Introduction

In a takeovers-related transaction, an offeror and the offeree company are required to comply with the various requirements of the Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”). Furthermore, an offeror and the offeree company typically may not routinely engage in takeovers-related transactions. Therefore, it is in the best interest of an offeror and the offeree company to seek advice from professionals with relevant expertise and experience early in the preparation process and retain them for guidance throughout the transaction. In its latest Takeovers Bulletin, the Securities and Futures Commission (“SFC”) stresses the importance of engaging suitable professional advisers in transactions governed by the Codes.

Engagement of suitable professional advisers

The SFC stated in its latest Takeovers Bulletin that recently it has observed a number of recent cases in which advisers engaged by the offerors or offeree companies appeared to lack sufficient understanding of the requirements of the Codes, as shown by their sub-standard drafts and incomplete responses. As a result, certain Codes issues were not identified and addressed in a timely manner, even for straightforward transactions.

Section 1.7 of the Introduction to the Codes sets out the SFC’s expectations of financial advisers and other professional advisers (for example, legal advisers) in transactions governed by the Codes. The role and responsibility of financial and other professional advisers is of particular importance given the non-statutory nature of the Codes, and it is part of their responsibility to use all reasonable efforts, subject to any relevant requirements of professional conduct, to ensure that their clients understand, and abide by, the requirements of the Codes, and to co-operate to that end by responding to inquiries from the SFC. Financial and other professional advisers must therefore have the competence, professional expertise and adequate resources to fulfil their role and to discharge their responsibility under the Codes.

Note to section 1.7 specifically sets out the SFC’s expectation on financial advisers advising on transactions subject to the Codes. Financial advisers are expected to allocate to the transaction in question sufficient experienced and competent professional staff with the appropriate involvement of, or reasonable supervision by, a duly approved responsible officer or a suitably experienced senior member of the financial adviser’s staff. The supervisor and his staff are expected to devote sufficient time and effort to the transaction to discharge the financial adviser’s responsibilities under the Codes. Section 1.7 also emphasises that if a financial adviser is in any doubt about its ability to meet these requirements, it should consult the Executive in advance. If the Executive considers that a financial adviser is not able to meet these requirements, it may not allow that financial adviser to act in that capacity.

Consequences of non-compliance

Typically, time is of the essence in a takeovers-related transaction. The latest Takeovers Bulletin warns that failure to adhere to the requirements of the Codes is likely to result in longer processing time and could even lead to disciplinary action against relevant parties. This is a practical warning that compliance with the Codes is not merely a matter of formality, but a critical factor in ensuring deal certainty, regulatory efficiency and the timely execution of transactions. It also underscores the importance of engaging suitable professional advisers with competence and adequate resources, whose execution capability is often decisive in navigating regulatory expectations and avoiding unnecessary delays or compliance missteps. Indeed, in the past, the SFC has issued public censures and criticisms on financial advisers for failing to comply with the Codes or falling short of the standards expected of them under the Codes.

Key takeaways

In light of the SFC’s recent observations and enforcement stance, parties involved in takeovers-related transactions should not underestimate the regulatory risks arising from inadequate adviser competence or resourcing. Market participants are reminded to exercise particular care in the selection of their advisers, recognising that deficiencies in execution and compliance may lead to adverse consequences.