HKSI Paper 17 (LE) Regulation of Takeovers and Share Buy-backs Free Practice Questions Set One

According to the Takeovers Code, certain relationships automatically trigger a presumption of acting in concert, unless proven otherwise. Class (1) includes a company, its parent, its subsidiaries, its fellow subsidiaries, associated companies of any of the foregoing, and companies of which such companies are associated companies. Class (2) includes a company with any of its directors (and their close relatives, related trusts and companies controlled by any of these persons) or those of its parent. Class (3) includes a company with any of its pension funds, provident funds and employee share schemes. Therefore, a parent company and its subsidiary are presumed to be acting in concert under Class (1). A company and its director are presumed to be acting in concert under Class (2). A company and its pension fund are presumed to be acting in concert under Class (3). However, two companies that operate in the same industry, without any ownership or director overlap, are not presumed to be acting in concert under any of the defined classes. The Takeovers Code emphasizes the importance of identifying concert parties early, as their combined voting rights trigger obligations, particularly under Rule 26 regarding mandatory offers. Financial advisors must conduct thorough due diligence to assess potential concert party relationships and consult the Executive if uncertainty arises. Ignoring these presumptions can lead to severe regulatory consequences and potential breaches of the Takeovers Code.

Directors’ duties are not diminished by delegation, emphasizing their ongoing responsibility for oversight and ensuring compliance with the Code on Takeovers and Mergers. Avoiding information asymmetry is crucial to ensure all shareholders have equal access to information relevant to the takeover decision. Prior to the offer period, both the offeror and offeree company must act with utmost caution and maintain confidentiality to prevent leaks and market manipulation. The offeror is the party making the offer to acquire the offeree company, while the offeree company is the target of the takeover bid. At the commencement of an offer period, both parties have specific obligations, including making announcements and providing information to shareholders. Restrictions on action during the offer period aim to prevent either party from taking actions that could frustrate the offer or disadvantage shareholders. Documents related to the offer must be made available for inspection to ensure transparency. Announcements obligations under the Code are designed to keep the market informed of material developments. The meaning of “document” is broad and includes any written or electronic material relevant to the offer. Prior to an offer, the focus is on maintaining confidentiality and avoiding premature disclosure. At the commencement of an offer period, the emphasis shifts to providing full and accurate information to shareholders. On the closing date, the offeror must declare whether the offer has been successful. Following the end of an offer period, there may be restrictions on subsequent acts by both the offeror and offeree company to prevent abuse of power or manipulation of the market.

The Takeovers Code places significant restrictions on dealings in the securities of the offeree company prior to the announcement of an offer to prevent insider trading and ensure a fair market. Specifically, any person privy to the information that an offer is being contemplated, other than the offeror, is prohibited from dealing in the offeree company’s securities, securities convertible into those securities, or their derivatives. This restriction aims to prevent individuals with inside knowledge from profiting unfairly at the expense of other investors who do not possess such information. The offeror itself must also be mindful of insider dealing provisions under the Securities and Futures Ordinance (SFO), particularly if it has acquired inside information during discussions with the offeree company.

In contrast, after the announcement of an offer, the restrictions and disclosure obligations become more formalized and apply primarily to the offeror and its concert parties and associates. These parties are subject to specific rules regarding dealing in the offeree company’s securities, including disclosure requirements and potential restrictions on the price and terms of their dealings. The purpose of these rules is to ensure transparency and prevent the offeror from manipulating the market or gaining an unfair advantage during the offer period. The Takeovers Code aims to create a level playing field for all shareholders of the offeree company, allowing them to make informed decisions about whether to accept or reject the offer.

The key to this question lies in understanding the Executive’s approach to frustrating actions during a takeover offer, particularly concerning service contracts and material transactions. Statement I is correct because any abnormal increase in emoluments or significant improvement in the terms of service of a director, outside of a genuine promotion, is considered a frustrating action, according to the Takeovers Code. The Executive aims to prevent the offeree company from taking actions that could impede the offer or disadvantage shareholders. Statement II is also correct. The materiality threshold for disposals or acquisitions is determined using the same percentage ratio tests as those used for ‘discloseable transactions’ under the Listing Rules, which is 5% or more. This ensures consistency in assessing the significance of transactions during a takeover. Statement III is incorrect because while the Executive normally gives consent to grant options over shares in a manner consistent with its normal practice under an established share option scheme, it is not an absolute guarantee. The Executive retains the discretion to withhold consent if circumstances warrant it. Statement IV is correct. Declaring and paying an interim dividend outside the normal course during an offer period could be seen as a frustrating action, as it could alter the financial position of the offeree company and potentially affect the offer. Therefore, the Executive should be consulted in advance. In summary, statements I, II, and IV are correct, while statement III is incorrect.

According to the Securities and Futures Ordinance (SFO), individuals are obligated to cooperate with investigations conducted by the Securities and Futures Commission (SFC). This includes providing requested evidence. However, the SFO acknowledges that there may be legitimate reasons why an individual cannot provide the requested evidence. In such cases, the individual can make a statutory declaration explaining the reasons for their inability to comply. This declaration must be truthful and provide a reasonable justification for the non-compliance. The SFC will then assess the validity of the reasons provided in the statutory declaration. Providing a false or misleading statutory declaration is an offense under the SFO. The SFO aims to balance the need for effective investigations with the rights of individuals to provide reasonable explanations for non-compliance. The statutory declaration serves as a formal mechanism for individuals to explain their situation and avoid potential penalties for non-compliance, provided the reasons are deemed acceptable by the SFC. The SFC’s decision will depend on the specific circumstances of each case and the credibility of the explanation provided in the statutory declaration. This process ensures fairness and transparency in the enforcement of securities regulations in Hong Kong.

This question assesses the understanding of the ‘creeper rule’ within the context of Hong Kong’s mandatory offer obligations, specifically as it relates to concert parties and individual shareholders. The ‘creeper rule’ is designed to prevent creeping takeovers without triggering a full offer. The scenario involves a shareholder, X, who initially held a 35% voting interest and subsequently acquired additional shares. The key to answering this question lies in understanding how prior disposals affect the calculation of the creeper threshold. According to the Securities and Futures Commission’s (SFC) guidelines, the creeper threshold is calculated based on the *lowest* percentage holding during the preceding 12 months. Therefore, if X sold a portion of their shares before acquiring more, the lowest holding becomes the baseline for calculating the 2% threshold. In this case, X sold 3% of their voting interest, reducing their holding to 32%. The creeper threshold is then calculated from this 32% baseline. A mandatory offer obligation is triggered if X’s net acquisitions exceed 2% above this lowest holding within a 12-month period. Thus, the maximum voting interest X can hold without triggering a mandatory offer is 34%. The other options present scenarios where the creeper rule is misapplied, either by ignoring the impact of prior disposals or by incorrectly calculating the allowable acquisition threshold.

The question relates to the mandatory offer requirements under Rule 26 of the Takeovers Code. Let’s analyze each statement:

Statement I is correct. According to TC r26, if a person acquires 30% or more of the voting rights of a company, whether through a series of transactions or a single transaction, a mandatory offer is triggered.

Statement II is incorrect. A mandatory offer is triggered when a person holding between 30% and 50% increases their holding by more than 2% from their *lowest* holding in the *past 12 months*, not the highest.

Statement III is correct. A mandatory offer is triggered when a concert party collectively holding less than 30% acquires additional voting rights that increase their collective holding to 30% or more.

Statement IV is incorrect. Mandatory offers must be subject to a 50% acceptance condition, but they cannot include any other conditions. This is to protect the interests of minority shareholders.

Therefore, the correct combination is I & III only.

Statements I and II are correct. The Securities and Futures Commission (SFC) plays a crucial role in regulating takeovers and share buy-backs in Hong Kong, ensuring fairness and protecting the interests of shareholders, as outlined in the Securities and Futures Ordinance (SFO). The SFC’s Codes on Takeovers and Mergers and Share Buy-backs provide detailed rules and guidelines for these activities. These codes aim to ensure that all shareholders are treated fairly and have sufficient information to make informed decisions. The Hong Kong Exchanges and Clearing Limited (HKEX) also has a significant role, particularly in ensuring compliance with listing rules related to takeovers and share buy-backs. These rules cover aspects such as disclosure requirements and shareholder approval processes. Therefore, the HKEX is involved in overseeing the procedural aspects of these transactions to maintain market integrity. Statements III and IV are incorrect. While the Hong Kong Monetary Authority (HKMA) regulates financial institutions, it does not directly regulate takeovers and share buy-backs. Similarly, the Hong Kong Legal Information Institute (HKLII) provides access to legal information, including ordinances, but it does not have a regulatory role in takeovers and share buy-backs. The primary regulators are the SFC and the HKEX.

The general mandate allows a company to issue shares up to 20% of its existing share capital without needing further shareholder approval. However, during an offer period (takeover bid), this mandate cannot be freely exercised. This restriction aims to prevent the target company from frustrating the offer by altering its shareholding structure, potentially making the takeover more difficult or expensive for the offeror. The display documents are crucial for transparency during a takeover. They provide shareholders with access to key information about the offeror and offeree company, enabling them to make informed decisions. These documents, which must be available from the posting of the Code Document until the offer period ends, include articles of association, audited accounts, reports referred to in the Code Document, consents from financial advisors, profit forecasts, asset valuations, details of irrevocable commitments, information on dealings, material contracts, service contracts, financing arrangements, and any other documents required by the Executive. Making these documents available on the company’s website and submitting them through the SFC’s WINGS portal ensures accessibility and regulatory compliance. The requirement to display these documents is outlined in the Codes on Takeovers and Mergers issued by the Securities and Futures Commission (SFC).

The Corporate Finance Adviser (CFA) Code of Conduct mandates several key operational controls to ensure integrity and compliance within financial advisory firms. Statement I is correct because the CFA Code explicitly requires financial advisers to maintain an effective compliance function, headed by a Designated Compliance Officer (DCO), that operates independently from other business functions and reports directly to senior management. This ensures that compliance oversight is not compromised by business pressures. Statement II is also correct. The CFA Code emphasizes the importance of proper licensing and registration of staff to ensure they are competent and authorized to perform their duties. This is a fundamental aspect of maintaining professional standards and regulatory compliance. Statement III is correct as the CFA Code requires the implementation of a watchlist and restricted list system to monitor personal account dealings and proprietary trading. This helps prevent insider trading and conflicts of interest. Statement IV is correct because the CFA Code necessitates that financial advisers adopt an appropriate written staff dealing policy to govern personal account dealings and prevent potential abuses. Therefore, all statements are correct and reflect the operational controls mandated by the CFA Code.

In a scheme of arrangement, the resolution must be approved by at least 75% of the votes attaching to disinterested shares cast in person or by proxy at a duly convened meeting of the disinterested shareholders. This threshold ensures that a significant majority of shareholders who are not affiliated with the offeror support the scheme. The requirement safeguards the interests of minority shareholders and prevents the offeror from unfairly pushing through a scheme that benefits them at the expense of others.

Additionally, the number of votes cast against the resolution must not exceed 10% of the votes attaching to all disinterested shares. This condition provides a further layer of protection for disinterested shareholders. Even if a substantial majority votes in favor, the scheme cannot proceed if a significant minority opposes it. This ensures that the concerns of a substantial minority are taken into account. The Takeovers Code mandates that the vote must be taken by way of poll, ensuring that votes are calculated by counting the number of votes attaching to shares being voted at the meeting, whether present in person or by proxy. This method accurately reflects the shareholders’ voting power. The offeree company must appoint one of its auditors, share registrar, or an accounting firm qualified to act as its auditors to act as scrutineer for the vote-taking. This ensures impartiality and transparency in the vote-counting process, bolstering the integrity of the scheme of arrangement.

According to the Codes on Takeovers and Mergers and Share Buy-backs, financial advisers play a crucial role in ensuring the integrity and fairness of takeover transactions. Statement I is correct because a financial adviser to the offeror must diligently assess the offeror’s ability to implement the offer, including verifying the availability of sufficient resources. This is a fundamental requirement to protect the interests of the offeree company’s shareholders. Statement II is also correct. The Codes mandate that an Independent Financial Adviser (IFA) be appointed to advise the offeree company’s board. The IFA’s primary role is to provide an objective assessment of the offer and its fairness to the shareholders, ensuring that the board acts in the shareholders’ best interests. Statement III is incorrect because the Codes emphasize the importance of the IFA’s independence. The IFA must not have any material relationships or conflicts of interest that could compromise their objectivity. Statement IV is incorrect. While cooperation with the Securities and Futures Commission (SFC) is essential, the Codes primarily focus on ensuring fair treatment of shareholders and the integrity of the market during takeovers and mergers. The SFC’s role is to oversee compliance with the Codes and relevant regulations, but the primary focus of the Codes is on the conduct of the parties involved in the transaction.

The SFC’s approach to disciplinary actions emphasizes cooperation from intermediaries. Taking remedial steps, such as compensating clients, disciplining staff, and preventing recurrences, demonstrates a commitment to rectifying issues and mitigating harm. According to the SFC’s Guidance Note on Cooperation, such actions are viewed favorably and can lead to a reduction in sanctions. The maximum reduction can be up to one order of magnitude or 33%, especially if the cooperation is spontaneous and extensive. Furthermore, the SFC considers whether the intermediary has a previous disciplinary record and the likelihood of other penalties from other authorities or civil actions.

Statement I is correct because taking remedial steps to compensate clients is explicitly mentioned as a way of cooperating with the SFC, potentially leading to reduced sanctions.

Statement II is correct because disciplining staff concerned demonstrates a proactive approach to addressing misconduct, which the SFC views positively as part of remedial actions.

Statement III is correct because preventing recurrences shows a commitment to improving internal controls and preventing future violations, aligning with the SFC’s expectations for responsible intermediaries.

Statement IV is correct because the SFC considers the intermediary’s disciplinary record and potential penalties from other sources when determining the appropriate disciplinary action.

The Executive mandates that both the offeror and offeree companies engage a financial advisor to ensure compliance with the Codes, emphasizing the critical role these advisors play in maintaining the integrity of corporate finance transactions. To effectively assist these parties, a financial advisor must possess a Type 6 license, which specifically permits advising on corporate finance matters, and must be authorized to advise on transactions falling under the purview of the Codes (“TC Transactions”). This requirement ensures that advisors have the necessary regulatory understanding and expertise.

Prior to accepting an assignment, a financial advisor must rigorously assess its own capabilities to ensure it possesses the requisite expertise, competence, and resources to fulfill its obligations under all applicable regulations, including the Codes and other relevant regulatory codes. This assessment includes ensuring the availability of sufficient experienced and competent professional staff to dedicate to the TC Transaction. Furthermore, a designated TCRO must be actively and appropriately involved, dedicating sufficient time and effort to the transaction to ensure the financial advisor’s responsibilities under the Codes are met.

The Executive retains the discretion to disallow a financial advisor from acting if these requirements are not adequately met, underscoring the importance of thorough preparation and compliance. The commencement of the financial advisor’s appointment is considered to begin as soon as they start working with the client, regardless of whether a written agreement is in place, highlighting the immediate responsibility assumed upon engagement. The appointment must be disclosed to the Executive within three business days of the announcement initiating an offer period or the first announcement of a whitewash proposal, ensuring timely regulatory oversight.

The Conflicts of Interest Guidelines are a critical component of the regulatory framework overseen by the SFC, designed to ensure fairness and impartiality in the securities and licensing environment. These guidelines mandate that all members of the Panel, along with their respective firms, must adhere to stringent conflict of interest protocols. This requirement is in place to maintain the integrity of the Panel’s decision-making processes, preventing any undue influence or bias that could arise from personal or professional relationships. The guidelines are accessible on the SFC’s website, providing transparency and allowing stakeholders to understand the standards expected of Panel members.

Aggrieved shareholders have the right to request a review of the Executive’s rulings by the Panel. However, the Panel must first determine that the request is not frivolous, ensuring that the review process is reserved for legitimate concerns. To initiate a review, the Executive must be notified within 14 days of the event that prompted the request, except in urgent cases. This notification must include a detailed explanation of the grounds for the review, allowing the Panel to assess the validity and relevance of the complaint.

Panel meetings are typically held in private due to the confidential nature of the price-sensitive information discussed. These meetings are informal, and the Panel is not bound by strict rules of evidence, giving it the flexibility to consider various forms of evidence and draw inferences as necessary. While a recording of the hearing is usually made, a transcript may be created and provided to any party involved, subject to confidentiality protocols. The Panel’s proceedings are governed by the Rules of Procedure issued by the SFC, which are available on the SFC’s website. The Chairman has the authority to provide procedural directions to ensure the efficient and fair determination of each case. Parties are allowed to bring financial and legal advisors to the meetings, but they are expected to answer questions directly without consulting their advisors. Parties can present their case themselves or through their advisors, although it is less common for legal advisors to present the case in non-disciplinary hearings. Typically, parties are required to submit a written summary of their case beforehand, and the Executive will provide a written summary of the issues along with its ruling or views. With the Chairman’s consent, parties may also call witnesses. Following the meeting, the Panel will promptly inform the parties of its ruling and the reasons behind it.

The general approach under the Codes is to publish rulings and their reasons to enhance public understanding of the Executive and Panel’s activities. The Executive may publish rulings that set important precedents or interpretations of the Codes. Additionally, the Executive announces when it initiates proceedings before the Panel. Panel rulings are typically published on the SFC’s website as soon as feasible, promoting transparency and accountability.

A scheme of arrangement, unlike a general offer, involves court oversight and shareholder voting at court meetings. The announcement of the offer becoming unconditional (A day) is not directly applicable in the same way as in a general offer because the scheme’s success hinges on court sanctioning after shareholder approval. The timetable for a scheme of arrangement diverges from a general offer after the initial announcement (D day) due to the legal and procedural requirements specific to schemes. The court’s role in approving the scheme introduces additional steps and considerations that are not present in a standard takeover offer. The key difference lies in the court’s power to sanction the scheme, making the process more structured and legally binding. This sanctioning process includes assessing whether the scheme is fair to all stakeholders and complies with relevant regulations. The court’s involvement ensures a higher level of scrutiny and protection for minority shareholders. The timetable is therefore more flexible and dependent on court schedules and shareholder meeting outcomes. The Securities and Futures Commission (SFC) also plays a role in overseeing schemes of arrangement, ensuring compliance with the Takeovers Code and other relevant regulations. The SFC’s involvement adds another layer of regulatory oversight to the process.

Statements I and II are correct. The Guidelines on Disclosure of Inside Information (GDII) issued by the SFC are indeed designed to assist listed companies in fulfilling their obligations to disclose inside information as mandated by Part XIVA of the Securities and Futures Ordinance (SFO). The GDII offers examples and discusses specific scenarios to clarify the SFC’s interpretation of how the SFO’s provisions should be applied. It’s crucial to note that the GDII itself does not have the force of law but serves as guidance. Financial advisors must prioritize the confidentiality of inside information during TC Transactions, as a breach of confidentiality could compel a listed issuer to disclose the information to the market, potentially jeopardizing the transaction’s progress. Statement III is incorrect because the disclosure timeframe for changes of interest after the initial listing is normally within three business days, not five. Statement IV is incorrect because the Seventeenth Schedule of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) provides a carve-out from the prospectus provisions for offers that comply with the requirements of the Codes, not the Companies Ordinance.

In situations where a public company in Hong Kong, or its subsidiary, intends to make an offer for a company that directly or indirectly controls the offeror, specific measures must be taken to protect the interests of the offeror’s shareholders. According to the Codes on Takeovers and Mergers, the board of the offeror is required to establish an Independent Committee of the Board (ICB) to assess the proposed offer. This committee ensures an unbiased evaluation of the offer’s merits. Furthermore, the offeror’s board must appoint an Independent Financial Advisor (IFA) to provide advice on whether the offer is in the best interests of the offeror’s shareholders. This advice is crucial for informed decision-making. Shareholders of the offeror are entitled to access the substance of the IFA’s advice, promoting transparency and accountability. The board may initially seek oral advice from the IFA before announcing the offer, followed by obtaining comprehensive advice as soon as possible. The main points of the IFA’s advice must be summarized in the offer announcement, and the full advice must be circulated to the offeror’s shareholders promptly. If a general meeting is convened to approve the offer, the full advice must be sent to shareholders at least 14 days in advance. The board must also include a responsibility statement by the directors when issuing any documents or advertisements related to the offer, as stipulated by the Codes. This entire process ensures that the offeror’s shareholders are fully informed and that their interests are protected during a potentially complex and sensitive transaction. The independence of the IFA is a critical aspect, ensuring unbiased advice.

According to the Takeovers Code, a fund manager managing investments on a discretionary basis is considered a Class 4 concert party. This classification is crucial because it implies that the fund manager’s actions could be aligned with those of the company or individuals they manage funds for, especially during takeover situations. This alignment could potentially influence the outcome of a takeover bid, making it essential to monitor their activities. The Takeovers Code aims to ensure fairness and transparency in takeover transactions, and identifying concert parties is a key aspect of this. By classifying fund managers as potential concert parties, the Code requires careful scrutiny of their actions to prevent any unfair advantages or manipulations. The classification helps to maintain a level playing field for all stakeholders involved in a takeover, including shareholders, directors, and potential acquirers. The presumption of acting in concert can have significant implications, including restrictions on trading and voting rights. The Securities and Futures Commission (SFC) actively enforces these provisions to uphold the integrity of the market. Understanding these classifications is vital for anyone involved in securities and licensing in Hong Kong, as it directly impacts how takeovers are regulated and conducted.

The Securities and Futures Ordinance (SFO) grants the Securities and Futures Commission (SFC) extensive powers to conduct investigations into potential breaches, misfeasance, and activities deemed not in the public interest. Section 182 and 183 of the SFO are central to these investigative powers. The SFC can authorize individuals, typically staff members or, with the Financial Secretary’s consent, other persons, to conduct these investigations. This authorization empowers the investigator to compel individuals to provide documents, explanations, and attend interviews to answer questions. Furthermore, the investigator can demand reasonable assistance and require individuals to support their evidence with a statutory declaration. The scope of these investigations extends to any person deemed relevant to the inquiry. The SFC’s authority also includes the power to make inquiries and obtain documents related to listed corporations, intermediaries, associated entities, and specified transactions under sections 179, 180, and 181 of the SFO. The SFC’s supervisory inspections are crucial for ensuring compliance with the SFO, related notices, licensing terms, and other imposed conditions. The ability to request documents and inquire into the affairs of licensed corporations, including providing assistance to overseas regulatory bodies, further underscores the SFC’s broad mandate in maintaining market integrity and protecting investors in Hong Kong.

The Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”) apply to various entities and situations to ensure fair and equal treatment of shareholders during corporate restructuring activities. Statement I is correct because the Codes explicitly apply to public companies in Hong Kong, ensuring that takeovers, mergers, and share buy-backs involving these companies adhere to established standards of conduct. Statement II is also correct as the Codes extend to companies with a primary listing of their equity securities in Hong Kong, regardless of where the company is incorporated. This provision ensures that companies accessing the Hong Kong equity market are subject to the Codes’ regulations. Statement III is correct because the Codes also apply to real estate investment trusts (REITs) with a primary listing of their units in Hong Kong, reflecting the importance of protecting the interests of REIT unit holders during relevant transactions. Statement IV is also correct. The Codes are non-statutory, meaning they do not have the force of law in the same way as legislation passed by the Legislative Council. Instead, they operate based on principles of good practice and are enforced through the regulatory powers of the Securities and Futures Commission (SFC) and the Takeovers Panel. Therefore, all the statements are correct.

The Codes on Takeovers and Mergers and Share Buy-backs are designed to ensure fair and equal treatment of all shareholders during TC Transactions. While the Codes provide detailed rules, they cannot cover every possible scenario. Therefore, the Codes emphasize the importance of adhering to both the letter and the spirit of the General Principles and rules. This means that the principles may apply even in situations not explicitly addressed by a specific rule. When uncertainty arises, consulting the Executive of the Securities and Futures Commission (SFC) is crucial to ensure compliance and avoid breaches. The Codes are supplemented by Practice Notes, Executive decisions, and Takeovers Bulletins, which offer additional guidance and interpretations. These resources, along with previous rulings, inform the Executive and the Panel’s decisions, although each transaction is assessed based on its unique circumstances. The General Principles outline the expected standards of conduct for those involved in TC Transactions, requiring even-handed treatment of shareholders, general offers when control changes, equal access to information, responsible offer announcements, and sufficient information for shareholders to make informed decisions. The ultimate goal is to maintain market integrity and protect the interests of all shareholders.

The offeree board circular, as mandated by the Takeovers Code, serves as a crucial document for shareholders to make informed decisions regarding an offer. It must contain comprehensive information, including the Independent Committee’s (ICB) recommendations and the Independent Financial Advisor’s (IFA) opinion on fairness and reasonableness. The circular also requires detailed disclosures about shareholding interests, director’s intentions, and material contracts.

Statement I is correct because the offeree board circular must include a statement from the IFA consenting to the inclusion of its name and recommendation within the circular. This ensures transparency and accountability regarding the IFA’s advice.

Statement II is correct because the circular must disclose details of any director who will receive a benefit as compensation for loss of office in connection with the offer. This disclosure is essential for shareholders to assess potential conflicts of interest.

Statement III is incorrect because, while the circular needs to include financial information, it is not limited to the last two financial years. It requires financial information covering the last three financial years.

Statement IV is incorrect because the circular must include details of material contracts entered into over the two years prior to the offer period not in the ordinary course of business. This is to ensure shareholders are aware of any significant commitments made by the company that could affect its value or operations.

Therefore, the correct combination is I & II only.

The exempt status for EFMs and EPTs, as outlined in the Codes on Takeovers and Mergers, is designed to address the potential for conflicts of interest arising from their connection to corporate finance operations within the same financial group. This exemption recognizes that certain dealing activities are carried out independently and are not influenced by corporate finance decisions. The primary purpose is to remove EFMs and EPTs from the presumption of acting in concert under class (5) of the definition of acting in concert, which could otherwise extend to all entities within their financial group, including financial advisors to an offeror or offeree company. This exempt status allows them to continue their discretionary dealings or principal trading activities without automatically being considered as acting in concert with the offeror or offeree company. However, this exemption is not absolute. It does not apply when the EFM or EPT is in the same group of companies as the offeror or offeree company. Furthermore, an EPT connected with the offeror is restricted from dealing with the offeror or its concert parties in relevant securities. They also face restrictions on accepting the offer or exercising voting rights associated with the securities. These measures are in place to prevent any potential misuse of information or influence that could unfairly benefit the offeror or offeree company, ensuring fairness and transparency in the takeover process. The Executive retains the authority to impose conditions on the granting of exempt status and must be consulted in advance for any exceptions to these rules.

According to the rules governing takeovers in Hong Kong, specifically concerning the disclosure of information by the offeree company, transparency is paramount. Directors’ service contracts are a crucial element of this transparency, especially given their potential impact on the company’s valuation and the fairness of the offer. The requirement to disclose details of directors’ service contracts aims to provide shareholders with a comprehensive understanding of the financial commitments and potential conflicts of interest associated with the company’s leadership. This disclosure is particularly important when these contracts have been recently entered into or amended, as these changes may reflect strategic decisions made in response to the offer. The six-month timeframe before the offer period commenced is a critical window, as any significant changes during this period could be interpreted as attempts to influence the offer’s outcome. Continuous contracts with long notice periods and fixed-term contracts with substantial remaining terms are also significant because they represent long-term commitments that could affect the company’s future operations and financial stability. The rule also addresses material increases in remuneration, treating them as amendments to existing contracts if they occur within six months of the offeree board circular, highlighting the importance of scrutinizing any changes in compensation that could be seen as incentivizing directors to act in a particular way. The requirement to display these documents and their location ensures accessibility for all shareholders, promoting informed decision-making. This aligns with the Securities and Futures Ordinance (SFO) and the Listing Rules, which emphasize the need for timely and accurate disclosure of material information to maintain market integrity and protect investors’ interests. The Executive’s role in overseeing these disclosures ensures compliance and fairness throughout the offer period.

The question explores the SFC’s disciplinary actions against regulated persons, focusing on the factors influencing the severity of penalties. According to the SFC’s Disciplinary Fining Guidelines, several factors determine the seriousness of misconduct. Intentional or reckless misconduct that damages market integrity, causes losses, or benefits the intermediary is considered more serious. A breach of fiduciary duty also elevates the severity. Systematic weaknesses in management or internal controls are significant aggravating factors, indicating a broader failure of compliance. Conversely, self-reporting and cooperation with the SFC are mitigating factors that can reduce the severity of the penalty.

Statement I is correct because a breach of fiduciary duty is explicitly mentioned in the SFC guidelines as a factor that increases the seriousness of misconduct.

Statement II is correct because intentional misconduct is considered more serious than negligent misconduct according to the SFC guidelines. The SFC prioritizes cases where there is intent or recklessness.

Statement III is incorrect because the SFC considers whether the intermediary reports the conduct and cooperates, not whether they conceal it. Concealing misconduct would be an aggravating factor, not a mitigating one.

Statement IV is correct because the SFC considers whether the misconduct reflects serious or systematic weaknesses in management or internal control systems as an aggravating factor, leading to potentially higher penalties.

Therefore, the correct combination is I, II & IV only.

The Takeovers Code outlines specific circumstances under which an offer lapses, providing clarity and structure to the process. When a potential offeror publicly announces that they will not proceed with a possible offer, this constitutes a clear indication that the offer is no longer viable, leading to its lapse. Similarly, a formal announcement about the withdrawal of a proposed offer unequivocally terminates the offer. Furthermore, if an offer includes alternative forms of consideration and specifies a deadline for electing one of these options, failure to meet this deadline results in the offer lapsing for any shareholder who did not make a timely election. These provisions are designed to protect the interests of shareholders by ensuring they are not left in a state of uncertainty regarding the status of an offer. The strict adherence to these rules promotes transparency and fairness in takeover transactions, preventing potential manipulation or exploitation of shareholders. The Takeovers Code, administered by the Securities and Futures Commission (SFC) in Hong Kong, aims to maintain market integrity and investor confidence by providing a clear framework for corporate takeovers and mergers. Understanding these specific conditions under which an offer lapses is crucial for all parties involved in a takeover, including offerors, offeree companies, and shareholders, to ensure compliance and informed decision-making. These rules are in place to provide a structured and fair process for all parties involved, ensuring that shareholders are not disadvantaged by uncertainty or lack of information.

The Securities and Futures Ordinance (SFO) mandates that all licensed or registered individuals must be fit and proper. The TC Adviser Guidelines augment these general requirements with specific competence criteria for those licensed or registered for Type 6 regulated activity (advising on corporate finance) who intend to engage in TC Adviser work. These additional requirements encompass the TC Adviser firm itself, individuals within the firm acting as Principals or representatives/relevant individuals, and continuous professional training (CPT). It is the responsibility of the TC Adviser and its management to ensure that staff undertaking TC Adviser work are appropriately licensed or registered, competent, and meet the criteria outlined in the TC Adviser Guidelines. The term ‘management’ of a TC Adviser refers to the board of directors, managing director, chief executive officer, ROs, executive officers (EOs), and other senior management personnel. The SFC’s Circular of 16 December 2016 clarifies that senior management includes directors, ROs, and Managers-In-Charge of Core Functions (MICs). The primary obligations and duties of a TC Adviser to its client cannot be delegated, although they may engage external advisors for assistance. A financial adviser should only undertake TC Adviser work if it has adequate resources, internal procedures, and expertise to ensure full compliance with the Codes and properly discharge its obligations. The Transaction Team must meet eligibility requirements and be sufficiently competent and professional, under the supervision of a RO (for licensed corporations) or EO (for registered institutions), referred to as TCROs.

A share buy-back by general offer represents a formal offer made by a company to all its shareholders to repurchase a specified number of shares at a predetermined price. This method ensures equal opportunity for all shareholders to participate, aligning with principles of fairness and transparency. The offer document must comprehensively detail the terms, conditions, and implications of the buy-back, including any potential impact on shareholders’ proportionate interests and the company’s capital structure. Under the Hong Kong Code on Takeovers and Mergers, such buy-backs may trigger mandatory offer obligations if a shareholder’s stake increases beyond certain thresholds. However, the Executive may grant a waiver from this obligation, provided specific conditions are met, including shareholder approval, disclosure of Takeovers Code implications, and adherence to a whitewash vote procedure. This process ensures that minority shareholders’ interests are protected and that the buy-back does not unfairly disadvantage them. Furthermore, the company must consult with the Executive prior to commencing the buy-back to determine the applicable provisions of the Codes and to seek any necessary waivers or approvals. This proactive engagement with regulatory authorities ensures compliance and promotes market integrity. The Share Buy-backs Code aims to prevent market manipulation and insider trading, ensuring that all shareholders are treated equitably and that the buy-back is conducted in a transparent and orderly manner. The Executive’s discretion to waive requirements underscores the need for flexibility in applying the rules to specific circumstances, while maintaining the overall objectives of shareholder protection and market integrity.

According to the Code on Takeovers and Mergers, specifically concerning voluntary offers, an offeror’s ability to waive the fulfillment of a condition is explicitly restricted unless the initial offer announcement, made in compliance with TC r3.5, clearly states that such conditions are waivable. This stipulation ensures transparency and protects the interests of the offeree company’s shareholders, preventing offerors from unilaterally altering the terms of the offer to the detriment of those shareholders who relied on the initial conditions when deciding whether to accept the offer. Furthermore, all conditions attached to the offer must be fulfilled, or the offer must lapse within 21 days of the later of the first closing date or the date the offer becomes or is declared unconditional as to acceptances. This time limit ensures that the offer process is not unduly prolonged, providing certainty to shareholders and the market. The Code also addresses scenarios where a change of control occurs during a voluntary offer, potentially triggering a mandatory offer obligation under TC r26. In such cases, the Executive must be consulted in advance, and the voluntary offer is typically replaced by a mandatory offer, with the only remaining condition being the acceptance of at least 50% of the voting rights. This transition aims to ensure fair treatment of all shareholders in the event of a significant shift in the offeree company’s control structure. The announcement of the mandatory offer is not considered a revised offer if there is no change in the nature or level of consideration, simplifying the communication requirements to shareholders.