Robert Ashworth, a legal M&A expert at Freshfields Bruckhaus Deringer explains the new takeover code in Hong Kong.
What has been the genesis of the changes to the Hong Kong takeover code?
The current amendments to the code were first published by the SFC in 2001 for consultation. The consultation period went through most of 2001and the process has now come to an end. A revised code was introduced on February 1.
Looking at that in isolation would give a misleading impression of the overall scheme. Unlike the Singapore code, which hadn't been significantly changed for several years, the Hong Kong code had been updated every few years, to keep it current with international developments.
Having said that, this has been the most sweeping set of changes brought in at any one time.
What was the driver behind the change? Any particular event?
The main driver has been the desire to ensure that Hong Kong plays on the international stage and continues to. Therefore, ensuring that we are in line with other mature jurisdictions when it comes to takeovers is important. Allied to that is the general attention given to better corporate governance, where transparency, accountability and a level playing field have all been important issues. Hand in hand with that, Hong Kong needs to have a set of regulations that are comprehensive and are accessible to all that operate in this market. The recent changes have largely been a codification of existing practices, and now in theory, everyone is fully appraised of how takeovers work in Hong Kong and that produces transparency and a level playing field.
What have been the most significant changes?
Perhaps the single most significant change was that to the mandatory bid threshold, which was actually introduced in October 2001. This was significant since there were a number of companies hovering at a shareholding level of 34.9% or thereabouts. Such shareholders could exercise a substantial degree of control without having to make a full bid for the company. The threshold has come down to 30% and for shareholders that are between 30% and 34.9% there are transitional provisions.
This is a recognition that control can be exercised at levels that are lower than 34.9%. Now 29.9% is, in effect, the maximum.
What is the transitional phase?
It is 10 years.
So there will be no big block of share sales.
No. The changes were introduced in a manner that tried to ensure there wasn't a significant reorganization of company shareholdings prior to the changes.
Have there been changes to the creep period too?
Yes, the creep percentage has been reduced to 2%. A creep is where you can buy or sell shares within a 2% band, without triggering a general offer.
Why do you think it is considered to be important to have a creep in Asia, versus in London where it has been abolished?
The SFC review considered the idea of abolishing the creep provision. And whilst we don't know their inner thinking, I believe the idea of removing it was considered too dramatic a change. In the UK, they went to 1% before removing it altogether. Perhaps the 12 month creep may disappear in the fullness of time in Hong Kong too.
Is the philosophy behind this difference, that in Asia we have lots of big family shareholders, whereas London is a much more institutional market?
That is a correct description of the two markets. Does it follow that because of that there needs to be a difference. Perhaps it does.
What are the other major changes to the code?
One key change is to the rules on what the financial advisor or the offeror company can say about the bid whilst it is in progress. For example, in discussions with the media and analysts, efforts must be made to ensure that no new information leaks into the market that isn't already in the offer document. That document should contain all the salient facts. There has been a clampdown and new procedures to make sure that is the case.
This also affects the use of research reports. As you know, research is about sales. The new rules make it quite difficult for integrated houses to both advise on a bid and yet have their research arm making recommendations on buys and sells on the companies concerned. Reports they want to put out will have to be reviewed by the SFC, and historic reports on the given companies will have to be removed from their website. No further copies of those reports can be given to clients.
I can see that being quite difficult for compliance people, and already we've had enquiries from investment bankers asking about the ramifications and how to ensure compliance.
What if investment X is about to launch a hostile bid for company B by company A. Does it have to freeze its research as soon as it gets the mandate from company A?
The rules apply only when the offer period commences, which is generally when the offer is announced. However, it will be earlier if the companies announce they are in talks.
Has the offer period changed?
The offer period is now capable of being extended to 81 days. Before it was 60.
You now have 60 days to achieve the acceptances condition, and a further 21 days to fulfil the other conditions to the bid.
If you get over 50% is it considered a successful bid?
It all depends what threshold you set yourself. In Hong Kong, you are permitted, in a voluntary bid, to set your own acceptance level. It could be 50%, it could be 90%. If your intention is to take the company private ie delist it, then you will need 90%.
But there are plenty of examples of bids going through, where an offer is declared unconditional at something less than 90%, or even less than 75%. The majority shareholder, for example, may have increased its stake from 25% to 65%.
What's the minimum free float in Hong Kong?
It's 25%.
So if they get 80%, for example, there's a bit of a quandary?
This comes up a lot. In those circumstances, the stock exchange will usually require an undertaking to place down by issuing new shares to bring the level to at least 75%. The obvious concern for the offeror is that in order to place down a significant holding, a discount to the market is likely to be required.
Doesn't it make more sense for their to be a squeeze out at 75%?
You have to bear in mind that the other concern of the SFC is that there isn't oppression of minorities. You shouldn't be able to compulsorily delist a company unless you have at least 90%.
The new rules actually have amendments here. They now provide when you want to delist a company, not only do you need 90% acceptances, but you also need a resolution of the independent shareholders which is carried by a 75% majority.
Does that suggest it is quite hard to delist a company in Hong Kong?
It is. These changes haven't facilitated the delisting procedure. If anything they've empowered the minority shareholders.
And you think the philosophy behind this is minority shareholder rights?
Yes, I believe so. It is consistent with moves to make sure that minorities are not unduly prejudiced.
What is the squeeze out in the UK?
It's 90% too.
What are the regulations like in Hong Kong for whitewashes?
They're much the same as Singapore. Whitewashes can be approved but you have to get SFC consent and that of independent shareholders. But that wasn't such a glaring omission in the Hong Kong rules as in Singapore.
So basically the Singapore and Hong Kong codes are now very similar?
In general that is true.
Does that suggest these are the model codes for Asia as a whole?
These codes are sufficiently in tune with international best practice for a good case to be made for that, particularly in relatively mature markets, where you have a vibrant stock exchange.
Then again, if you take the PRC, the different nature of corporate law would make it hard to simply lift the Hong Kong code and drop it into a mainland Chinese context. In some ways the Hong Kong code is too sophisticated for the level of development of the PRC market.
Ultimately, there are advantages to having uniformity in the international marketplace. Therefore ultimately I believe it would be sensible for the PRC to strive to get its takeover regulations into line with those in Hong Kong and Singapore.
