Takeovers and Mergers Panel decides that a special waiver to mandatory general offer obligation is appropriate in case of involuntary disposal of interest
Introduction
The Takeovers and Mergers Panel
(the “Panel”) considered a referral by
the Takeovers Executive (the “Executive”)
on whether an obligation to make a mandatory general offer (“MGO”) under Rule 26.1 of the Introduction to the Code on Takeovers and Mergers (the “Takeovers Code”) would be triggered upon
a Seller Forced Disposal (as defined below).
Background
Major
parties
Jinke Smart Services Group Company Limited (the “Company”) is listed on the Main Board
of The Stock Exchange of Hong Kong Limited (“Stock Exchange”) (stock code: 9666). Jinke Property Group Company
Limited (“Jinke Property” or the “Seller”) is the Company’s controlling
shareholder holding approximately 30.33% of the issued share capital of the
Company.
Broad Gongga Investment Pte. Ltd. (“Broad Gongga” or the “Purchaser”) is a special purpose vehicle controlled by Boyu Capital Advisory Company
Limited (“Boyu”).
Mr Huang Hongyun (黃紅雲) (“Mr Huang”
or the “Founder”) is the founder and
the controller of the Seller. Mr Zhou Da (周達) (“Mr Zhou”)
has been the chairman of the board of directors of the Seller since January
2021.
Tianjin Zhuoyue Gongying Jinke Management
Consulting Partnership (Limited Partnership) (“Seller Management ESOP”) is the pooling entity of the Seller’s
management used for the purpose of holding Shares under an employee share
ownership plan. Tianjin Hengye Meihao Management Consulting Partnership (Limited
Partnership) (“Company Management ESOP”)
is the pooling entity of the Company’s management used for the
purpose of holding Shares under an employee share ownership plan.
The
2021 Acquisition
On 15 December 2021, the Purchaser entered into a
share purchase agreement (the “Share
Purchase Agreement”) with the Seller to acquire 22% of the voting rights of
the Company (“Initial Stake”), out
of the Seller’s then existing 52.33% shareholding interest in the Company (the “2021
Acquisition”). The 2021 Acquisition was completed on 21 December 2021 (the
“Completion Date”).
On the same date as the Share Purchase Agreement,
the Seller and the Purchaser also entered into a supplementary
agreement (the “Supplementary Agreement”)
and the Purchaser entered into a cooperation agreement (the “Cooperation Agreement”) with the
Founder, Mr Zhou and Mr Xia.
Under the Share Purchase Agreement, the
Supplementary Agreement and the Cooperation Agreement, the relevant parties
agreed, inter alia, the followings:
1.
Consent Right: conditional on the Purchaser holding not
less than 45% of the Initial Stake, the Seller undertakes to procure the
Company not to conduct a list of defined material transactions unless the
Seller has reached prior agreements on such proposed material transactions with
the Purchaser;
2.
Change in Control Call Option: conditional on the
Purchaser holding not less than 45% of the Initial Stake, the Purchaser is
entitled to require the Seller to transfer additional Shares to the Purchaser,
or a third party designated by the Purchaser, at an agreed price, so that the
Purchaser or such designated third party shall become the single largest
shareholder of the Company if certain events occur at any time up to 31
December 2026;
3.
Disposal Restriction 1: the Founder agrees
not to sell any Shares, and the Founder, Mr Zhou and Mr Xia each agree that the
Management would not sell any Shares, within 3 years of the Completion Date,
provided that such restriction would not apply to any Shares already held by
the Management as at 15 December 2021; and
4.
Disposal Restriction 2: the Founder agrees
not to sell more than 20% of his Shares, and the Founder, Mr Zhou and Mr Xia
each agree that the Management would not sell more than 20% of their aggregate
Shares, in each year between the third anniversary and the fifth anniversary of
the Completion Date, provided that such restriction shall not apply to any
Shares already held by the Management as at 15 December 2021.
The
December 2021 Loan
On 15 December 2021, the Purchaser, as lender,
entered into a US$156,800,000 (the “Loan”)
facility agreement with Chongqing Jinke Enterprise Management Group
Company Limited (a wholly owned subsidiary of the Seller), as borrower, and the
Seller, as the guarantor of the Loan.
