The Code on Share Buy-backs (“Share Buy-backs Code”) stipulates that a listed company may only engage in 4 types of share buy-back, one of which is share buy-back by general offer (“SBBGO”). Under rule 5 of the Share Buy-backs Code, certain rules of the Codes of Takeovers and Mergers (“Takeovers Code”) will normally apply to SBBGO, including Rule 25 of the Takeovers Code.

Rule 25 of the Takeovers Code

Under Rule 25 of the Takeovers Code, except with the consent of the Executive, neither the “offeror” nor “any person acting in concert with it” may make any arrangements with shareholders or enter into arrangements to purchase or sell securities of the “offeree company”, either during an offer or when such an offer is reasonably in contemplation or for 6 months after the close of such offer (the “Relevant Period”) if such arrangements have favourable conditions which are not to be extended to all shareholders (“Special Deals”).

Rule 25 reflects a fundamental principle of the Takeovers Code that all shareholders of a listed company should be treated equally. Any Special Deal made during the Relevant Period will, in the absence of the Executive’s consent, constitute a breach of Rule 25.

Practice Note 17 (Issues relating to special deals and Rule 25 of the Takeovers Code) published by the SFC sets out in summary the Takeovers Executive’s approach to Special Deals. In essence: -

1.If a Special Deal is capable of being extended to all other shareholders, it should be so extended.

2.If a Special Deal is not capable of being extended to shareholders but the special benefit received by the counter-party shareholder(s) can be quantified, the value of the benefit should be appropriately reflected in the offer price.

3.If a Special Deal is not capable of being extended and the special benefit cannot be quantified, in cases where considered appropriate, the Executive may consent to these deals subject to compliance with the requirements of Note 4 to Rule 25, in particular, that (a) an independent financial adviser to the offeree company publicly states that in its opinion the terms of the transaction are fair and reasonable; and (b) the transaction is approved at a general meeting of the offeree company’s shareholders who are not involved in or interested in the transaction.

Decision of the Takeovers and Mergers Panel (the “Panel”)
in relation to Alibaba Health Information Technology Limited

On 23 January 2014, CITIC 21CN Company Limited (“21CN”, now known as Alibaba Health Information Technology Limited) announced that it had entered into an agreement with Alibaba (the “Whitewash Transaction”) under which Alibaba would subscribe for shares in 21CN at a subscription price of HK$0.30 per share, subject to the grant of a whitewash waiver of the Rule 26 mandatory general offer obligation which would otherwise result from the subscription. The Whitewash Transaction was completed on 30 April 2014. On the date and completion date of the Whitewash Transaction, Alibaba entered into several agreement and side agreement (collectively the “Side Agreements”) with one Mr. Chen, brother of the second largest shareholder of 21CN.

The Panel was invited to determine whether the Side Agreements constituted a Special Deal under Rule 25 of the Takeovers Code and if so, whether the whitewash waiver granted to Alibaba in respect of the Whitewash Transaction should be invalidated. While this case was not concerned with SBBGO, the Panel’s decision provides further guidance on how Rule 25 will be applied in determining whether a transaction will constitute a Special Deal:

4.the Panel has made it clear that the favourable condition is one which may favour the shareholders concerned; that is, it is not plainly unfavourable (rather than being a consideration which exceeds the market price for an asset or service) and in which a positive value or benefit is received by the shareholder under an arrangement with the offeror and not something in excess of this. In particular, the Panel rejected the argument that a favourable condition should only be the one that gives a greater value to an asset than could be obtained from another party; and

5.the Panel also endorsed the Executive’s view that:

a.the underlying purpose of Rule 25 is not restricted to arrangements which are designed to encourage a shareholder to influence the outcome of an offer or whitewash. A plain reading of the Rule and its Notes makes it apparent that the provisions are not limited to special deals designed to influence a counterparty shareholder to accept an offer or to vote in favour of a whitewash; and

b.there does not need to be an inducement or distinct incentive to the shareholder for the arrangement to constitute a Special Deal under Rule 25.

The Panel decided that the Side Agreements constituted a Special Deal and the whitewash waiver was invalidated as a result. The Panel also emphasized the importance of consulting with the Executive before entering into any arrangements which may or may not constitute a Special Deal.

Application of Rule 25 to SBBGO

In the context of SBBGO, both the “offeror” and the “offeree company” refers to the listed company that conducted the SBBGO, and “any person acting in concert with the offeror” includes any shareholder / shareholder group that owns or controls 20% or more of the voting rights of the listed company. Hence, if a controlling shareholder group (i.e. owning or controlling 30% or more of the voting rights of the listed company) has been granted a whitewash waiver in a SBBGO and conducts intra-group dealings in the listed company shares during the Relevant Period, this may constitute a Special Deal if favourable conditions are present (e.g. the consideration involves a premium) even though the shareholding of the controlling shareholder group remains the same after the intra-group dealings.

Conclusion

A vast variety of considerations will be taken into account by the Executive to determine whether or not arrangements between shareholders constitute a Special Deal. Corporations that are part of a larger group of companies that includes listed companies should be minded to consult professionals for potential implications under the Takeovers Code and/or other applicable laws and regulations before entering into intra-group dealings in listed company shares. Feel free to contact us should you require any related advice.