Consultation Paper on the Hong Kong Securities and Futures Commission's Proposed Amendments to the Takeovers Codes

In Short 

The Situation: Certain provisions of the current Codes on Takeovers and Mergers and Share Buy-Backs of Hong Kong (the "Codes") may cause confusion to companies and relevant stakeholders in complying with the Codes. Also, various existing practices are not codified. 

The Development: The Hong Kong Securities and Futures Commission ("SFC") proposed a wide range of amendments to the Codes, together with the reasons for such changes, since it last amended the Codes in 2018. 

Looking Ahead: The proposals, if adopted, would provide comprehensive guidance to companies and relevant stakeholders in complying with the Codes in transactions involving takeovers, mergers and share buy-backs.

The SFC published a consultation paper on proposed amendments to the Codes on 19 May 2023. The proposed amendments cover various provisions of the Codes and include codifying current practices of the SFC, clarifying the SFC's positions on the Codes, aligning the timing requirements and some miscellaneous amendments. This Commentary discusses the key proposed changes and is not intended to be a full summary of the consultation paper. 

The proposals put forward by the consultation paper include, among other matters, the following. 



"Close Relatives". The SFC will codify its current practice and expand the definition of "close relatives" to include a person's grandparents, grandchildren, sibling's spouse or de facto spouse, children of siblings, and the parents and siblings of the person's spouse or de facto spouse. 

The expanded definition will result in a larger group of individuals presumed to be acting in concert with a person. However, the SFC will continue to consider rebuttal applications disputing concert party presumptions. 

"Voting Rights". The SFC will clarify that "voting rights" subject to any restrictions on their exercise by agreement, by operation of law and regulations or pursuant to a court order will still be regarded as voting rights exercisable at a general meeting. The voting rights attached to treasury shares (if any) that will not be treated as voting shares for the purpose of the definition of "voting rights" will be excluded. 

Shareholders' Approval and Acceptance 

90% ThresholdNote to Rule 2.2 of the Code on Takeovers and Mergers (the "Takeovers Code") will be amended to include purchases made by the offeror and persons acting in concert with it from the date of the announcement of a firm intention to make an offer, in determining whether the threshold of receiving valid acceptances of 90% of the disinterested shares has been met. 

Rule 2.11 of the Takeovers Code will be amended to include purchases made by the offeror and persons acting in concert with it during the period from the date of announcement of a firm intention to make an offer to the expiry of the four-month period after posting the initial offer document, in determining whether the threshold of acquiring 90% of the disinterested shares has been met. 

Shareholders' Meeting for a Privatisation by Way of a Scheme of Arrangement. Hong Kong courts recently have issued two alternative views on whether Rule 2.10 of the Takeovers Code prohibits an offeror and its concert parties from attending and voting at the shareholders' meeting for a privatisation by way of a scheme of arrangement. In light of those judgments, the SFC will amend Rule 2.10(a) and Rule 2.2(a) of the Takeovers Code to allow offerors and concert parties to attend and vote at shareholders' meetings, but their votes will not be counted for the purpose of satisfying Rule 2.10 of the Takeovers Code. 

Irrevocable Commitments 

The SFC will amend Note 4 to Rules 3.1, 3.2 and 3.3 of the Takeovers Code and Practice Note 12 such that: (i) an offeror is not required to consult the SFC before approaching a shareholder with a material interest (i.e. holding 5% or more of voting rights); (ii) the SFC must be consulted where an offeror intends to approach shareholders other than those with a material interest; and (iii) the maximum number of shareholders that an offeror can approach is six (whether with or without material interest). 


With regard to the Substantiality Test, the SFC will codify its existing practice to: 

  • Add market capitalisation as one of the parameters for comparison when determining the Substantiality Test and amend Note 8(a) to Rule 26.1 of the Takeovers Code;
  • "Look back" at least the three most recent financial periods when calculations of the Substantiality Test produce an anomalous result; and 
  • Update Practice Note 19 to provide further guidance on the Executive's approach to the Substantiality Test. 


Definition of "Offer Periods" 

The SFC will amend the definition of "offer period" to give the Executive the explicit power to end an offer period in order to address situations where an offeree company is subject to an unnecessarily prolonged offer period if the offeror or potential offeror is not proactive in relation to an offer or ending an offer. 

