HongKong Code on Takeovers and Mergers

1. Introduction

The HongKong Code on Takeovers and Mergers (the Code) is the principal regulatory framework governing takeover transactions involving companies listed on the Stock Exchange of HongKong (SEHK). Administered by the Takeovers Panel, the Code aims to ensure that takeovers are conducted in a fair, transparent, and orderly manner, protecting the interests of shareholders, creditors, and the public.

2. Key Objectives

• Equality of Treatment: All shareholders of the same class must be offered the same terms.
• Fairness and Transparency: Information about the offer must be disclosed promptly and accurately.
• Protection of Minority Interests: Mechanisms such as squeezeout and sellbyorder protect minority shareholders.
• Orderly Market Conduct: The Code prevents market abuse and ensures that any takeover activity does not destabilise the market.

3. Scope of Application

The Code applies to any acquisition of shares in a listed company that results in a change of control, regardless of the method (cash, shares, or a combination). It also covers mandatory general offers triggered by indirect holdings, shareswap arrangements, and certain transactions involving nonlisted entities that affect a listed company.

4. Core Concepts

4.1 Control

Control is generally defined as the power to determine the composition of the board of directors or to exercise a dominant influence over the affairs of the company. A direct or indirect holding of 30% or more of voting rights usually triggers a mandatory offer, unless an exemption applies.

4.2 Offer and Offeror

An offer is a proposal made by an offeror to acquire shares of a target company on the same terms for all shareholders of the same class. Offers can be friendly (with board support) or hostile (without board support).

4.3 Mandatory General Offer (MGO)

When a party acquires the threshold shareholding (normally 30% of voting rights), the Code requires that party to make an MGO to all remaining shareholders of the same class, at the highest price paid by the offeror for any shares in the target during the 12month period preceding the offer.

4.4 Squeezeout and SellbyOrder

If an offeror acquires at least 90% of the voting rights, they may enact a compulsory acquisition (squeezeout) of the remaining shares. Conversely, if the offeror acquires at least 50% but less than 90%, shareholders may invoke a sellbyorder to compel the offeror to purchase their shares on the same terms.

5. Procedural Steps

1. Preoffer Disclosure: The offeror must file a preannouncement with the Takeovers Panel, stating the intention to make an offer and providing basic details.
2. Offer Document: Within 10business days of the announcement, the offeror must lodge a detailed offer document (the offer memorandum) containing information on the offer terms, funding, board recommendations, and any arrangements.
3. Board Recommendation: The targets board must issue a recommendation to shareholders within 20business days after the offer is announced, unless the board decides to remain neutral.
4. Shareholder Acceptance Period: The offer must remain open for at least 28calendar days (or 41days if a contractual offer is made).
5. Regulatory Clearance: The HongKong Securities and Futures Commission (SFC) reviews the offer for compliance with securities law, but the Takeovers Panel assesses compliance with the Code.
6. Completion: After acceptance, the parties settle the transaction, and any postcompletion obligations (e.g., filing of a postoffer statement) are fulfilled.

6. Role of the Takeovers Panel

The Takeovers Panel is an independent, nongovernmental adjudicatory body. Its key functions include:

• Interpreting the Code and issuing guidance.
• Investigating alleged breaches and imposing sanctions, such as monetary penalties or prohibition orders.
• Facilitating dispute resolution between parties.
• Monitoring market conduct during the offer period.

Decisions of the Panel are enforceable under the Companies Ordinance and can be appealed to the High Court.

7. Recent Amendments (20232024)

In response to evolving market practices, the Takeovers Panel introduced several amendments:

• Electronic Offer Documents: Offers may be made and accepted electronically, subject to verification of shareholder identity.
• Enhanced Disclosure on ESG: Offerors must disclose material environmental, social, and governance (ESG) considerations that may affect the valuation.
• Clarified Partial Offer Rules: The threshold for partial offers (offers for less than 30% of shares) was refined to prevent market manipulation.

8. Practical Considerations for Companies

8.1 For Target Companies

• Maintain an uptodate share register and shareholder contact list.
• Prepare a robust defence strategy, including possible whiteknight alternatives.
• Engage legal and financial advisers early to evaluate the offer.

8.2 For Offerors

• Conduct thorough due diligence to identify any contractual arrangements that could trigger an MGO.
• Secure financing and confirm the source of funds to avoid breaches of the cashinhand rule.
• Develop a clear communication plan for shareholders and the market.

9. Comparison with Other Jurisdictions

While the HongKong Code shares many principles with the UK Takeover Code and the US Williams Act, notable differences include:

• Threshold Levels: HongKong uses a 30% trigger for mandatory offers, whereas the UK also applies a 30% rule but with different squeezeout thresholds.
• Regulatory Body: The Takeovers Panel is a nongovernmental body; in the US, the Securities and Exchange Commission (SEC) has primary oversight.
• ESG Disclosure: Recent HongKong amendments place explicit ESG disclosure requirements on offerors, a feature less pronounced in older codes.

10. Conclusion

The HongKong Code on Takeovers and Mergers provides a comprehensive, shareholdercentred framework that promotes fairness, transparency, and market stability. By understanding the Codes definitions, procedural requirements, and the role of the Takeovers Panel, both target companies and prospective offerors can navigate takeover transactions more effectively and mitigate the risk of regulatory breaches.

Staying abreast of ongoing amendmentsparticularly those related to electronic procedures and ESG disclosureswill be essential for all market participants looking to participate in HongKongs dynamic capital market.