On 19 October 2001 the Securities and Futures Commission (the "SFC") announced important changes to the Hong Kong Code on Takeovers and Mergers (the "Takeovers Code"). These are a result of a consultation process conducted in April this year, when the SFC proposed to revise many of the provisions of the Takeovers Code. The changes announced relate mostly to mandatory general offers and are immediately effective. Proposed changes to other aspects of the Code are still under consideration.
Mandatory Offer Threshold
Under Rule 26 of the Takeovers Code, if a person acquires the prescribed level of voting rights in a public company, he is obliged to make a mandatory offer on the terms specified in the Code ("general offer") for all the shares of the company. Broadly speaking, before the changes the rules were that a general offer was required where:
- a person acquired 35% or more of the voting rights
- a group of persons, acting in concert, acquired voting rights so their collective holding was increased to 35% or more of the voting rights
The rules have now been changed so that the 35% threshold is replaced by 30%.
Rule 26 also imposes, for certain persons, a cap on the increases in the number of voting rights held in any 12-month period. This was referred to as the "creeper". Again in summary, before the amendment, the rules were that a general offer would be required where:
- a person, holding 35% to 50% of the voting rights, acquired more voting rights which increased his holding by more than 5% from his lowest percentage holding in the preceding 12 months
- a group of persons, acting in concert and collectively holding 35% to 50% of the voting rights, acquired more voting rights which increased their collective holding by more than 5% from their lowest collective percentage holding in the preceding 12 months
As from 19 October 2001, the 35% threshold referred to above is replaced by 30% and the creeper is reduced from 5% to 2%.
Grandfathering And Transitional Provisions
The SFC is anxious to ensure as far as possible that shareholders are neither worse nor better off as a result of the rule changes. Certain "grandfathering" and transitional arrangements have therefore been put in place in respect of certain groups of persons affected by the new rules
- For a person (or a group of persons acting in concert) holding 30% or more but less than 35% just before implementation of the new rules on 19 October 2001:
- the old 35% trigger applies
- the new 2% creeper does not apply
However, if such person’s holding subsequently drops below 30%, then the 30% trigger will apply.
For these persons, the "grandfathering" provisions will be effective for 10 years from 19 October 2001. After the expiry of 10 years, the 2% creeper will apply to them. The provisions apply also to any conversion, exercise, or subscription, after 19 October 2001, of convertible securities, warrants, options, and similar instruments (where such instruments were held immediately before 19 October 2001) which entitles a person to 30% or more but less than 35% of the voting rights.
- the 5% creeper applies to the period between the date that is 12 months prior to the acquisition and the date of the acquisition
- the 2% creeper applies to the period between 19 October 2001 and the date of the acquisition
To facilitate the implementation of the new rules, the SFC has set up a register of interests of 30% or more but less than 35% (including holdings of shares, convertibles, warrants, options and subscription rights) held on 19 October 2001. These will help the SFC keep track of persons to whom the "grandfathering" provisions discussed above apply. Where registered interests drop below 30%, the SFC should be notified. In the meantime, the SFC urges persons who are unclear as to what their position might be under the amended rules to consult the SFC or apply for a formal written ruling under Rule 15 of the Introduction to the Takeovers Code
© Herbert Smith 2002
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