In its recent decision relating to The Cross Harbour (Holdings) Limited (Cross Harbour), the Takeovers and Mergers Panel (the “Panel”) ruled that despite there being no change in leadership of a long established concert group, nor payment of premium in the proposed intra-concert group transfer, no waiver from the obligation to make a mandatory general offer (an “MGO”) would be granted if the leader acquires a direct holding of a controlling interest in the listed company.
The Cross Harbour Decision
In that case, the proposed transfer (see below) involved the sale of Y.T. Realty Group Limited’s (YT Realty) entire issued share capital of Honway Holdings Limited (Honway) (a BVI company) to its controlling shareholder, Mr. Cheung Chung Kiu (Mr. Cheung), with Honway’s sole material asset being the controlling interest in Cross Harbour:
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In deciding whether an MGO waiver should be granted for the proposed transfer, the Panel adopted a 3-step approach:
- Will the transfer trigger an MGO?
Mr. Cheung is acquiring the statutory control of Honway and thereby, “acquiring or consolidating the control” of Cross Harbour. The ‘chain principle’ set out in Note 8 to the Notes to Rule 26.1 of the Takeovers Code applies and a general offer obligation arises.
- If the answer to item 1 is affirmative, should waiver be granted under Note 6(a)(i) and (ii) to the Notes to Rule 26.1?
Note 6(a)(i) is not applicable as Yugang is not a subsidiary of the company controlled by Mr. Cheung and YT Realty is not a subsidiary of Yugang. The proposed transfer is not an intragroup reorganisation defined under Note 6(a)(i).
Note 6(a)(ii) is not applicable as the proposed transfer is not an arrangement for the transfer of voting rights between Mr. Cheung and members of his family, whether held directly or through related family trusts or family-controlled companies.
- If the answer to item 2 is negative, do circumstances of the case warrant a waiver being granted?
The Panel emphasised that ‘waivers from the obligation are the exception’. It is interesting to note that the Panel acknowledged that no premium has been paid for the transfer (as distinguished from the decision relating to Hong Kong Aircraft Engineering Company Limited (HAECO) mentioned below). It, however, ruled that this is not determinative. The Panel placed great emphasis in distinguishing a direct holding of a controlling interest and a holding through a chain of companies, each of which is controlled through a controlling interest and the qualitative difference between them. Such a change is regarded as changing the balance of the shareholders and therefore, circumstances do not warrant a grant of an MGO waiver.
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It is clear from both the Cross Harbour and HAECO decisions that for any intra-concert group transfer resulting in one member consolidating control through a change of a relative control into an absolute control of a controlling interest in the listed company, no MGO waiver would normally be granted, except possibly in a family arrangement, which is yet to be tested.