24 May 2023



On 19 May 2023, the Securities and Futures Commission (the “SFC”) published the consultation paper (the “Consultation Paper”) seeking written comments on proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”).

The proposed amendments include codification of existing practices of the Executive Director of the Corporate Finance Division of the SFC (the “Executive”), clarifications on the Codes and housekeeping matters. The Executive also proposes amendments to various provisions of the Codes together with reasons for such changes. The public consultation period will end on 23 June 2023.

Part 1: Voting, Acceptances and Concert Party Issues


Definition of “close relatives”

The SFC proposes to amend the definition of “close relatives” under the Codes. The current definition refers only to a person’s spouse, de facto spouse, children, parents and siblings, which does not cover the existing practice of the SFC. In order to codify the existing practice and expand the definition of “close relatives”, it is proposed to delete Note 8 to the definition of acting in concert and introduce a new definition of “close relatives” as follows:

Close relatives: A person’s close relatives means:
(1) the person’s spouse or de facto spouse, parents, children, grandparents and grandchildren;
(2) the person’s siblings, their spouse or de facto spouse and their children; and
(3) the parents and siblings of the person’s spouse or de facto spouse.”

This new definition will result in a larger group of individuals presumed to be acting in concert with a person.

Definition of “voting rights”

Voting rights is currently defined as “… voting rights currently exercisable at a general meeting of a company whether or not attributable to the share capital of the company”. This definition leads to confusions on whether shares that are subject to voting restrictions and, hence their voting rights are not currently exercisable, would be treated as voting rights for the purpose of the Codes. This may also create undesirable situations where voting rights would disappear or re-appear due to the imposition or lifting of voting restrictions.

Therefore, the SFC proposes to amend the definition of “voting rights” by deleting the word “currently”. A Note to the definition of voting rights is also added to the Codes for clarification:

“For the purposes of the Codes, 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 rights for the purpose of this definition.”

Shareholders’ approval and acceptance

Note to Rule 2.2(c) of the Takeovers Code

In current practice, condition (iii) to the Note to Rule 2.2 is silent as to whether purchases will also be included when determining the equivalent threshold of acquiring 90% of the disinterested shares as compared to Rule 2.11, which has expressly included the purchases. As a matter of practice, the SFC has allowed purchases to be included in determining whether the threshold under condition (iii) to the Note to Rule 2.2 has been met.

Hence, to clarify the rules, it is proposed to amend condition (iii) in the following:

“(iii) the resolution to approve the delisting is subject to the offeror having received valid acceptances of the offer together with purchases (in each case of the disinterested shares) 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 amounting to 90% of the disinterested shares.”

Rule 2.11 of the Takeovers Code

The current Rule 2.11 indicates that only purchases made by an offeror and its concert parties during the period of 4 months after the posting of the initial offer document, together with acceptances, would count towards the 90% threshold. As the SFC considers it unnecessary to distinguish between an offer which does not involve a delisting and an offer which involves a delisting in deciding whether an acceptance condition has been met, it is proposed that the treatment of an acquisition pursuant to an acceptance of an offer or via an on-market acquisition should be the same.

The Rule 2.11 is proposed to be amended as follows:

“Except with the consent of the Executive, where any person seeks to acquire or privatise an company by means of an offer and the use of compulsory acquisition rights, such rights may only be exercised if, in addition to satisfying any requirements imposed by law, acceptances of the offer and purchases (in each case of the disinterested shares) made by the offeror and persons acting in concert with it during the period from the date of the announcement of a firm intention to make an offer to the expiry of the 4-month period after posting the initial offer document total 90% of the disinterested shares.”

