Introduction

Rule 26.1 is one of the most fundamental provisions of the Code on Takeovers and Mergers (“Takeovers Code”). Rule 26.1(a) provides that any person who acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights of a company, he shall make a mandatory general offer to the shareholders of that company. A recent case serves as a reminder that the Securities and Futures Commission (“SFC”) takes breaches of Rule 26.1 very seriously and would impose sanctions even if the breaches are due to inadvertent oversight.

Background

Between 2 and 20 November 2023, Ms Zuo Ping (“Ms Zuo”) made a number of acquisitions and disposals resulting in a net holding of 28,200,000 shares (“Shares”) in CBK Holdings Limited (“CBK”) on the market via her newly opened brokerage account. As a result of her dealings, Ms Zuo’s shareholding interest in CBK increased from 0% to 30.22% of its then issued share capital on 20 November 2023. Under Rule 26.1 of the Takeovers Code, Ms Zuo’s dealings had triggered a mandatory general offer obligation.

Subsequently, Ms Zuo bought another 700,000 Shares on 24 November 2023 and disposed of 40,000 Shares on 28 November 2023. These dealings further increased her shareholding in CBK to 28,860,000 Shares, which represented 30.93% of CBK’s then issued share capital.

Ms Zuo did not notify CBK of these acquisitions at the material time or make timely disclosure in compliance with Part XV of the Securities and Futures Ordinance (Cap. 571) (“SFO”). Ms Zuo only informed CBK in writing on 11 December 2023. Ms Zuo claimed that her breach of Rule 26.1 of the Takeovers Code was inadvertent and she had no intention to make a general offer because of insufficient financial resources. On 12 December 2023, CBK requested a trading halt, and on 18 December 2023 CBK published an announcement to disclose the above and resumed trading on the same day.

Ms Zuo subsequently disposed of her 28,860,000 Shares on 28 July 2024 according to her filed disclosure of interest notice. 

Sanctions against Ms Zuo

Ms Zuo accepted that her breach of Rule 26.1(a) of the Takeovers Code had deprived CBK’s shareholders of the right to receive a general offer for their Shares, and she apologised for such breach. The SFC found that, at the time of the breach, Ms Zuo directly held a substantial shareholding interest (as defined under the SFO) in the parent company of a corporation licensed to carry out Type 1 regulated activities (dealing in securities) under the SFO. In addition, she was also a director of two substantial shareholders of the parent company of that licensed corporation at the time.

Given Ms Zuo’s background, the SFC is of the view that it is reasonable to expect that Ms Zuo should have been aware of the rules and regulations concerning changes in significant shareholding in listed companies in Hong Kong, and she should have made necessary enquiries and sought professional advice about the implications of her acquisitions of the Shares under the Takeovers Code before the transactions. Nonetheless, she acquired more than 30% interest in a listed company in a short span of about two weeks shortly after opening a brokerage account for this purpose, and continued to make more purchases thereafter.

The SFC concluded that Ms Zuo’s conduct fell short of the standards expected of her and amounts to a disregard of one of the most fundamental provisions of the Takeovers Code which merits strong disciplinary action. As a result, the SFC publicly censured and imposed a six-year cold shoulder order against Ms Zuo. Ms Zuo will be denied direct or indirect access to the Hong Kong securities market for six years until November 2030.

Takeaway

This case serves as a reminder that the fundamental provisions under Rule 26.1 of the Takeovers Code should be observed and upheld at all times, and that the SFC would not hesitate to take disciplinary actions. Parties who wish to take advantage of the Hong Kong’s securities markets should conduct themselves in matters relating to takeovers in accordance with the Takeovers Code, or otherwise they may find that the facilities of such markets are withheld from them by way of sanction in order to protect participants of Hong Kong’s securities markets. In case of doubt, the relevant persons should consult professional advisors at the earliest opportunity before embarking on a course of action which might have implications under the Takeovers Code.