Lowering the takeover trigger to 30 per cent could result in some existing business agreements being deemed connected transactions, according to a corporate finance expert. Connected transactions are often between companies where one has a controlling stake in another. They also occur when a director has a controlling stake in another firm with which his employer does business. Due to the potential conflict of interest for company directors, connected transactions require the approval of independent shareholders. The Securities and Futures Commission announced on Thursday that the takeover trigger above which an investor has to make a general offer for all the shares in the company would be lowered to 30 per cent from 35 per cent with immediate effect. The changes followed on from an April consultation paper. The Listing Rules of the stock exchange cite the takeover trigger as the point where a shareholder is deemed to control a firm. Firms that have already entered into contracts with associates in which they hold between 30 per cent and 35 per cent could therefore now have these viewed as connected transactions. 'The lowering of the general offer threshold from 35 to 30 per cent may automatically result in certain on-going business arrangements entered into by listed companies - which currently are not deemed connected transactions - becoming connected transactions,' said Ernst & Young Corporate Finance managing director John Maguire. Publicly listed companies should examine whether they have such arrangements that may be affected by the new takeover trigger, according to Mr Maguire. The stock exchange should consider issuing an announcement to alert companies to the issue and provide guidance to prevent inadvertent breaches of the listing rules. For investors that already hold between 30 per cent and 35 per cent of a listed company, the previous takeover trigger will apply over the next 10 years, to ease transition to the new rules. The SFC also has reduced the 'creeper', which determines how much a controlling shareholder can increase a stake without triggering a general offer, to 2 per cent from 5 per cent. Financial commentator and editor of Webb-site.com David Webb welcomed the SFC's announcement on the takeover trigger but argued the 2 per cent creeper should apply immediately to investors with between 30 per cent and 35 per cent of a company. The SFC has allowed such investors to move freely between 30 per cent and 35 per cent over the next 10 years. 'We still await the SFC's conclusions on the remaining proposals, but for now we can declare today a victory day for the public share-owner,' Mr Webb wrote on his Web site. Proposals still being considered by the SFC include measures to curb a potential conflict of interest for financial advisory firms affiliated to auditors. If adopted, the proposals would prevent corporate financiers from advising a client in a merger when one of the parties involved was being audited by an affiliate. These corporate finance firms - such as Ernst & Young Corporate Finance - argue the proposals would place too many restrictions on their business. Hong Kong should instead introduce similar regulations to Britain, where audit-affiliated financial advisory firms have been active for many years, Mr Maguire said.