Rule 2.2 and 2.10 of the Takeovers Code

Given the different interpretations of Rule 2.10 among the Hong Kong courts, the SFC proposes to amend Rule 2.10 to remove any ambiguity in the interpretation of the rule. This applies to Rule 2.2 as well as the same issue exists in Rule 2.2 equally. The amendments proposed by the SFC are as follows:

Rule 2.10:
“(a) the scheme or the capital reorganization is approved by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested shares shareholders ; and…”

Rule 2.2:
“(a) approval by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested shares shareholders ;…”

A Note 8 to Rule 2 is added as well:

“8. Shareholders’ meetings held for the purpose of Rules 2.2 and 2.10
Reference to “duly convened meeting of shareholders” under Rules 2.2 and 2.10 refers to shareholders’ meetings which are duly convened in accordance with an offeree company’s constitutional documents and the company law of its place of incorporation. Offeree companies and their advisers are encouraged to seek legal advice and, where applicable, guidance and directions from the relevant courts in respect of the meetings held for the purpose of considering a scheme of arrangement or a capital reorganisation

Irrevocable commitments

The SFC proposes to amend Note 4 to Rules 3.1, 3.2 and 3.3 in order to revise the existing framework on the gathering of irrevocable commitments and adopt the following:

(a) Consultation with the Executive is not required where an offeror approaches a shareholder with a material interest in an offeree company. A shareholder has a material interest when he and his concert parties control(s) directly or indirectly 5% or more of the voting rights of an offeree company.

(b) The Executive must be consulted where an offeror intends to approach shareholders other than those with a material interest in an offeree company.

(c) The maximum number of shareholders an offeror can approach in an offer is six. This number includes approaches made to both: (a) shareholders who have a material interest; and (b) shareholders who do not have a material interest.

Part 2: The Chain Principle

In order to address the difficulties faced by practitioners in the application of the Substantiality Test (as set out in Note 8(a) to Rule 26.1) in assessing whether a “chain principle offer” is required, Note 8 to Rule 26.1 is amended to provide more guidance according to the follows:

(a) to add market capitalisation as one of the parameters for comparison when determining the Substantiality Test and amend Note 8(a) to Rule 26.1.

(b) to add further language to codify the Executive’s practice to “look-back” at least the three most recent financial periods when calculations of the Substantiality Test produce an anomalous result; and

(c) to update Practice Note 19 to provide further guidance on the Executive’s approach to the Substantiality Test as set out in this section.

Part 3: Offer Period and Timetable

Certain enhancements were introduced to streamline and improve efficiency during an offer.

Definition of “offer period”

Under the current rules, once an offer period has commenced, it will not end until one of the situations under the current definition of “offer period” is met. The Executive is not given the express power to end an offer period by the Codes either. This may be problematic as the offeree company may be subject to an unnecessarily prolonged offer period when the offeror is not proactive in relation to an offer or ending an offer.

Hence, the SFC proposes to give the Executive an express power to end an offer period. It is suggested that when the Executive exercise this power, an Executive statement will be published on the SFC’s website under the section headed “Executive decisions and statements”, while the offer period table will be updated to set out the reasons for the close of the relevant offer period.

Last possible day for Day 60 in privatisations and take-private transactions

The current Rule 15.5(ii) allows the extension of the last day on which an offer must be declared unconditional as to acceptances beyond the 60th day after the posting of the composite document (Day 60) if the offeree board consents.

In order to balance an offeror’s desire to extend an offer period to meet the acceptance condition and the interest of shareholders of an offeree company, as well as to ensure an offeree company will not be subject to an unnecessarily prolonged offer period, the SFC proposes to codify the practice where the Executive would give its consent to extend Day 60 given that any extension of Day 60 would not exceed four months after the despatch of the offer document.

Put up or shut up (PUSU) orders

A PUSU order requires a potential offeror to announce its firm intention to make an offer within a set period of time (put up), or to announce that it will no longer proceed with an offer (shut up). Under the current rules, there is no express provision under the Codes for the Executive to issue a PUSU order. Hence, the SFC proposes to add Rule 3.9 to codify the existing practice with respect to PUSU orders and to expressly empower the Executive to impose such orders in exceptional circumstances.

