Alice in Wonderland seen through consensual SFC looking glass
with Jake van der Kamp
'The codes do not have the force of law. They are framed so far as possible in non-technical language and should not be interpreted as if they were statutes.'
Securities and Futures Commission
IF ONLY IT were true that the takeover codes do not have the force of law there would be an easy way to deal with this convoluted 332-page consultation paper. You would hold it between finger and thumb over the round filing cabinet on the floor at the side of your desk and you would then release your grip. But it is not really true.
These codes are enforced by an arbitrary power that is much more onerous than the force of law could ever be. They are meant to represent the 'consensus of opinion' on takeover matters and the final decision on what consensus may be, rests with an SFC takeovers panel.
With law you get hard and fast rules and you know what the game is. With the SFC you have to guess the mind of a regulator. Woe betide you if you guess wrong. And if it were true that these codes are framed 'so far as possible in non-technical language' then possible does not go very far at all.
Here is the flavour of the proposed rule changes along with the underlines and strike-outs to denote proposed amendments and deletions:
'The independent financial adviser's written Such advice, including reasons, should be obtained in writing and such written advice should must be made known to shareholders by including it in the offeree board circular along with the recommendations of the independent committee offeree company's board regarding acceptance of the offer.'
Thus it should not surprise you that investment bankers frequently find themselves having to go to the SFC to clarify what all these ephemeral rules really require in hard practice. They have jobs to do and, if all their time is taken up in memorising the latest twists of SFC thinking, those jobs would never get done. Bear in mind here that this 332-page paper is only a document on rule changes and covers only takeovers.
There is more, much more, of this sort of thing confronting financiers every day. The SFC is an example of regulators gone wild, of law gone cancerous. But does it then understand the difficulties and accommodate the enquiries? No, it does not.
One of the changes it wishes to make is to stop pre-vetting of documents submitted to it and tell financiers to work things out themselves or face disciplinary action. Its excuse for the high-handed approach to a legitimate grievance is that this is the international trend (so what?) and to complain that the people coming with questions are too often junior staff.
Well, of course they are juniors. What are juniors for? Does the SFC really think that the senior investment bankers have time to spend more than half their working day sorting out the muddles of its endless papers? If it wishes to be God, let it apply for regime change in heaven.
On its immediate wish list (34 items on which it asks for responses in this consultation) is one to stop what it calls 'low-ball' offers (where do they come up with the jargon?) An example of a low-ball that we cited in our news coverage yesterday was a one cent a share takeover bid for China Motor Bus in 2002 when the stock was $70. The idea was that the bidder, if successful, would asset strip the company and pay out more than $90 a share afterwards.
What a superb idea. China Motor Bus in 2002 was to my mind a company that sorely needed breaking up after it lost its bus franchise. This was the obvious way to unlock the remaining value of the stock for the benefit of shareholders and the one-cent offer got the ball rolling. It was a service to the market worthy of commendation, not reproach.
But while the SFC admits that it has no business making judgments on this sort of thing - 'the Codes provide that the Codes are not concerned with the financial or commercial advantages or disadvantages of a takeover transaction' - it has gone ahead and done so anyway. Another arbitrary rule is in the making.
Meanwhile, two-thirds of the front page of this newspaper was devoted yesterday to two cases of serious financial scandal involving mainland companies, the sort that our exchange so desperately wants to list (and has listed in one of those instances).
The fact is that the reputation of our securities markets does not depend on patching itty-bitty loopholes in sub-clauses of clauses of a regulatory overload that, like dragons' teeth, only spawns an exponential growth of similar spurious loopholes for any that are closed. It depends rather on whom we let into these markets and we are letting in a lot of the wrong people from the mainland these days.
But that is not an SFC matter, you see. Of the big loopholes it takes no account.