Background

On 10 April 2001, the SFC issued a Consultation Paper on a review of the Codes on Takeovers and Mergers and Share Repurchases ("Codes"). The Consultation Paper invited the public to comment on a number of proposed changes to the Codes. These included the changes to the trigger and creeper described below. The consultation period ended on 15 June 2001. A copy of the Consultation Paper is available on the SFC's website at www.sfc.hk.

The amendments to the trigger and creeper and the related transitional provisions have been adopted by the SFC in light of the public comments received, the majority of which were in favour of the changes, and the recommendations made by the Takeovers and Mergers Panel ("Panel"). The Panel recommended that these changes should be implemented with immediate effect so that shareholders currently holding less than 30% do not gain an unfair advantage by acquiring further shares to take their holding above 30% before a subsequent implementation date; such shareholders would otherwise be able to make use of the flexibility afforded by the transitional provisions for shareholders with existing holdings of between 30% and 50% without incurring a mandatory offer obligation when they pass through 30%. This is consistent with the objective set out in the Consultation Paper of ensuring as far as possible that all shareholders are neither worse off nor better off as a result of the changes.

Trigger reduced to 30% and creeper to 2% in any 12 month period

The SFC announces that effective today, Friday, 19 October 2001, the threshold for triggering a mandatory offer obligation under Rule 26.1 of the Code on Takeovers and Mergers ("Takeovers Code") has been reduced from 35% to 30% and the creeper has been reduced from 5% to 2% in any 12 month period.

Transitional provisions for shareholders holding 30% or more but less than 35%

Where a person, or two or more persons acting in concert, holds 30% or more of the voting rights of a company but less than 35% immediately prior to the implementation of the Rule changes to the trigger and the creeper today, transitional provisions apply. These transitional provisions are set out in the new Rule 26.6 of the Takeovers Code.

In summary, these provide that where a person, or two or more persons acting in concert, holds 30% or more but less than 35% of the voting rights of a company and stays in that range, the old 35% trigger will apply to him or them but the new 2% creeper will not apply. However, if the shareholding subsequently drops to below 30%, the new 30% trigger will apply to him or them from then on. The transitional provisions will remain in force for so long as such shareholding remains in that range and for 10 years from today's date. After the 10 year period such shareholders will be free to increase their shareholdings without incurring a mandatory offer obligation subject only to the 2% creeper which will then apply to them. For the avoidance of doubt, it will not be necessary for such holders to reduce their holdings to below 30% at the end of the transitional period in order to avoid a mandatory offer obligation.

These provisions will also apply following conversion, exercise or subscription in whole or in part on or after today where a person, or two or more persons acting in concert, holds convertible securities, warrants, options or subscription rights immediately prior to implementation of the Rule changes today that, together with any voting rights held immediately prior to today, could result in him or them holding 30% or more of the voting rights of a company but less than 35% of such voting rights.

Transitional provisions for the creeper

The transitional provisions for the creeper are set out in the new Rule 26.7 of the Takeovers Code. In summary, these provide that (other than for holdings of 30% or more but less than 35% covered by Rule 26.6) for the 12 months from today, the 2% creeper will apply to cover the period from the date of the relevant acquisition back to today and the old 5% creeper will apply to cover the period from the date of the relevant acquisition back to the date 12 months prior to the relevant acquisition. The Note to Rule 26.7 sets out examples of its application.

These changes to the Takeovers Code are of immediate effect

The amendments will not apply to offers and other relevant transactions which were announced or entered into before today Friday, 19 October 2001. However, where this arrangement may produce major difficulties, the Executive should be consulted and will endeavour to reach a solution which is fair to all parties.

Where there is any doubt about the application of any of the provisions of the Codes, the Executive should be consulted at the earliest opportunity.

Register of shareholdings of 30% or more but less than 35%

In order to avoid market confusion a register will be compiled of all shareholders who, immediately prior to implementation of the new Rules today, alone or acting in concert either (a) own 30% or more but less than 35% of the voting rights of a company or (b) own convertible securities, warrants, options or subscription rights that together with any existing voting rights held immediately prior to today could result in their holding 30% or more but less than 35% of such voting rights. All such shareholders are asked to register their holdings with the Executive as soon as possible. If any shareholder or group of shareholders is in any doubt as to whether they fall within this band, the Executive should be consulted at the earliest opportunity. Where appropriate, an application should be made to the Executive for a formal written ruling under section 15 of the Introduction to the Takeovers Code. In these circumstances, the Executive will not charge a fee for a ruling. If any shareholders do not register and the Executive or the Panel subsequently find that the Takeovers Code has been breached by the acquisition of shares by them as a concert party or otherwise, the Executive or the Panel may take disciplinary action. All relevant shareholders are also asked to notify the Executive if their holdings fall below 30% so that their holdings can be removed from the register. The register will be published on the SFC website in due course.

