In April 2001 the SFC conducted an overall review of the Hong Kong Code on Takeovers and Mergers (The "Takeovers Code"), as mentioned in the July 2001 issue of this briefing. It was the first wholesale review of the Code in a decade and at the time major amendments to the Code were proposed for public consultation.
Some of the proposed reforms, regarding the percentage thresholds for mandatory offers, were introduced in October 2001. The other proposed reforms remained under consideration. After taking account of comments from the market, the SFC announced the conclusions to the consultation and formally introduced the revised rules, which came into effect on 1 February 2002.
Rule 2.10 relates to privatisations. Before the revision, this rule required that a proposed privatisation by way of a scheme of arrangement must be approved by a majority in number representing 90% in value of all the shares voted at the relevant general meeting (excluding those held by persons who are seeking to privatise the company and their concert parties), or, if not so approved, that it must not have been disapproved by shareholders holding more than 2.5% of the total number of shares in issue.
Since 1998, when the rule was introduced in such form, it has been controversial and the SFC has had to re-consider its implications, particularly in light of the legal and regulatory provisions for de-listings, schemes of arrangement and compulsory acquisitions. In the recent review process the SFC has thoroughly reviewed these provisions and the amendments are expected to result in more coherent regulatory supervision in this area.
Rule 2.10 has now been amended so privatisation by way of a scheme may be implemented only if it is:
a approved by at least 75% of the votes attaching to the disinterested shares that are cast at a meeting of the holders of disinterested shares; and
b not disapproved by more than 10% of the votes attaching to all disinterested shares.
"Disinterested shares" refer to shares of the company other than those owned by the offeror or its concert parties. The same voting requirements now extend also to takeovers by way of schemes of arrangement or capital reorganisations.
Rule 2.2 relates to approval of de-listings and should be read in conjunction with the Stock Exchange’s listing rules (Rule 6.12 for MB and Rule 9.20 for GEM).
In its previous form, Rule 2.2 of the Takeovers Code merely stated that, where after a proposed offer the shares of the offeree would be de-listed from the Stock Exchange, the offeror and its concert parties must abstain from voting at the meeting at which the resolution to de-list would be considered.
The listing rules, on the other hand, require that for a company which maintains only a primary listing on the Stock Exchange and no alternative listing elsewhere, any voluntary de-listing must be approved by a 75% majority present and voting at the meeting (excluding certain persons connected with the company).
The operation of the listing rules and Rules 2.2 and 2.10 of the Takeovers Code had the unfortunate result that a threat of de-listing, which required only a 75% majority, could be used as part of the tactics in a privatisation offer, which as stated above required a higher majority. Shareholders who feared they would left with unlisted and illiquid shares could find themselves under pressure to accept a privatisation offer.
Rule 2.2 has now been amended so that de-listings are subject to the following conditions:
a that the proposal must be approved by at least 75% of the votes attaching to disinterested shares that are cast at a meeting of the holders of disinterested shares;
b that the number of votes cast against the resolution must be not more than 10% of the votes attaching to all disinterested shares; and
c that the offeror must be entitled to exercise, and does exercise, its rights of compulsory acquisition (see "Compulsory acquisitions" below).
In addition, in January 2002 the Stock Exchange proposed, in its consultation paper relating to corporate governance issues (please see the article "Stock Exchange plans to enhance corporate governance" below), to amend the listing rules to reflect the first two conditions in the revised Rule 2.2 of the Takeovers Code. At the time of writing this is still under consultation and there is no assurance that such proposal will be adopted. In practice, however, all companies bound by the listing rules must also observe the Takeovers Code, so the higher voting threshold in the Code will apply to most de-listings from the Stock Exchange.
Compulsory acquisitions under Hong Kong law are primarily governed by s.168 of, and the Ninth Schedule to, the Companies Ordinance. In summary, these provide that if an offeror has, within four months after the date of an offer, acquired not less than 90% in value of the shares for which the offer is made, it is entitled to acquire the remaining shares.
A new Rule 2.11 has been added to the Takeovers Code so that an offeror seeking to acquire or privatise a company by way of compulsory acquisition may do so only if the disinterested shares it has obtained (due to acceptances or purchases made by it and its concert parties) during the relevant four-month period amount to at least 90% of the disinterested shares. This provision tightens up the aforesaid legal requirements under the Companies Ordinance.
Many other sections of the Takeovers Code have been substantially amended. These include, for example, the rules relating to standard of care and responsibility in preparing offer-related documents, asset valuations, timing of the offer and restrictions on dealing before and during the offer by persons possessing price-sensitive information.
© Herbert Smith 2002
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