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Introduction
On 21 September 2023, the Securities and Futures Commission (the “SFC”) published the consultation conclusions (the “Consultation Conclusions”) addressing comments on the amendments to the Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”) proposed in its consultation paper dated 19 May 2023 (the “Consultation Paper”).
During the consultation period which ended on 23 June 2023, the SFC received in total 12 responses from the public. After considering the comments made by the respondents, the SFC has adopted all of the amendments proposed in the Consultation Paper, some with slight modifications. For more details of the amendments to be made to the Codes, please refer to our news update on the Consultation Paper. The said amendments have become effective on 29 September 2023.
The SFC has marked the several modifications to its original proposals in Appendix 2 of the Consultation Conclusions, of which the material changes from the Consultation Paper are summarised below:
Part 2: The Chain Principle
In the Consultation Paper, the SFC proposed to expand Note 8 to Rule 26.1 to give better guidance on the factors to be considered by the Executive Director of the Corporate Finance Division of the SFC (the “Executive”) in deciding whether a mandatory general offer for the second company is required when statutory control of the first company that holds 30% or more of the voting rights of the second company is obtained or consolidated by a person or group of persons. The SFC adopted market capitalisation as one of the comparison parameters in light of its objectivity and that it is a widely accepted indicator of company size.
The proposed amendment was generally well received by the respondents as it could provide clarity on assessing whether a chain principle offer is required. In response to one of the comments, the SFC made a slight modification in the Consultation Conclusions to clarify in the drafting that the market capitalisation test is only relevant where both companies are listed.
Part 3: Offer Period and Timetable (Last possible day for Day 60 in privatisations and take-private transactions)
The SFC proposed to amend Rule 15.5 to codify its practice that any consents to extend “Day 60” (the last day on which an offer must be declared unconditional as to acceptances) would not exceed 4 months after the despatch of the offer document, which is in line with the spirit of Rule 2.11. Despite a comment suggesting the term “Day 60” be renamed, the SFC believes keeping the use of such term has its merits as it is commonly understood by the market to refer to the last day on which an offer can be declared unconditional as to acceptance. In light of a comment requesting the Executive to clarify whether the 4-month period under Rule 15.5 should start from the initial offer document or the date of any revised offer document, the SFC made clear that it runs from the date of the initial offer document, consistent with the spirit of Rule 2.11.
Part 5: Partial Offers (Comparable offer for convertible securities, warrants, etc.)
Part 5 of the Consultation Paper proposed the addition of Rule 28.10, requiring Rule 13 comparable offers for convertibles, warrants options and subscription rights in a partial offer to incorporate the market practice of making such offers in a partial offer. In the Consultation Conclusions, the proposed wording of the new Rule 28.10 has been modified and now refers to “comparable” offers rather than “appropriate” offers to elucidate that an offer for convertibles only have to be made for the same percentage as the partial offer for shares.
Part 7: Miscellaneous Amendments (Definition of “on-market share buy-back”)
The SFC proposed in the Consultation Paper to define that on-market share buy-backs are only limited to those made according to the Stock Exchange’s automatic order matching system where buy-orders and sell-orders are matched through an automated system. Moreover, the company buying back its shares and its directors should not have any involvement in the solicitation, selection or identification of the seller of the shares (whether directly or indirectly). The use of the automatic order matching system was considered by the SFC to be a good prima facie indicator that the company and its directors are not involved in the share buy-back.
All respondents were supportive of the proposed amendment, while one requested the SFC to confirm that the appointment of a broker to effect a share buy-back is not by itself considered as direct or indirect involvement by the company or its directors in soliciting, selecting or identifying sellers. Therefore, in the Consultation Conclusions, the SFC added the following note:
“Note to the definition of on-market share buy-back:
The appointment of a broker to effect buying-back of shares would not in itself be treated as the company or its directors being involved in the solicitation, selection or identification of sellers of shares.”
Analysis and Takeaways
With a view to bringing greater certainty to the market, the SFC has put enormous effort in codifying the Executive’s existing practice in the Consultation Paper, and has further made clarifications to the same in the Consultation Conclusions. As to the transactions that have already been announced before the amendments come into force, it is advised in the Consultation Conclusions that the Executive be consulted to then search for a fair solution for all parties involved.
Please contact our Mr. Rodney Teoh (Partner) 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.