Put Up or Shut Up ("PUSU") 

The SFC will codify its existing practice and add a new Rule 3.9 of the Takeovers Code to give the Executive an express power to issue a PUSU order to require a potential offeror to announce its firm intention to make an offer within a set time period (put up), or to announce that a potential offeror will no longer proceed with an offer (shut up). 

The Executive will take all relevant factors into account in deciding whether and how long a time limit should be imposed on the potential offeror to clarify its intention under the Rule 3.9 of the Takeovers Code, including (without limitation): (i) the current duration of the offer period; (ii) the reason(s) for the offeror's delay in issuing a firm intention announcement; (iii) the proposed offer timetable (if any); (iv) any adverse effects that the offer period has had on the offeree company; and (v) the conduct of the parties to the offer. 


Disclosure of Offer Price in Talks Announcement Under Rule 3.7 

The SFC will codify its existing practice and add a new note to Rule 3.7 of the Takeovers Code to give effect that disclosure of an indicative offer price is not normally permitted before an announcement of a firm intention to make an offer unless there are exceptional circumstances. 

Such exceptional circumstances may include, for example, the need to clarify an incorrect market rumour or incorrect statement in the media which may be creating a false market in the shares of the offeree company, or where an offeror or an offeree company is required by overseas regulatory requirements to disclose an offer price prior to the announcement of a firm intention to make an offer. 

Deduction of Dividends from Offer Price 

Note 11 to Rule 23.1 and Note 3 to Rule 26.3 of the Takeovers Code will be amended such that no deduction of dividends from the offer price would be allowed unless an offeror reserves its rights in an announcement to do so. In cases where the payment of dividends is subject to a withholding tax, the Executive will allow only a reduction to the offer price based on the gross dividends received by shareholders. 


No Extension of the Closing Date of Rule 28.4 of the Takeovers Code 

The SFC notes that the current wording of Rule 28.4 of the Takeovers Code, which cross-refers to Rule 15.3 and Rule 28.5 of the Takeovers Code, could be confusing. The SFC will amend Rule 28.4 of the Takeovers Code such that where the acceptance condition is satisfied after the first closing day during an extended offer period, an offeror must declare a partial offer unconditional as to acceptances on the day the acceptance condition is met, and the final closing date cannot be extended beyond the 14th day thereafter. This applies irrespective of whether the approval under Rule 28.5 of the Takeovers Code (if required) has been obtained. 

Comparable Offer for Convertible Securities, Warrants, etc. 

A new Rule 28.10 of the Takeovers Code will be added to explicitly require the making of appropriate Rule 13 offers during a partial offer when an offer is made for a company which could result in the offeror holding shares carrying 30% or more of the voting rights, and the offeree company has convertible securities, warrants, options or subscription rights outstanding. 


Electronic Dissemination of Documents 

A new Rule 8.7 of the Takeovers Code will be added to allow the dispatch of documents under the Codes by electronic means to the extent permissible under a publisher's constitutional documents and applicable laws and regulations. Note 4 to Rule 8 of Rule 8.7 of the Takeovers Code will be amended to reflect the various methods to disseminate a document under the Codes. 

Submissions to the Executive 

The SFC will require all submissions to the Executive by email and continue to accept fees in the form of cheques or telegraphic transfers. The SFC is exploring the feasibility of establishing an online platform for submissions to the Executive and payment of fees due under the Codes. 

Printed Copies of the Codes 

No hard copies of the Codes will be available for purchase after the revision of the Codes.

Three Key Takeaways 

  1. The proposed amendments to the Codes covered various aspects, including but not limited to voting, acceptance and concert party issues, the chain principle, offer period and timetable, offer requirements, partial offers, green initiatives and other miscellaneous amendments.
  2. The proposed amendments to the Codes and the codification of various existing practices of the SFC are likely to address market concerns over the Codes throughout the years and provide certainty to public companies when conducting their business or any corporate actions which involve interpretation of the Codes.
  3. We expect that the SFC will continue to review the Codes from time to time, with the aim of providing better guidance to public companies and relevant stakeholders.
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