The Securities and Futures Commission (the “SFC”) publicly censured two units of the Bank of America Merrill Lynch Group (the “BofAML Group”) for their failure to disclose dealings in relevant securities in two transactions in 2015 (the “Transactions”) in breach of Rule 22 of the Code on Takeovers and Mergers (the “Takeovers Code”).


The Transactions concerned are:

  • the partial offer (the “CRB Partial Offer”) for China Resources Beer (Holdings) Company Limited (“CRB”); and
  • the proposed privatisation (the ”Power Assets Privatisation”) of Power Assets Holdings Limited (“Power Assets”) by Cheung Kong Infrastructure Holdings Limited (“CKI”).

Merrill Lynch (Asia Pacific) Limited (“MLAP”) – a unit of the BofAML Group – acted as financial advisor to the offeror in CRB Partial Offer and to the offeree company in Power Assets Privatisation.

Rule 22 of the Takeovers Code requires parties to an offer and their respective “associates” to disclose their dealings in relevant securities of the offeree company (and of the offeror in a securities exchange offers) conducted for themselves or on behalf of clients during an offer period. The Takeovers Code defines an “associate” to include “any bank and financial and other professional adviser… to an offeror [or] the offeree company… including persons controlling, controlled by or under the same control as such banks, financial and other professional advisers”.

Bank of America, National Association (“BANA”) and Merrill Lynch International (“MLI”), which are members of the BofAML Group, fell within the definition of “associate” of the offeror in the CRB Partial Offer and of the offeree company in the Power Assets Privatisation for the purposes of the Takeovers Code. Both BANA and MLI were also deemed acting in concert with the offeror in the CRB Partial Offer under the Takeovers Code.

BANA and MLI are therefore required to disclose their dealings in CRB shares during the offer period of the CRB Partial Offer, and in Power Assets shares and CKI shares during the offer period of the Power Assets Privatisation, under Rule 22 of the Takeovers Code.

Breach of Rule 22

During the offer period of the CRB Partial Offer, BANA entered into certain cash-settled equity swaps with its clients in respect of CRB shares. For each of such equity swaps, BANA entered into a corresponding swap with MLI. Where relevant, MLI would then undertake the market activities to hedge the equity swaps as permitted activities relying on its exempt principal trader status (the ”Back-to-Back Arrangement”). BANA did not file disclosures for any of the above equity swaps entered into with its clients or with MLI. MLI also failed to make dealing disclosures for equity swaps which did not result in any market activities save in respect of one trade.

During the offer period of the Power Assets Privatisation, BANA entered into certain cash-settled equity swaps in respect of CKI shares and Power Assets shares. Similar to the CRB Partial Offer, the Back-to-Back Arrangement was put in place and BANA entered into a corresponding swap with MLI for each equity swap BANA had with its clients. BANA failed to file disclosures for some of these equity swaps. MLI made disclosures of the equity swaps which resulted in permissible market activities under its exempt principal trader status, but failed to make disclosures for some of the other equity swaps.

Self-reporting of breaches to the SFC and disciplinary sanction

During the offer period of the Power Assets Privatisation, MLAP consulted the SFC about the nature of the Back-to-Back Arrangement in the context of the Power Assets Privatisation and the applicable disclosure requirements in the scheme document. It became apparent then that BANA and MLI should have made requisite disclosures of the equity swaps between (i) BANA and its clients and (ii) BANA and MLI in compliance with Rule 22. MLAP subsequently self-reported the earlier non-compliance of the disclosure requirements in the CRB Partial Offer.

The SFC considered that BANA’s and MLI’s failure to report their dealings in equity swaps in accordance with Rule 22 in both the CRB Partial Offer and the Power Assets Privatisation is a material and serious breach of General Principle 6 and Rule 22 of the Takeovers Code.

In deciding the sanction, the SFC took into account the BofAML Group’s full cooperation and the remedial measures it has now put in place to ensure future compliance with the Takeovers Code.

Reminders to advisers in a financial group

The SFC reminds that where an adviser is part of a financial group, the presumption of acting in concert extends to all entities within a group, including fund managers and principal traders, and a financial advisor to an offeror and/or persons in the same group as the advisor should be prudent in their dealings in an offeree company’s securities during an offer period.

Fund managers and principal traders should also consider applying for exempt status under the Takeovers Code at an early stage if they foresee the need to deal in the securities of an offeree company and/or offeror during an offer period where another member of the financial group may be advising.

They should take reasonable care to establish and maintain procedures and systems to guard against non-compliance with the disclosure obligations under Rule 22 of the Takeovers Code. In any case of doubt as to the application of Rule 22, the SFC should be consulted at the earliest opportunity.

In February 2016, the SFC censured Goldman Sachs (Asia) L.L.C for breaching various provisions of the Takeovers Code whilst acting as a financial advisor to Wing Hang Bank, Limited in relation to a voluntary general offer for the Bank in 2014. Please refer to our earlier client alert on that case.

Full text of the SFC”s Executive Statement on the disciplinary action against BANA and MLI can be accessed via the link below: