The SFC has launched a three-month consultation exercise on proposed amendments to the Takeovers Code. The proposals in the consultation paper cover a wide range of areas of varying significance. The proposals include reforms to the Executive’s powers in administering the Takeovers Code and changes to the shareholder approval requirements for whitewash transactions and delistings, as well as less noteworthy “housekeeping” amendments which codify existing practice and update accounting terminology. In this bulletin, we summarise the key proposals.
Enhanced powers of the Executive and Panel – compensation, compliance rulings and co-operation
Compensation
In line with the position under the equivalent codes in London and Singapore, the SFC is proposing that the Panel is given the power to order compensation to be paid to shareholders for certain breaches of the Takeovers Code. This power would only apply to breaches of specified rules relating to the obligation to make a takeover offer or its terms (such as the mandatory offer obligation under Rule 26, Rule 23 on the nature of the consideration to be offered and Rule 24 on the minimum level of consideration required). The intent behind this proposal is to give the Panel the power to order compensation where it believes it to be “just and reasonable” to put shareholders in the position they would be have been in if the Takeovers Code had been complied with.
It should be noted that the Takeovers Code is non-statutory and therefore a compensation ruling could not be pursued through the courts. However, the ultimate sanction for breach of the Takeovers Code is a cold shoulder order. The consultation paper cites previous Panel decisions where cold shoulder orders have been made, to be lifted upon payment of compensation. It appears that this is the approach the Panel may follow to enforce compensation rulings if this proposal is ultimately adopted.
Compliance rulings
Expanding upon the existing provisions of the Takeovers Code which enable the Executive to make a ruling of its own volition, the consultation paper proposes adding specific provisions to make it clear that the Executive and the Panel can issue pre-emptive compliance rulings where satisfied that a person has, or there is a reasonable likelihood that a person will, breach the Takeovers Code.
Co-operation
The proposals also enhance the requirements in the Takeovers Code for parties to cooperate with the Takeovers Executive and the Takeovers Panel and to provide true, accurate and complete information. The proposals include requirements to correct any information which was, or becomes, incorrect and to promptly notify any new information where relevant to a determination which has continuing effect.
Section 8.3 of the Introduction to the Takeovers Code is also to be amended to refer to the requirement to submit the SFC’s prescribed form with any application specifying the truth, accuracy and completeness of the information and confirming the authority for it to be filed.
Increased voting approval threshold for whitewash waivers The consultation paper proposes increasing the voting approval threshold for whitewash waivers. Currently the Takeovers Code includes a dispensation from the requirement to make a mandatory general offer under Rule 26 in certain limited circumstances where a “whitewash waiver” is granted. The whitewash waiver currently requires majority independent shareholders’ approval of the transaction (ie only those shareholders not involved or interested in the transaction). In the consultation paper, the SFC is proposing to increase the voting approval threshold from a majority to at least 75% of the independent vote at the meeting. Additionally, the SFC is proposing that the underlying transaction and the whitewash waiver are separately approved (each with at least 75% of the votes of the independent shareholders). This would provide additional safeguards to minority shareholders and enable shareholders to vote in favour of a transaction but not the whitewash waiver if this is what they want. These proposals have been driven by the SFC’s concern that whitewash waivers have become viewed as inevitable and that majority shareholder approval does not enable any effective veto by dissenting shareholders such that these transactions are open to potential abuse. Separately, the SFC has also recently raised concerns about questionable capital raisings which may be potentially unfair to minority shareholders. These issues are being addressed through a Stock Exchange consultation (see our previous e-bulletin for further information). |
Other miscellaneous proposals covered in the consultation paper include:
The proposals in the consultation paper are aimed at enhancing investor protection and ensuring the fair treatment of shareholders participating in the Hong Kong market. The consultation paper is open for comments until 19 March 2018. |