Hong Kong: Securities Law : A Guide To The Hong Kong Code On Takeovers And Mergers

Last Updated: 5 December 2006


The Hong Kong Code on Takeovers and Mergers (the "Takeovers Code") regulates takeovers and mergers in Hong Kong and applies to public companies and companies with a primary listing of their equity securities in Hong Kong.

The primary purpose of the Takeovers Code is to provide fair treatment for shareholders by requiring equal treatment of shareholders, mandating disclosure of timely and adequate information to enable shareholders to make informed decisions on the merits of an offer and ensuring that there is a fair and informed market in the shares of companies affected by takeover and mergers transactions.

The Takeovers Code however does not have the force of law.

Mandatory Offer Rule

The key rule in the Takeovers Code is Rule 26 – the Mandatory Offer Rule.

This rule provides that, subject to the granting of a "whitewash" waiver by the Takeover and Mergers Executive (the "Executive") which will be discussed below, when a person, or 2 or more persons acting in concert collectively :-

  • acquire 30% or more of the voting rights of a company; or
  • hold not less than 30% but more than 50% of the voting rights of the company and acquires more than 2% of the voting rights of a company within a 12 month period ("creeper provisions"),

then a general offer must be made to all other shareholders of the company.

For persons who held between 30% to 35% of the voting rights immediately before 19 October 2001 (when the offer threshold was reduced from 35% to 30%), for a period of 10 years the Takeovers Code will apply as if the relevant percentage was 35% so long as their holding remains in this range. In addition, the creeper provisions will not apply to such persons.

An offer under Rule 26 must be unconditional, except that the offeror having received acceptances in respect of shares which, when aggregated with the shares already acquired or agreed to be acquired before or during the offer, will result in the offeror and persons acting in concert with him holding more than 50% of the voting rights of the company.

The offer must be in cash or be accompanied by a cash alternative at the highest price paid by the offeror or any person acting in concert with him for shares of that class of the company during the offer period and 6 months prior to its commencement.

Acting in Concert

Since the mandatory offer obligation may arise if a group instead of an individual acquires or consolidates control, the Takeovers Code introduced the concept of persons acting in concert in order to identify the controlling group, so that the voting rights acquired or held by persons acting in concert with each other are aggregated when determining whether the relevant threshold is reached.

"Acting in concert" is defined in the Takeovers Code as being 2 or more persons who, pursuant to an agreement or understanding (whether formal or informal), actively co-operate to obtain or consolidate control of a company through the acquisition by any of them of voting rights of the company. The definition also sets out 9 classes of person who will be presumed to be acting in concert with others in the same class, for example a company with any of its directors.

Whitewash Procedure and Other Exceptions

Notwithstanding the above, the mandatory offer obligation may be avoided by a whitewash procedure in cases where the obligation arises as a result of the issue of new securities as consideration for an acquisition, or a cash subscription, or the taking of a scrip dividend, or the issue of shares to underwriters.

Under the whitewash procedure, the Executive will normally waive such obligation provided that :-

  1. there is approval of the proposal by an independent vote at a shareholders’ meeting. "Independent vote" means a vote by shareholders who are not involved in, or interested in, the transaction in question;
  2. the person to whom the new securities are to be issued or any person acting in concert with him has not acquired voting rights in the company in the 6 months prior to the announcement of the proposals but subsequent to negotiations, discussions or the reaching of understandings or agreements with the directors of the company in relation to the proposed issue of new securities; and
  3. no acquisitions or disposals of voting rights are made by such persons in the period between the announcement of the proposals and the completion of the subscription.

The Executive may also waive the requirement for a person to make a general offer where :-

  1. the company is in such a serious financial position that an urgent rescue operation which involves the issue of new securities without approval by a vote of independent shareholders is necessary;
  2. there has been an inadvertent mistake and the person disposes of the securities within a limited period to unconnected persons; or
  3. a shareholder holding 50% or less of the voting rights places part of his shares with an independent person and, as soon as practicable thereafter, subscribes for new shares up to the number placed at a price substantially equivalent to the placing price less expenses.

Voluntary Offers

Unlike a mandatory offer, a voluntary offer may be in cash or securities.

A voluntary offer may also be conditional on an acceptance level of shares carrying a higher percentage of voting rights – for example, 90% acceptance is required if he wishes to exercise compulsory acquisition.

Offer Document and Timing

Offer Document

The offer document must contain the information required under the Takeovers Code and must be prepared with the same standard of care as if it were a prospectus. Generally, shareholders must be given sufficient information to enable them to reach a properly informed decision as to the merits or demerits of an offer. All documents must be filed with the Executive and the Stock Exchange of Hong Kong Limited and must not be released or published until approved by the Executive.


The Takeovers Code provides certain time limits within which announcements must be made, documentation must be dispatched to shareholders and the general offer must remain open for acceptance.

Generally, the offer document must be despatched within 21 days (in the case of a cash offer) or 35 days (in the case of a securities exchange) of the date of announcement of the offer. In an agreed offer, the Executive encourages 1 document comprising the offer document and the offeree’s board circular to be posted within the relevant period. Otherwise, the offeree board circular must be sent to shareholders within 14 days of the posting of the offer document.

A general offer must remain open for at least 21 or 28 days from the date of the posting of the offer document (depending on when the target company’s response document is posted). If at any time, the terms of a general offer are revised, then the offer must be kept open for not less than 14 days from the date on which the revised offer document is posted. It should however be noted that in certain circumstances, the above time requirements may be waived or extended on a case-by-case basis by the Executive.


If you wish to know more about listed companies’ compliance requirements or have any questions relating to securities and futures regulations in Hong Kong, lawyers in our Corporate Finance and Securities Department will be happy to assist you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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