Detailed changes to the Rules

1. In the following provisions, replace all references to "35%" with "30%":

(a) definition of "control";

(b) Note 1 of the Notes to Definitions;

(c) Rules 3.2(d) and 3.3;

(d) Note 2 to Rule 21.6;

(e) Rules 26, 28 and 31; and

(f) Section 7 of Schedule VI;

2. in the following provisions, replace all references to "5%" with "2%":

(a) Rule 26; and

(b) Section 7 of Schedule VI;

3. in Note 15 to Rule 26.1, replace all references to "38%" with "31%".

4. in Note 17 to Rule 26.1, replace:

(a) all references to "45%" with "48%"; and

(b) all references to "54%" with "51%".

5. in Note 2 to Rule 26.2, replace the words "will not exercise more than 34.9%" with the words "can only exercise less than 30%";

6. in Section 4(c) of Schedule VI, replace all references to "55%" with "52%"; and

7. after Rule 26.4, and before the Notes on dispensations from Rule 26, add the following new Rules 26.5, 26.6 and 26.7:

"26.5 [Deliberately left blank]

26.6 Holdings of between 30% and 35%

Where a person, or two or more persons acting in concert, holds 30% or more of the voting rights of a company but less than 35% of such voting rights immediately prior to implementation of this Rule on 19 October 2001 then, for so long as such holding remains in this range and until 10 years after that date:-

(a) the Code (other than this Rule 26.6) shall be interpreted and applied as if the 30% trigger in Rule 26.1(a) and (b) was 35% for such person or persons; and

(b) such person or persons are not subject to the 2% creeper under Rule 26.1(c) and (d).

Where a person, or two or more persons acting in concert, holds convertible securities, warrants, options or subscription rights immediately prior to implementation of this Rule on 19 October 2001 that, together with any voting rights held immediately prior to that date, on conversion, exercise or subscription in whole or in part on or after that date could result in such person or persons holding 30% or more of the voting rights of a company but less than 35% of such voting rights, the above provisions will apply following conversion, exercise or subscription in whole or in part in respect of such convertible securities, warrants, options or subscription rights.

For the avoidance of doubt, where such person or persons continue to hold 30% or more but less than 35% of the voting rights of the company at the end of the 10 year period, it will not be necessary for them to sell voting rights to take such holding below 30% in order to avoid a mandatory offer obligation.

26.7 Transitional provisions for the creeper

For the 12 months following implementation of this Rule on 19 October 2001, the creeper under Rules 26.1(c) and (d) shall be applied, in all respects other than under Rule 26.6, in the following manner:-

(a) the 2% limit shall apply so as to cover the period from the date of the relevant acquisition back to 19 October 2001; and

(b) the 5% limit previously applicable under the Code shall apply so as to cover the period from the date of the relevant acquisition back to the date 12 months prior to the relevant acquisition.

Note to Rule 26.7:

Effect of transitional provisions for the creeper

The effect of the transitional provisions for the creeper can be illustrated by the following examples. Assuming there is no other acquisition or disposal of voting rights, if a person or group of persons acquires 4% of the voting rights of a company 3 months before 19 October 2001, such person or group of persons will be restricted from acquiring more than 1% of the company's voting rights within 9 months following 19 October 2001. Thereafter, the person or persons will be subject to the 2% limit. If a person or group of persons has acquired 1% of the voting rights of a company 3 months before 19 October 2001, such person or group of persons will be restricted from acquiring more than 2% in the 12 month period after 19 October 2001."

All amendments to Rules also apply to the Notes to those Rules.

Other Changes to the Codes

The other proposals for change set out in the Consultation Paper of 10 April 2001, including further changes to the detail of Rule 26, are still in the course of review and will be announced as soon as possible. A Conclusions Paper setting out the rationale for all changes to the Codes will be published at this time.

The SFC will start posting the revised pages of the Takeovers Code to subscribers to the Codes as soon as practicable. Copies of the Codes are available on the SFC's website www.sfc.hk.