The proposed factors for the Executive to consider when deciding whether or not to impose a PUSU order:
(1) The current duration of the offer period;
(2) The reason(s) for the delay in issuing a firm intention announcement by the offeror;
(3) The proposed offer timetable (if any);
(4) Any adverse effects that the offer period has had on the offeree company; and
(5) The conduct of the parties to the offer.
Settlement of consideration and return of share certificates

Under the current Rule 20.1, 20.2 and Rule 17, there are no rules that set out the timing expected for new share certificates that are required to be issued to accepting shareholders following a successful offer. Hence, the SFC proposes to amend Rule 20.2 and Rule 17 in order to clarify that, in successful offers, share certificates for untaken or untendered shares in an offer (including partial offers) or share buy-back by way of general offer must be posted to or be made ready for collection by the accepting shareholder at the same time as the payment of consideration, and in any event no later than 7 business days after the later of: (i) the date of offer becomes, or is declared, unconditional; and (ii) the date of receipt of a duly completed acceptance.

Other amendments

Timing Requirements

Currently, different variations of the timing requirements have been used throughout the Codes. This causes confusion.

Thus, the SFC proposes to make a number of housekeeping amendments to provisions where time periods are relevant. The changes are extracted in Appendix 2 of the Consultation Paper.

Apart from that, in relation to Rule 7, there had been some confusion in the market as to the exact permitted time as to when directors’ resignations may take effect.

Hence, the SFC proposes to clarify Rule 7 as follows:

“Once a bona fide offer has been communicated to the board of the offeree company or the board of the offeree company has reason to believe that a bona fide offer is imminent, except with the consent of the Executive, the directors resignation of any directors of an offeree company should not resign take effect until after the publication of the closing announcement on the first closing date of the offer, or the date when publication of the announcement that the offer becomes has become or is been declared unconditional, or shareholders have voted on whichever is later. In the case of a transaction involving a whitewash waiver, the resignation of any director of an offeree company should not take effect until after the publication of the results announcement relating to the shareholders’ meeting to approve the waiver of a general offer obligation under Note 1 on dispensations from Rule 26, whichever is the later.

Rule 15.7 of the Takeovers Code

Rule 15.7 provides that all conditions must be fulfilled or the offer must lapse within 21 days of the later of the first closing date or the date when the offer becomes or is declared unconditional as to acceptances, unless the Executive consents otherwise.

The SFC proposes to add a note to Rule 15.7 to the effect that no consent from the Executive will be required in cases where the time delay between the court meeting and the effective date of a scheme is due to the court’s timetable. In other words, applications for consent will no longer be required. The amendment will also streamline the vetting and approval process for a privatisation by way of a scheme of arrangement.

Part 4: Offer Requirements

Disclosure of offer price in talk announcement

Under the current regime in Issue 37 (June 2016) of the Takeovers Bulletin, the Executive advised parties to maintain confidentiality and take all necessary steps to ensure there is no leakage of information prior to the announcement of a firm intention to make an offer.

That said, the SFC indeed acknowledges that parties should be given the flexibility to disclose a price in a Rule 3.7 announcement and there could be situations where this would be desirable. Notwithstanding the Executive’s strict approach to the disclosure of an offer price in a Rule 3.7 announcement, in practice, the SFC has been flexible in its supervision having regard to the specific circumstances of the case.

As such, the SFC now proposes to codify this practice by introducing a new note to give effect that the 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.

Deduction of dividends from offer price

In the 2019 decision relating to Dalian Port (PDA) Company Limited (“Dalian Port”), the Panel ruled that the offeror will not be allowed to deduct the final dividend approved by the shareholders of Dalian Port from its offer price in a possible mandatory general offer.

Following the decision, the SFC proposes to codify the effect of dividends and withholding tax on an offer price. The proposed Note 11 to Rule 23.1 is as follows:
“An offeror will not be permitted to reduce from the offer consideration any amount equivalent to a dividend (or other distribution) which is subsequently paid or becomes payable by the offeree company to offeree company shareholders, unless it has specifically reserved in an announcement the right to do so. Where a dividend (or other distribution) is subject to withholding or other deductions, the offer consideration should be reduced by the gross amount received or receivable by the offeree company shareholders.”
Part 5: Partial Offers

Proposed amendments to the Codes aim to clarify certain procedural matters in partial offers and requirements for comparable offers.

