INTRODUCTION
1. The Council welcomes the Securities and Futures Commission's (SFC) initiative to undertake a public consultation on a review of the codes on takeovers and mergers and share repurchases.
COUNCIL COMMENT ON THE PROPOSALS
2. The Council supports the SFC policy in keeping the Codes under regular review with the aim of ensuring that the Codes are kept in pace with market developments and international practice. The Council understands that the essential structure of the Takeovers Code is not changed, although it is refined to take account of relevant experience and where relevant international standards. The following comments are directed at the relevant amendments, and questions raised in the current consultation paper:
- Trigger and Creeper Levels
- Grandfathering Provision
- Use of Threat of Delisting
- Compulsory Acquisition Procedures
Trigger and Creeper Levels
3. A proposed change concerns the trigger (which is the level of control of a company that triggers a mandatory offer for an acquiring shareholder) and creeper (within which a controlling shareholder may increase shareholding without triggering mandatory offer). The SFC proposes lowering the trigger from the existing 35% to 30% and reducing the creeper from the existing 5% in a 12 month period to 2%.
4. The Council understands that the rationale for the incorporation of trigger level is that shareholders of a public company should be given an exit opportunity upon a change of control. The existing 35% trigger level is considered relatively high by international standard (Malaysia:33%, UK:30%, Singapore:25%). With a 35% trigger level, it is believed that in some cases it could result in an acquiror gaining effective control of a company without being required to make a general offer, particularly in large companies with dispersed share ownership. This may be detrimental to the interest of the minority shareholders.
5. Accordingly, the Council agrees that the trigger level should be lowered by reference to an internationally accepted level. It is understood that UK adopts 30%, Mainland China also adopts 30% and by implication Singapore will raise the threshold to 30%. For this reason, the Council considers it reasonable to lower the trigger level, as the SFC proposes, to 30% to bring Hong Kong in line with international standard. The Council also agrees that the creeper level should be reduced to 2%.
Grandfathering Provision
6. The SFC seeks comments on whether the proposed grandfathering provision should apply only for a fixed period to time, say 10 years, instead of indefinitely, after which all shareholders would be subject to the same trigger and creeper.
7. The Council accepts that, as a general principle, caution should be exercised where persons may be advantaged or disadvantaged as a result of a rule change. By the same token, the Council would be concerned with the possibility of market confusion through maintaining two levels of triggers over an indefinite period of time.
8. On balance, the Council is of the view that the Government's policy should be directed towards lessening any confusion that may arise in the marketplace. Accordingly, a moratorium of ten years is considered preferable to maintaining an indefinite period of exemption from the new rules. Moreover, applying a ten year period would seem to be reasonable, in terms of not providing any undue advantage or disadvantage, given that shareholdings would be expected to change over that investment life span. As a result, any advantage or disadvantage would seem to be diminished over the ten year period.
Use of Threat of Delisting
9. To address the market concern over delisting being used as a threat to pressure minority shareholders into accepting privatisation by way of general offer, the SFC proposes to impose the same voting requirements on voluntary delisting of any company as with privatisation by scheme of arrangement.
10. The Council is also of the view that once shares are delisted, minority shareholders lose a ready market to sell their shares and this is detrimental to their interest. The Council therefore supports the SFC's proposal to protect the rights of minority shareholders.
Compulsory Acquisition Procedure
11. As noted in the Consultation Paper, in some cases, offerors could seek to use compulsory acquisition procedures notwithstanding that less than 90% of the disinterested shares have been acquired. Although it is likely that minority shareholders can object through the Court and would be likely to succeed, such an application by a minority shareholder is unlikely to be made because of the cost and practical difficulty involved.
12. It is noted that the Takeovers Panel believes an attempt to exercise compulsory acquisition procedures in this manner would constitute oppression of the minority shareholder and proposes to include a specific provision in the Code to cover this.
13. In this regard, the Council also shares the Panel's view that it is costly and cumbersome for minority shareholders to take out Court action to protect their right. Therefore, the Council supports the SFC's move to include a specific provision that 90% of the disinterested shares have to be acquired before compulsory acquisition to protect the rights of minority shareholders.
