Offer. An exempt principal trader is also subject to disclosure obligations under the Takeover Code if it is related to the Takeover Offer. Yet, instead of disclosing the full details of each dealing in relevant securities in a Takeover Offer, Rule 22.4 of the Takeover Code allows an exempt principal trader to disclose only the following:

• total purchases and sales of the relevant securities;
• the highest and lowest prices paid and received; and
• whether the trader’s connection is with the offeror or the offeree company.

Nevertheless, this exempt status will no longer be relevant if the trader is related to a Takeover Offer not for the sole reason that it is “controlled by or is under the same control as a financial or other professional adviser … to an offeror or the offeree company”. For example, if an exempt principal trader trades in the offeree company with another member of its group when the group is advising the Takeover Offer for that offeree company, it has an interest in the Takeover Offer for an additional reason that it is engaged in an intra-group trading of the relevant securities in the Takeover Offer. In such a case, the exempt status is not relevant and the more burdensome ordinary obligations of disclosure apply.

BANA’s and MLI’s non-compliance

Merrill Lynch (Asia Pacific) Limited (“MLAP”), another member in the BofA Group, was engaged to advise on each of the Transactions, which are Takeover Offers. During the offer period of each of the Transactions, BANA dealt in the shares of the offeror and/or the offeree company (the “Relevant Shares”) by executing equity swaps of the Relevant Shares.

MLI is an exempt principal trader. In order to hedge the equity swaps executed by BANA, in each of the Transactions BANA and MLI entered into corresponding back-to-back swaps with each other. As such, MLI also dealt in the Relevant Shares. Since MLI dealt in the Relevant Shares by entering into back-to-back swaps with BANA, MLI was related to the Transactions not for the sole reason that it is a member of the BofA Group. The exempt status of MLI was therefore not relevant regarding the back-to-back swaps and MLI was subject to the ordinary obligations of disclosure.

Notwithstanding the above dealings in the Relevant Shares, BANA and MLI failed to disclose a significant number of these dealings, in breach of Rule 22 of the Takeovers Code. Disclosure and self-report of non-compliance were made after the consultation by MLAP with the SFC on the disclosure requirements regarding one of the Transactions. To address the non-compliance, the BofA Group has made an open apology and carried out various remedial measures to improve its compliance policies and procedures.

Comments of the SFC

In its statement, the SFC took the opportunity to comment on the disclosure obligations under the Takeovers Code:

“The disclosure obligations under Rule 22 of the Takeovers Code are intentionally onerous to reflect the fact that a high degree of transparency is essential to the efficient functioning of the market in an offeree company’s shares and/or offeror company’s shares … during the critical period of an offer or possible offer. Timely and accurate disclosure of information in relation to dealings by the offeree company’s or the offeror company’s associates including advisers plays a fundamental role in ensuring that takeovers are conducted within an orderly framework and that the integrity of the markets is maintained.”

For a financial group like the BofA Group in which a member is an adviser engaged in a Takeover Offer, the SFC emphasized that “the presumption of acting in concert extends to all entities within a group”, which means that the disclosure obligations generally apply to all the entities in the financial group. Therefore, the SFC suggests fund manager and principal traders to consider applying for exempt status under the Takeovers Code if they foresee the need to deal in relevant securities in a Takeover Offer in which another member of their group may be engaged in advising. Consultation with the SFC is encouraged in any cases of doubt.

Lesson to learn

As stated in General Principle 6 of the Takeovers Code, “full and prompt disclosure of all relevant information” and “precaution to avoid the creation or continuance of a false market” are required from a person related to a Takeover Offer. This is the general principle behind the disclosure obligations under the Takeovers Code. It should further be noticed that the Takeovers Code, framed so far as possible in non-technical language, should not be interpreted like a statute. Therefore, if there is any doubt as to whether one is under a disclosure obligation in a Takeover Offer, consultation with the SFC and seeking specific legal advice are essential to avoid potential breaches. In particular, financial groups with different business entities shall put in place internal control and monitoring systems that can ensure that different business entities and units are aware of their disclosure obligations which arose as a result of dealings and positions held by other business units and entities.

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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.