Offer periods relating to partial offers

The current Rule 28.4 provides that for partial offers, once acceptances exceed the number of shares stated and the offeror declares the partial offer unconditional, the final closing date must be the 14th day thereafter and cannot be further extended. The rationale for that is any extension of the offer period will (i) dilute the number of shares accepted from an accepting shareholder; and (ii) delay the receipt of consideration which would only be settled after the close of offer.

Yet, in response to the misconception that an offer must be unconditional on both acceptances and approval before the restriction on extension of offer periods under Rule 28.4 kicks in, the SFC proposes to make amendments to clarify that the acceptance and approval conditions are in fact two separate conditions. The SFC does not consider it appropriate to allow an offer period in a partial offer to remain open for a prolonged period of time when an acceptance condition has already been met in order to facilitate the satisfaction of the approval condition under Rule 28.5.

Comparable offer for convertible securities, warrants, etc.

Currently, there is no explicit requirement to make appropriate Rule 13 offers for convertible, options, warrants etc. during a partial offer.

However, upon review, the SFC notes that all partial offers made since 2011 have included comparable offers for options or convertible securities, typically offering the same percentage as that under the partial offer for shares. Given that the market has accepted that appropriate Rule 13 offers apply to partial offers for more than a decade, the SFC proposes to add a new Rule 28.10 to make the requirement explicit.

Tick-box approval

The current Rule 28.5 imposes a “tick-box” approval condition requiring a partial offer to be conditional on, in addition to acceptances, majority approval from independent shareholders if an offer may result in an offeror holding 30% or more of a company. Under the rule, the tick-box requirement may be waived if one independent shareholder holding over 50% of the independent voting rights has indicated approval of the partial offer.

In response to enquiries on whether the tick-box approval applies to partial offers falling under Rule 28.1 (a) or (b), the SFC proposes to make amendments to clarify that the tick-box approval does not apply to an offer “(a) which could not result in the offeror and persons acting in concert with it holding 30% or more of the voting rights of a company; or (b) where the offeror and persons acting in concert with it hold more than 50% of the voting rights of a company.”

Acceptance and approval of partial offer by exempt principal traders

The current Rule 35.4 provides that shares held by exempt principal traders connected with an offeror or an offeree company must not be voted in the context of an offer.

In response to enquiries on whether Rule 35.4 applies to partial offers (as the rule does not specify whether an exempt principal trader can approve a partial offer under Rule 28.5), the SFC believes there is no reason that the discipline under Rule 35.4 that applies to general offers should not apply equally to partial offers, which are subject to more stringent rules than general offers. Hence, the SFC proposes to add a new Note 3 to Rule 28 to clarify that Rule 35.4 indeed applies to partial offers.

Part 6: Going Green

The SFC proposes several green initiatives to reduce the environmental impact associated with the documents published under the Codes, including introduction of electronic dissemination under the Codes and the related Code amendments.

Analysis and Takeaways

Some provisions of the current Codes are ambiguous and may cause confusion to companies and relevant stakeholders in complying with the Codes. It is believed the proposed amendments by the SFC would clarify current issues of the Codes and provide better guidance to companies on interpretation of the rules, as well as to reduce the number of disputes arising from such ambiguity. Codification of certain market practice undertaken by the SFC would also provide certainty to companies when conducting their business or any corporate actions which involves interpretation of the Codes, as well as greater convenience by reducing the need to conduct separate consultation with the SFC. The proposal to include green initiatives is also a commendable action as the dispatch of physical copies of documents required under the Codes can be cumbersome and, in particular, bulk-printing of documents for meeting the despatching requirements under the Codes may in practice hinder actions of some companies where time is of essence and compelling.

In the future, it is expected that the SFC would continue to review the rules to provide better guidance and efficiency to the market participants while balancing the core value to maintain market order and defend the market integrity of Hong Kong.

Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.