Amendments to the Hong Kong Codes on Takeovers and Mergers and Share Buybacks

On 21 September 2023, the SFC published consultation conclusions on its proposed amendments to the Codes (the "Conclusions"). The Conclusions were issued in response to the consultation paper published by the SFC on 19 May 2023. All proposals in the consultation paper were adopted, some with minor modifications based on responses received during the consultation.  

The amendments to the Codes mainly include codifying current practices of the SFC, clarifying the SFC's positions on the Codes, streamlining processes to enhance efficiency, and introducing green initiatives to reduce the carbon footprint of Codes documents. The amended Codes will be gazetted on 29 September 2023 and then take effect immediately. 

This Commentary discusses the key changes to the Codes and is not intended to be a full summary of the all amendments to the Codes. 

The amendments to the Codes include, among other matters, the following: 

VOTING, ACCEPTANCES AND CONCERT PARTY ISSUES 

Definitions 

"Close Relatives." The SFC will codify its current practice and expand the definition of "close relatives" to include a person's grandparents, grandchildren, sibling's spouse or de facto spouse, children of siblings and the parents and siblings of the person's spouse or de facto spouse. 

The expanded definition will result in a larger group of individuals presumed to be acting in concert with a person. However, the SFC will continue to consider rebuttal applications refuting concert party presumptions. 

"Voting Rights." The SFC will clarify that "voting rights" that are subject to any restrictions to their exercise by agreement, by operation of law and regulations or pursuant to a court order will still be regarded as voting rights exercisable at a general meeting, except for the voting rights attached to treasury shares (if any) which will not be treated as voting shares for the purpose of the definition of "voting rights". 

Shareholders' Approval and Acceptance 

90% Threshold. Note to Rule 2.2 of the Code on Takeovers and Mergers (the "Takeovers Code") will be amended to include purchases made by the offeror and persons acting in concert with it from the date of the announcement of a firm intention to make an offer in determining whether the threshold of receiving valid acceptances of 90% of the disinterested shares has been met. 

Rule 2.11 of the Takeovers Code will be amended to include purchases made by the offeror and persons acting in concert with it during the period from the date of announcement of a firm intention to make an offer to the expiry of the four-month period after posting the initial offer document in determining whether the threshold of acquiring 90% of the disinterested shares has been met. 

Shareholders' Meeting for Takeover and Privatisation by Scheme of Arrangement or Capital Reorganisation or Delisting Proposal. The SFC will amend Rules 2.2(a) and 2.10(a) of the Takeovers Code and add a new Note 8 to Rule 2 of the Takeovers Code to allow an offeror and its concert parties to attend and vote at the shareholders' meetings held to consider scheme of arrangements, capital reorganisation or a delisting proposal, as long as their votes are not included in determining whether the requirements under Rules 2.2 and 2.10 of the Takeovers Code are met. 

Irrevocable Commitments 

The SFC will amend Note 4 to Rules 3.1, 3.2 and 3.3 of the Takeovers Code and Practice Note 12 such that: (i) an offeror is not required to consult the SFC before approaching a shareholder with a material interest (i.e. holding 5% or more of voting rights); (ii) the SFC must be consulted where an offeror intends to approach shareholders other than those with a material interest; and (iii) the maximum number of shareholders that an offeror can approach is six (whether with or without material interest). 

THE CHAIN PRINCIPLE 

Substantiality Test 

The SFC will codify its existing practice to:  

• Add market capitalisation as one of the parameters for comparison between two listed companies when determining the Substantiality Test and amend Note 8(a) to Rule 26.1 of the Takeovers Code;
• "Look back" at least the three most-recent financial periods when calculations of the Substantiality Test produce an anomalous result; and 
• Update Practice Note 19 to provide further guidance on the Executive's approach to the Substantiality Test, which will include guidance on: (i) specific line items for assets and profits to be taken into account and (ii) market capitalisation reference dates, as well as clarification that one factor in excess of 60% may not by itself trigger a mandatory general offer under the chain principle. 

OFFER PERIOD AND TIMETABLE 

Definition of "Offer Periods" 

The SFC will amend the definition of "offer period" to give the Executive the explicit power to end an offer period in order to address the situations where an offeree company is subject to an unnecessarily prolonged offer period if the offeror or potential offeror is not proactive in relation to an offer or ending an offer. 

