Introduction

On 7 October 2016, the Takeovers and Mergers Panel (“Takeovers Panel”) upheld the Takeovers Executive’s decision and concluded that there is no basis to alter the offer in the way as requested by L&A International Holdings Limited (“Offeree Company”). The Panel agreed that under the Codes on Takeovers and Mergers and Share Buy-backs (“Takeovers Code”), the requirement to maintain the same ratio of cash to securities as requested by the Offeree Company only arises if a concert party has purchased shares after the formal announcement of an offer.

Background

On 22 July 2016, the Offeree Company received a letter from Favourite Number Limited (“Offeror”) to make a voluntary conditional offer to acquire all the issued share capital of the Offeree Company on the basis of one share in WLS Holdings Limited (“WLS”) and HK$0.28 in cash for every 20 shares in the Offeree Company (i.e. 0.05 WLS share and HK$0.014 cash for one share in the Offeree Company) (“Initial Offer”).

On 28 July 2016, the Offeree Company published a holding announcement (“Holding Announcement”) referring to the Initial Offer as a mere “purported” possible offer. The offer period commenced on the date of publication of the Holding Announcement.

Revised Offers

The Initial Offer gave rise to arguments due to the share purchase by a director of the Offeror and the grant of share options in respect of 2,000 million shares prior to the commencement of the offer period.

On 18 August 2016, upon a “put up or shut up ruling” issued by the Takeovers Executive, the Offeror made a Rule 3.5 announcement expressing its firm intention to make a revised offer on the basis of 57 shares in WLS and HK$5.6 in cash for every 400 shares in the Offeree Company (i.e. 0.1425 WLS share and HK$0.014 cash for one share in the Offeree Company) (“First Revised Offer”).

On 12 September 2016, subsequent to a second “put up or shut up ruling” issued by the Takeovers Executive, the Offeror further published a supplemental Rule 3.5 announcement confirming its intention to proceed and extending the First Revised Offer to cover newly issued shares following the exercise of accepted share options on the basis of 57 shares in WLS and HK$5.6 in cash for every 400 shares in the Offeree Company (i.e. 0.1425 WLS share and HK$0.014 cash for one share in the Offeree Company) (“Second Revised Offer”).

The Offeree Company contended that the Offeror should maintain the Second Revised Offer at the same ratio of cash to securities as the Initial Offer (i.e. 0.1425 WLS share and HK$0.0399 cash for one share in the Offeree Company) in accordance with Rule 24.2 of the Takeovers Code. That is, to maintain the cash to securities ratio under Rule 24.2, the cash consideration would increase up to HK$0.399 in cash for the same, if the Offeree’s interpretation was correct.

Takeovers Panel’s Decision

The Takeovers Panel held that Rule 24.2 of the Takeovers Code applied to neither the First Revised Offer nor the Second Revised Offer.

According to Rule 24.2, if the offer involves a further issue of securities of a class already listed on the Stock Exchange, the current value of the offer on a given day should normally be established by reference to the weighted average traded price of board lots (excluding special bargains and odd lots) of such securities traded during the immediately preceding trading day. If the offer involves a combination of cash and securities and further purchases of the offeree company’s shares oblige the offeror to increase the value of the offer, the offeror must endeavour, as far as practicable, to effect such increase while maintaining the same ratio of cash to securities as is represented by the offer.

Rule 24.2 only applies to “further” purchases, that is, purchases made after a Rule 3.5 announcement had been published. In this case, only after the Rule 3.5 announcement on 18 August 2016 was the Offeror bound to proceed with an offer. The private offer letter dated 22 July 2016 sent to the Offeree Company’s board of directors containing terms of an offer and expressing the Offeror’s firm intention to make an offer did not constitute a binding obligation to proceed under the Takeovers Code. Therefore, the Takeovers Panel concluded that there was no basis through the application of Rule 24.2 to alter the Offeror’s Second Revised Offer.

Implications

Once a Rule 3.5 announcement has been made, an offeror is committed to make that offer, except in the most exceptional circumstances. When an offer is announced, shareholders and the market generally can be confident that it will be implemented subject to the fulfilment of any condition. This also reinforces the importance of the financial sufficiency statement confirming an offeror’s ability to finance the full acceptance of its offer, which confirmation is contained in a Rule 3.5 announcement.

For other “talks” announcements made prior to Rule 3.5 announcements such as the announcement of a possible offer required under Rule 3.7 of the Takeovers Code, when the parties are in negotiation and until a Rule 3.5 announcement is made, a brief announcement by a potential offeror or the offeree company that talks are taking place or that a potential offeror is considering making an offer will normally satisfy the obligations under this Rule 3 of the Takeovers Code. Such an announcement does not commit a potential offeror to make an offer.

It is vital that the parties maintain confidentiality in compliance with Rule 1.4 of the Takeovers Code. Where a possible offer is still in the negotiation stage and may not materialise, parties are obliged to keep such information confidential until a firm intention to make an offer is announced. When parties are deciding whether to issue a Rule 3.7 announcement, they should carefully consider whether such an announcement is required to be made in cases, for example, where a possible offer (including a possible privatisation proposal) which is only at a stage of preliminary contemplation or negotiation.

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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.