Introduction

On 19 May 2023, the Securities and Futures Commission (“SFC”) published a consultation paper proposing a number of amendments to the Codes on Takeovers and Mergers and Share Buy-backs (“Takeover Code”). This article will highlight the key changes proposed.

Shareholders’ approval

Under the current Takeover Code, a shareholders’ resolution to approve delisting must be subject to an offeror being entitled to exercise and is exercising compulsory acquisition rights. For offeree companies incorporated in jurisdictions where compulsory acquisition is unavailable, the offeror will be required to receive valid acceptances of 90% of the disinterested shares. The SFC proposed to clarify that purchases made by the offeror and persons acting in concert will be included in determining whether the threshold of 90% has been met. 

Another area that the SFC seeks to clarify is the approval of a scheme of arrangement. To remove any ambiguity in the interpretation of Rule 2.10 and Rule 2.22 as to whether the offeror and its concert parties will be allowed to vote at the shareholders’ meeting held to consider the scheme of arrangement, it is proposed that reference to “the holders of the disinterested shares” from the relevant requirement of “a duly convened meeting” is to be removed. It is proposed that by removing the said qualification, general meetings held for approving a privatisation are required to be duly convened in accordance with the company’s constitutional documents and laws of its place of incorporation.

Revisions to definitions

Under the Takeover Code, a person’s close relatives are presumed to be acting in concert with the person. Currently, the term “close relatives” only includes a person’s spouse, de facto spouse, children, parents and siblings. The SFC proposes to expand the coverage to (1) grandparents and grandchildren, (2) the spouse, de facto spouse and children of the person’s siblings and (3) the parents and sibling of the person’s spouse or de-facto spouse.

The existing definition of the term “voting right” is “voting rights currently exercisable at a general meeting of a company whether or not attributable to the share capital of the company”. There is thus ambiguity as to whether shares subject to voting restrictions (for instance, by agreement, operation of law or court order) are still treated as voting rights under the Takeover Code. The SFC proposed to remove the word “currently” from the definition of voting right and clarify that the voting rights subject to restriction (whether by agreement, by operation of law and regulation or pursuant to a court order), except voting rights attached to treasure shares, will still be regarded voting rights.

Chain principle

A person or group of persons acting in concert acquiring control of one company may acquire or consolidate control of a second company because the first-mentioned company holds a controlling interest in the second company or voting rights which, when aggregated with those already held by the person or group, secure or consolidate control of the second company.

The Executive will not normally require an offer to be made in these circumstances unless either (i) the holding in the second company is significant in relation to the first company (“Substantiality Test”) or (ii) one of the main purposes of acquiring control of the first company was to secure control of the second company by applying the purpose test (the “Purpose Test”).

While the SFC does not propose to make any changes to the Purpose Test, the SFC proposes to:

1.       add market capitalization as one of the parameters for comparison when determining the Substantiality Test; and

 

2.       codify the Executive’s practice to look-back at least the three most recent financial periods when calculations of the Substantiality Test produce an anomalous result.

The Executive’s power to manage offer period and timetable

With a view to protecting the interest of the offeree company and its shareholders, the SFC seeks to strengthen the Executive’s power to manage the offer period and timetable with the following proposed amendments:

1.       to give the Executive express power to end the offer period in the Takeover Code;

 

2.       to give the Executive the power to issue a “put up or shut up” order, i.e. to require a potential offeror to announce its firm intention to make an offer within a timeframe or to announce that it will no longer proceed with an offer;

 

3.       to codify that the extension of the last day on which an offer must be declared unconditional as to acceptances should not go beyond a date that is 4 months after the date of the offer document; and

 

4.       to amend that the latest time for return of share certificates for untaken or untendered shares in a successful offer or share buy-back must be made available no later than seven business days after the offer becoming unconditional or date of receipt of valid acceptances; or in case of an unsuccessful offer, seven business days after the withdrawal or lapse of offer.

Irrevocable commitments

In relation to the gathering of irrevocable commitments, the SFC proposed the following amendments:

1.       Consultation with the Executive will not be required where an offeror approaches a shareholder with a material interest (i.e. controlling not less than 5% of the voting rights) in an offeree company.

 

2.       The Executive must be consulted where an offeror intends to approach shareholders other than those with a material interest.

 

3.       An offeror can at most approach six shareholders in an offer.

Disclosure of indicative offer price

The SFC proposed to clarify that disclosure of an indicative offer price is not normally permitted before an announcement of a firm intention to make an offer unless there are exceptional circumstances, such as the need to clarify incorrect market rumours or to comply with foreign regulatory requirements. Once such disclosure is made, it will be treated as a price floor for any offer that materializes.

Partial offer

The SFC proposed to, among others, clarify the application of the rules governing partial offers:

1.       If the acceptance condition is satisfied after the first closing day during an extended offer period, the offeror must declare a partial offer unconditional as to acceptance on the day the acceptance condition is met. The final closing date cannot be extended beyond the 14^th day thereafter.   

2.       A partial offer must stay open for a minimum of 21 days.

3.       Where an offer could result in the offeror holding shares carrying 30% or more of the voting rights, and the offeree company has outstanding convertible securities, warrants, options or subscription rights, the offeror must make an appropriate offer or proposal to the holders of such securities.

Takeaway

The proposed amendments cover a number of important areas regarding takeover of public companies. Persons intending to acquire public companies in Hong Kong are advised to follow the development closely and ensure compliance with the updated rules.  

 

For enquiries, please feel free to contact us at:

E: cc@onc.hk                                                                       T: (852) 2810 1212 W: www.onc.hk                                                                    F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

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 © 2023