Put Up or Shut Up ("PUSU") 

The SFC will codify its existing practice and add a new Rule 3.9 of the Takeovers Code to give the Executive an express power to issue a PUSU order to require a potential offeror to announce its firm intention to make an offer within a set time period (put up), or to announce that a potential offeror will no longer proceed with an offer (shut up). 

The Executive will take all relevant factors into account in deciding whether and how long a time limit should be imposed on the potential offeror to clarify its intention under the Rule 3.9 of the Takeovers Code, including (without limitation): (i) the current duration of the offer period; (ii) the reason(s) for the offeror's delay in issuing a firm intention announcement; (iii) the proposed offer timetable (if any); (iv) any adverse effects that the offer period has had on the offeree company; and (v) the conduct of the parties to the offer. 

The new Rule 3.9 would be applicable rule under the Takeovers Code during share buyback, and therefore will be included in the list set out in Rule 5.1(c) of the Code on Share Buybacks. 

OFFER REQUIREMENTS 

Disclosure of Offer Price in Talks Announcement Under Rule 3.7 

The SFC will codify its existing practice and add a new note to Rule 3.7 of the Takeovers Code to give effect that disclosure of an indicative offer price is not normally permitted before an announcement of a firm intention to make an offer unless there are exceptional circumstances. 

Such exceptional circumstances may include, for example, the need to clarify an incorrect market rumour or incorrect statement in the media which may be creating a false market in the shares of the offeree company, or where an offeror or an offeree company is required by overseas regulatory requirements to disclose an offer price prior to the announcement of a firm intention to make an offer. 

Deduction of Dividends From Offer Price 

Note 11 to Rule 23.1 and Note 3 to Rule 26.3 of the Takeovers Code will be amended such that no deduction of dividends (or other distributions) from the offer price would be allowed unless an offeror reserves its rights in an announcement to do so. In cases where the payment of dividends is subject to a withholding tax, the Executive will allow only a reduction to the offer price based on the gross dividends received by shareholders. Where an offeror has made a no increase statement to which Rule 18.3 of the Takeovers Code applies, and a dividend (or other distribution) is subsequently paid or becomes payable by the offeree company to offeree company shareholders, the offeror must reduce the offer consideration by an amount equal to that dividend (or other distribution) so that the overall value receivable by the offeree company shareholders remains the same, unless, and to the extent that, the offeror has stated that offeree company shareholders will be entitled to receive all or part of a specified dividend (or other distribution) in addition to the offer consideration. 

PARTIAL OFFERS 

No Extension of the Closing Date of Rule 28.4 of the Takeovers Code 

The SFC will amend Rule 28.4 of the Takeovers Code such that: (i) where the acceptance condition is fulfilled before the first closing day, an offeror must declare a partial offer unconditional as to acceptances on the day the acceptance conditions are met, provided that the offer would remain open for acceptance for not less than 14 days thereafter; and (ii) where the acceptance condition is satisfied after the first closing day during an extended offer period, an offeror must declare a partial offer unconditional as to acceptances on the day the acceptance condition is met and the final closing date must be extended to the 14th day thereafter. This applies irrespective of whether the approval under Rule 28.5 of the Takeovers Code (if required) has been obtained. 

Comparable Offer for Convertible Securities, Warrants, etc. 

A new Rule 28.10 of the Takeovers Code will be added to explicitly require the making of appropriate Rule 13 offers during a partial offer when an offer is made for a company which could result in the offeror holding shares carrying 30% or more of the voting rights, and the offeree company has convertible securities, warrants, options or subscription rights outstanding. 

GOING GREEN 

Electronic Dissemination of Documents 

A new Rule 8.7 of the Takeovers Code will be added to allow the dispatch of documents under the Codes by electronic means to the extent permissible under a publisher's constitutional documents and applicable laws and regulations. Note 4 to Rule 8 of the Takeovers Code will be amended to reflect the various methods to disseminate a document under the Codes. 

Submissions to the Executive 

The SFC will require all submissions to the Executive by email and continue to accept fees in the form of cheques or telegraphic transfers. The SFC is exploring the feasibility of establishing an online platform for submissions to the Executive and payment of fees due under the Codes.