Introduction

On 10 May 2017, the Takeovers and Mergers Panel (the “Panel”) ruled that a waiver of the mandatory offer obligation (“Whitewash Waiver”) should be granted in relation to a share buy-back offer which Television Broadcasts Limited (“TVB”) announced in January 2017, subject to conditions. The Panel considered this a “novel” and “difficult” case as it involved the consideration of the scaling back provisions in the Broadcasting Ordinance (Cap. 562 of the Laws of Hong Kong) (the “Broadcasting Ordinance”) when considering the conditions under which a Whitewash Waiver may be granted.

Background

On 24 January 2017, TVB announced the offer to buy back up to 138,000,000 TVB shares (31.5% of the 438,000,000 issued TVB shares) at HK$30.50 per share for a consideration of up to HK$4,209 million. Subsequently, on 13 February 2017, TVB reduced the maximum number of TVB shares to be bought back to 120,000,000 (27.40%) at an increased price of HK$35.075 to maintain the same aggregate consideration (the “Offer”).

Young Lion Holdings Limited (“Young Lion”) has a beneficial interest in 26% of issued TVB shares and Ms. Mona Fong has a beneficial interest in 3.90% of the issued TVB shares, comprising of a personal interest and a beneficial interest held through The Shaw Foundation Hong Kong Limited (“SF”). Young Lion, Ms. Mona Fong and SF together with certain non-shareholders comprise the “Young Lion Concert Party Group” (the “YLCPG”). Hence, YLCPG has a combined beneficial interest in 29.9% of the issued TVB shares.

Young Lion has decided not to accept the Offer. As a result, YLCPG’s combined shareholdings would rise up to 41.19%, acquiring control of TVB and triggering an obligation to make a mandatory general offer under Rule 26 of the Takeovers Code for all the other TVB shares. YLCPG, via TVB, applied for a Whitewash Waiver of that obligation, and TVB will make the Offer conditional on a Whitewash Waiver being granted by the Takeovers Executive.

This newsletter will focus on the Panel’s ruling on whether a Whitewash Waiver should be granted and whether the scaling back provisions in the Broadcasting Ordinance make any difference in light of the requirement in The Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”) to treat all shareholders equally.

Analysis

How did the Offer trigger the obligation for YLCPG
to make a mandatory general offer?

According to Rule 6 of the Share Buy-backs Code, if, as a result of a share buy-back, a shareholder’s proportionate interest in the voting rights of an offeror increases, the increase will be treated as an acquisition and Rule 32 of the Takeovers Code shall apply. Thus, since YLCPG’s combined shareholdings would rise up to 41.19% as a result of the Offer, Rule 32 applies to YLCPG.

Rule 32 of the Takeovers Code stipulates that an application for a waiver from the requirement to make a mandatory offer under Rule 26 of the Takeovers Code will be treated as an application for a Whitewash Waiver and Note 1 on the dispensations from Rule 26 and Schedule VI of the Takeovers Code shall apply.

What is a Whitewash Waiver and when will it be granted?

A Whitewash Waiver is a waiver from making a mandatory general offer under Rule 26 of the Takeovers Code. Under Rule 26.1, there are two circumstances under which a mandatory offer must be made:

• when any person (or two or more persons acting in concert) acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights of a company; or
• when any person (or two or more persons acting in concert) holding not less than 30% and not more than 50% of the voting rights of a company, acquires additional voting rights that increase his or their holdings of voting rights by more than 2% from the lowest percentage holdings by that person (of the concert group) in the preceding 12 month period (i.e. the creeper provision).

YLCPG falls under the first circumstance as their shareholding in TVB will rise up to more than 30% as a result of the Offer.

A Whitewash Waiver is subject to conditions found in Note 1 on the dispensations from Rule 26 and Schedule VI of the Takeovers Code. One notable condition is a requirement for an approval by independent shareholders (i.e. those who are not involved in, or interested in, the transaction in question) on a poll in general meeting.

The restrictions on shareholdings under the Broadcasting Ordinance

TVB is a holder of a licence to provide “domestic free television programme service” under the Broadcasting Ordinance. As such, the restrictions on the ownership and control of such licensees under the Broadcasting Ordinance apply to TVB. The restrictions include, for example, the requirement to obtain prior written approval from the Communications Authority if you are an “unqualified voting controller” (broadly, a non-Hong Kong-resident shareholder) if your shareholding crosses 2%, 6% or 10% of the issued TVB shares. Furthermore, voting control of “unqualified voting controllers” at general meeting of TVB is restricted – where votes cast by them exceed 49% of the total votes cast on a poll, the votes cast by the “unqualified voting controllers” shall be reduced so that they amount to only 49% of the adjusted votes cast.

The Panel’s ruling

The Panel emphasised that the Takeovers Executive has total discretion to grant the Whitewash Waiver on such terms or conditions as it thinks fit to achieve the underlying purposes of the Codes. The provisions of the Broadcasting Ordinance, with potentially highly disproportionate voting weights based on residency and turn-out of voters, are fundamentally at odds with the requirements of the Codes, particularly the principle that “all shareholders of the same class are to be treated similarly” (General Principle 1 of the Codes). Accordingly, a Whitewash Waiver cannot be granted on the normal condition.

On the other hand, regardless of the Codes, it is a statutory requirement under the Companies Ordinance (Cap. 622 of the Laws of Hong Kong) that the Offer itself must be subject to an ordinary resolution of shareholders in general meeting.

As such, due to the unique circumstances of this case, the Panel decided that the Whitewash Waiver should be granted conditional upon the majority of votes cast at general meeting on the resolution to approve the Offer (without adjustment) having been in favour of that resolution, and that the question of whether the Whitewash Waiver should be approved should not be put to a vote of shareholders in general meeting.

Therefore, the conditions imposed by the Panel are a modification of the requirement of approval by a vote of independent shareholders as stipulated in Schedule VI and Note 1 on the dispensations to Rule 26 of the Takeovers Code. The Panel considers this to be appropriate to achieve the underlying purposes of the Codes.

The Panel’s commitment in upholding the General Principles of the Codes

The Panel’s decision on 17 May 2016 in relation to Alibaba Health Information Technology Limited (“Alibaba”) also shows the Panel’s commitment in upholding General Principle 1 of the Codes to treat all shareholders of the same class even-handedly. In that case, the Panel invalidated a Whitewash Waiver previously granted to Alibaba upon finding out that Alibaba had a “special deal with favourable conditions” with the offeree company, thereby breaching Rule 25 of the Takeovers Code which prohibits offerors from transacting with a shareholder of the offeree company without the consent of the Takeovers Executive. Not only was the Whitewash Waiver granted subject to, among other things, compliance with Rule 25 of the Takeovers Code, Rule 25 itself is derived from the fundamental principle that all shareholders should be treated equally (General Principle 1 of the Codes).

Judicial Review

TVB has since sought leave for judicial review against the Panel’s decision. In particular, TVB is of the view that the fact that the Offer shall be subject to shareholders’ vote “without adjustment” will cause them to breach the Broadcasting Ordinance as it will prevent them from scaling back the voting shares of “unqualified voting controllers”. Furthermore, the decision that the Whitewash Waiver should not be put before TVB’s shareholders for a separate vote made TVB’s offer uncertain, as such factor was a condition in TVB’s share buy-back proposal in January.

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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.