The Seller entered into three share pledge
agreements (the “Share Pledge Agreements”)
with the Purchaser whereby the Seller pledged a total of 107,797,875 Shares
in favor of the Purchaser as security for the Seller Group’s obligations under
the under the Share Purchase Agreement, the Supplementary Agreement, the
Facility Agreement and the Share Pledge Agreements (collectively, together with
the Cooperation Agreement, the “2021
Acquisition Agreements”).
The Purchaser consulted the
Executive on whether an MGO obligation would be triggered if the Shares
held by the Seller is reduced to a level that is below the ownership percentage
of the Purchaser as a result of any foreclosure sale of the Seller’s
Shares by the Seller’s other creditors who have security interests over
such Shares, to parties other than the
Purchaser (“Seller Forced Disposal”).
Rule
26.1 of the Takeovers Code
Rule
26.1(a) of the Takeovers Code provides that subject to the granting of a waiver
by the Executive, a mandatory offer obligation arises when any person acquires,
whether by a series of transactions over a period of time or not, 30% or more of
the voting rights of a company.
Note
1 to Rule 26.1 further provides that there may be circumstances where there are
changes in the make-up of a group acting in concert that effectively result in
balance of the group being changed significantly. This may occur, for
example, as a result of the sale of all or a substantial part of his
shareholding by one member of a concert party group to other existing members
or to another person.
The
Executive’s proposal
The
Executive recognizes the perceived unfairness if the Purchaser would be
required to make a general offer as a result of actions by independent third
parties that are out of its control. The Executive therefore proposed that the Purchaser
would only be required to make the MGO if the Purchaser actually acquires any
voting rights of the Company following the Seller Forced Disposal.
The
Panel’s decision
It
is an accepted
fact that the Purchaser and the Seller are members of class (1) of the
definition of acting in concert under the Code and they are presumed to be
acting in concert.
The
Panel considers that the 2021 Acquisition Agreements contain various provisions
which clearly indicate that Purchaser and the Seller intend to consolidate
control of the Company amongst them, for the following reasons:
1.
The Call Option and the Change in Control Call Option give the Purchaser
the right to acquire control of the Company upon the occurrence of certain
events;
2.
The Consent Rights require the Seller and the Purchaser to reach
consensus before the Company can undertake certain material decisions;
3.
The Share Purchase Agreement contains an express term that the Seller
and the Purchaser acknowledge that they would be treated as parties acting in
concert under the Takeovers Code as a result of the provisions contained in the
2021 Acquisition Agreements.
Under the Seller Forced
Disposal scenario, the Purchaser would become the single largest shareholder
and hence the leader of the concert group.
The
proposal made by the Executive, if followed, would effectively be a special
waiver of the Purchaser’s obligation to make the MGO which would be
invalidated immediately upon the Purchaser acquiring any voting right (even if
one voting right) and, hence, the obligation to make the MGO would be revived.
The
Panel
took into account the following factors that would lead to the Seller Forced
Disposal:
1.
the Purchaser or the Seller would have no control in the enforced
disposal of the Shares under the Seller Forced Disposal;
2.
it is apparent that the Purchaser would not have anticipated the
possibility of the Seller Forced Disposal within a relatively short period of
time following the 2021 Acquisition;
3.
the perceived unfairness to the Purchaser that the MGO may bring about
even though the Purchaser (or any of its concert parties) would have taken no
part in the Seller Forced Disposal; and
4.
it is assumed that the Purchaser, the Seller, the Founder or anyone
acting in concert with any of them would not acquire any voting rights in
connection with the Seller Forced Disposal.
Based
on the above, the Panel decided that a special
waiver from the MGO obligation under Rule 26.1 that would result from the
Seller Forced Disposal would be appropriate.
Nonetheless, as the Seller
Forced Disposal has yet to occur and the referral to the Panel is on the basis
of a hypothetical Seller Forced Disposal, the Panel does not think it is
appropriate for the Panel to grant a waiver in respect of a hypothetical
situation.
The Purchaser should make a
formal application to the Executive for
the granting of the Special Waiver once the Seller Forced Disposal is imminent.
Conclusion
Note
1 to Rule 26.1 sets out the criteria that would be applied by the Executive in
deciding whether require a general offer should be made even when no single
member holds 30% or more of a company’s interest. Persons acting in a concert
group the holdings of members and the membership of which may vary from time to
time should pay particular attention to paragraph 6 of such clause. This case
also illustrates that special circumstances in some cases may warrant an
exception to the strict application of Rule 26.1 to avoid unfairness.
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Published by ONC Lawyers © 2022 |
