Important things to check before making a general offer
It is well known that under Rule 26.1 of the Code on Takeovers and Mergers (the “Takeovers Code”), unless a waiver is granted by the Securities and Futures Commission (the “SFC”), an offeror is required to make a mandatory general offer to all the shareholders of the offeree company when, among other things, any person (or two or more persons acting in concert) acquires 30% or more of the voting rights of a company. In this newsletter, we will discuss the crucial checks that must not be forgotten before a mandatory general offer can be triggered, as illustrated by a case study.
Background
Styland Holdings Limited (the “Company”), being a listed company on the Main Board of The Stock Exchange of Hong Kong Limited, is principally engaged in financial businesses. It has four subsidiaries (the “Licensed Subsidiaries”) which are corporations licensed to carry out regulated activities under the Securities and Futures Ordinance (“SFO”). At the time, approximately 27.52% of the shareholding interest in the Company were held in aggregate by a group of concert parties (the “Concert Group”), comprising Mr. Cheung Chi Shing (“Mr. CS Cheung”), the wife of Mr. CS Cheung, K. Y. Limited (being a company indirectly and equally held by Mr. CS Cheung and his wife) and Mr. Cheung Hoo Yin (being the son of Mr. CS Cheung) (“Mr. HY Cheung”). Of which, (i) Mr. CS Cheung and his wife directly and indirectly held approximately 22.05% of the shareholding interest in the Company; and (ii) Mr. HY Cheung held approximately 5.47% of the shareholding interest in the Company.
On 5 July 2022, Mr. CS Cheung acquired approximately 4.32% shareholding interest in the Company (the “Acquisition”) to the effect that, upon completion, the Concert Group’s aggregate shareholding interest in the Company would increase from 27.52% to 31.84%. It follows that the Completion of the Acquisition triggered the obligation of Mr. CS Cheung as the original offeror to make a mandatory offer under Rule 26.1 of the Takeovers Code (the “Mandatory Offer”), and at the same time the damage was done.
Relevant provisions of the SFO
Under the SFO, a person shall not become and continue to be a substantial shareholder (as defined under the SFO) of a licensed corporation without first being approved by the SFC under section 132 of the SFO (the “S132 Approval”), and a person who contravenes the aforementioned commits an offence under section 131 of the SFO.
Relevant provisions of the Takeovers Code
According to Rule 26.2 of the Takeovers Code, except with the consent of the SFC, the Mandatory Offer must be conditional only upon Mr. CS Cheung having received acceptances in respect of voting rights which, together with voting rights acquired or agreed to be acquired before or during the Mandatory Offer, will result in Mr. CS Cheung and any person acting in concert with him holding more than 50% of the voting rights. Furthermore, no acquisition of voting rights which would give rise to a requirement for the Mandatory Offer (i.e. the Acquisition) may be made if the making or implementation of such offer would or might be dependent on the passing of a resolution at any meeting of shareholders of the offeror or upon any other conditions, consents or arrangements.
Further requirements in relation to regulatory approvals are specified in Note 4 to Rule 26.2 of the Takeovers Code, according to which, no acquisition of voting rights that would trigger a requirement for the Mandatory Offer (i.e. the Acquisition) may be made if such acquisition or offer may require prior approval from a regulatory body (in relation to merger control or otherwise). In other words, Mr. CS Cheung must obtain the S132 Approval before the completion of the Acquisition or else he will be in breach of this Note 4 and subject to possible disciplinary action.
Issues
In the present case, in the event the Mandatory Offer becoming unconditional (i.e. Mr. CS Cheung acquiring at least 50% of the shareholding interest in the Company), the Concert Group would hold more than 35% shareholding interest in the Company and thus become new substantial shareholders of the Licensed Subsidiaries. However, the S132 Approval was not obtained before the completion of the Acquisition which gave rise to an obligation of making the Mandatory Offer. It follows that Mr. CS Cheung was in breach of Note 4 to the Rule 26.2 of the Takeovers Code.
Upon discovery of the said breach, Mr. CS Cheung and his professional advisors brought these matters to the attention of the SFC. Mr. CS Cheung submitted to the SFC that he could not recall the shareholding interest held by Mr. HY Cheung when he completed the Acquisition, and that he only realised after making enquiries with his son and seeking professional advice that the aggregate interest of the Concert Group had exceeded 30% upon the completion of the Acquisition and an obligation to make the Mandatory Offer had been triggered, but the S132 Approval had not been obtained. Mr. CS Cheung also took the following remedial actions:
· Three children of Mr. CS Cheung (including Mr. HY Cheung) and a company held by them in equal shares (with this Company being the new offeror) applied to the SFC for the S132 Approval, which the SFC has subsequently granted on 8 December 2022; and
· Mr. CS Cheung, his wife and K. Y. Limited transferred their entire shareholding in the Company after the Acquisition (i.e. 26.37%) to the new offeror on 15 December 2022 at an aggregate consideration of HK$4.
The Mandatory Offer was then made by the new offeror on 20 January 2023, became unconditional on 3 February 2023 and closed on 17 February 2023. In March 2023, the SFC issued a statement to publicly criticise Mr. CS Cheung for breaching Note 4 to Rule 26.2 of the Takeovers Code.
Takeaway
In its public statement, the SFC reiterated that Note 4 to Rule 26.2 relates to Rule 26 of the Takeovers Code which is one of the most fundamental provisions in the Takeovers Code, and that an offeror should ensure that all requisite regulatory approvals are obtained before making any acquisition of voting rights which would give rise to an obligation to make a general offer under Rule 26.1 of the Takeovers Code.
The present case illustrated the importance of making the crucial checks that must not be forgotten before a mandatory general offer can be triggered. These checks include not only the shareholding held by each of the concerted parties but also whether all requisite regulatory approvals are obtained before making any acquisition of voting rights which would give rise to an obligation to make a mandatory general offer under Rule 26.1 of the Takeovers Code. When checking whether regulatory approvals are required, one should also not forget to consider the implications of various provisions in the Takeovers Code (for example, Rule 26.2 in the present case). It is always advisable for any person to seek legal advice before taking any action which might have implications under the Takeovers Code.
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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. |
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