Hong Kong overhauls city’s takeover code to strengthen protection for small shareholders

Major changes to company takeover rules proposed by the regulator would bring Hong Kong in line with London and Singapore

PUBLISHED : Friday, 19 January, 2018, 8:23pm
UPDATED : Friday, 19 January, 2018, 11:38pm

Hong Kong’s securities regulator will overhaul the city’s takeover code to strengthen the protection for minority shareholders, offering them compensation for the first time in cases of malpractice, and making it harder for corporate raiders to control companies.

Investors who lose out because of malpractice during a takeover could soon be entitled to compensation, according to recommendations by the Securities and Futures Commission (SFC), under public review until a final decision on implementation on April 19.

If approved in its current form, the move would be a significant overhaul of the takeover codes. The SFC can currently ban companies or investors from trading in the local stock market but cannot force them to pay investors who have suffered as a result of their wrongdoing.

“The proposed changes are aimed at affording fair treatment to shareholders and protecting the interests of those who participate in Hong Kong’s securities markets,” the SFC’s chief executive Ashley Alder said in a statement.

The move would bring Hong Kong in line with global financial hubs such as London and Singapore, which already have such regulations in place.

The proposals, now under review, also include a measure to limit the scope of majority shareholders looking to obtain or consolidate control of a company. That rule would make it harder for controlling shareholders to obtain a so-called whitewash waiver that frees them from the obligation to make an offer for the remaining shares.

In a takeover, once a shareholder owns more than 30 per cent of a company, an offer must be made for the rest of the shares, unless the SFC grants an exception, known as a whitewash waiver. The SFC has proposed to raise the threshold for the waiver to 75 per cent of independent shareholders’ votes, from the current 50 per cent.

“There is a concern that the independent shareholders voting requirement in whitewash transactions is not acting as the ‘gatekeeper’ that it was intended to be, and in large part shareholders’ approval is regarded by both the whitewash applicant and shareholders as virtually inevitable,” the SFC said.

“The high level of certainty of obtaining approval from shareholders of a whitewash waiver can lead to abuse by whitewash applicants looking to obtain or consolidate control.”

Between 2015 to 2017, more than 90 whitewash transactions that were voted on by shareholders were approved. If the threshold had been set at 75 per cent, seven of those cases would not have obtained the necessary shareholders’ approval.

The SFC also set out additional amendments including the approval of delistings by independent shareholders in jurisdictions which do not afford compulsory acquisition rights.

In the case of listed companies being acquired, the SFC wants the takeovers panel – the body that oversees such deals – to be granted the power to require those who have broken the rules to compensate shareholders who have suffered as a result of their malpractice.

“The purpose of a compensation ruling would be to provide financial redress to shareholders or former shareholders who have suffered as a result of a breach of the codes,” the SFC said.