Consultation Conclusions on a Review of the Codes on Takeovers and Mergers and Share Repurchases and the revised Codes on Takeovers and Mergers and Share Repurchases (to become effective on 1 February 2002)

The Securities and Futures Commission (SFC) releases the Consultation Conclusions Paper on a Review of the Codes on Takeovers and Mergers and Share Repurchases (Conclusions Paper) to the public today. The revised Codes on Takeovers and Mergers and Share Repurchases (Codes) will become effective on Friday, 1 February 2002.

On 10 April 2001, the SFC issued a Consultation Paper inviting public comments on proposed changes to the Codes. The consultation period ended on 15 June 2001. A copy of the Consultation Paper is available on the SFC's website at www.hksfc.org.hk. In light of the public comments received and the recommendations of the Takeovers and Mergers Panel, the SFC has adopted the revisions to the Codes set out in the Conclusions Paper.

These revisions, including a complete reorganisation of the Code on Share Repurchases, are the most extensive since 1992 when the current form of the Codes was first introduced. The revisions are adopted with the aim of keeping the Codes in line with the market developments and international practice, clarifying the SFC's practices and interpretations of some provisions of the Codes, as well as addressing a number of technical issues.

Among these revisions are the lowering of the trigger threshold (which is the level of control of a company that triggers a mandatory offer obligation for the relevant shareholder) under Rule 26.1 of the Code on Takeovers and Mergers (Takeovers Code) from 35% to 30% and the reduction of the creeper (within which a controlling shareholder may increase shareholding in any 12 month period without triggering a mandatory offer) under the same Rule from 5% to 2%, both of which were implemented on 19 October 2001.

The other revisions of the Codes announced today will take effect on 1 February 2002. They include rationalising the voting requirements for company privatisation proposals and for delistings, and strengthening the requirements for asset valuations.

Existing Rule 2.10 of the Takeovers Code, as introduced in 1993 and revised in 1998, requires a privatisation by scheme of arrangement to be approved by no less than 90% in value of independent shareholders present and voting or, if not so approved, the scheme not being disapproved by shareholders holding over 2.5% of the total issued voting shares. The revised Rule 2.10 requires the scheme to be approved by no less than 75% in value of the disinterested shareholders present and voting, and that no more than 10% in value of all disinterested shareholders vote against the scheme. The new rule also extends the voting requirements to cover not only company privatisations by controlling shareholders, but also acquisitions of companies by any persons by way of schemes of arrangement or capital reorganisations.

To address market concerns about delisting being used to pressure minority shareholders into accepting a privatisation by way of general offer, the revised Rule 2.2 of the Takeovers Code imposes voting requirements for voluntary delistings which are the same as those applying to privatisations by scheme of arrangement and subjects the delisting to the offeror being entitled to exercise, and actually exercising, rights of compulsory acquisition.

A new Rule 2.11 of the Takeovers Code is added to make it clear that 90% of the disinterested shares (i.e., shares other than those held by the offeror and its concert parties) have to be acquired before any legal rights of compulsory acquisition may be exercised.

Mr. Ashley Alder, the SFC's Executive Director of the Corporate Finance Division the SFC, said: "The revised Codes will strengthen investor protection in Hong Kong and help keep Hong Kong securities market competitive in the area of takeovers, mergers and share repurchases."

The SFC will post the revised Codes to subscribers to the Codes as soon as practicable. The Conclusions Paper and the revised Codes are also available on the SFC's website at http://www.hksfc.org.hk.