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

According to the Hong Kong Takeovers Code, a “connected person” includes directors, substantial shareholders, and certain other related parties of the target company. Mr. Wong, being a director and a significant shareholder in Company ABC, falls under this category. This means he is subject to various restrictions and obligations outlined in the Codes. Options b, c, and d are incorrect because directors and substantial shareholders are explicitly within the scope of the Codes, regardless of their level of involvement or shareholding percentage.

As a broker handling client accounts, Ms. Lee is privy to confidential information regarding share transactions. According to the Takeovers Code, individuals who have access to inside information, including brokers, are classified as insiders. Therefore, Ms. Lee must comply with more stringent disclosure obligations to ensure fairness and transparency in takeover transactions. Options a, c, and d are incorrect because brokers are not exempt from the Codes, regardless of whether they act on behalf of clients or engage in personal trading activities.

The Takeovers Code in Hong Kong is not enacted as formal legislation but rather operates on a voluntary basis. It is administered by the Securities and Futures Commission (SFC) and enforced through the Listing Rules of the Hong Kong Stock Exchange. Market participants are expected to comply with the Codes’ provisions as they represent established industry best practices. Options a, b, and c are incorrect because they misinterpret the regulatory status of the Takeovers Code, which is non-statutory and not legally binding.

The Principle-based approach in the Takeovers Code aims to provide general principles rather than detailed rules, allowing flexibility in interpretation and application. This approach recognizes that takeover transactions can involve complex and diverse situations, and rigid regulations may not always be suitable. Options a, c, and d are incorrect because they misrepresent the purpose of the Principle-based approach, which is not to provide exhaustive rules, prioritize minority shareholders, or enforce strict mechanisms.

When interpreting the Takeovers Code, the primary source of guidance should be the principles and objectives explicitly stated within the Code itself. This ensures consistency and adherence to the intended regulatory framework. Options a, b, and c are incorrect because while they may provide supplementary insights, they do not carry the same authoritative weight as the actual provisions and principles outlined in the Takeovers Code.

As a substantial shareholder holding 25% of the voting rights in Company XYZ, Mr. Chan falls within the definition of a “connected person” under the Takeovers Code. Therefore, he is subject to the Codes’ provisions, irrespective of whether he acquires additional shares or his role as a consultant. Option d is partially correct as Mr. Chan’s consultancy role may influence his obligations under the Codes, but it does not negate his status as a substantial shareholder. Options a and c are incorrect because substantial shareholders are subject to the Codes regardless of exceeding specific thresholds or engaging in consultancy activities.

The Hong Kong Takeovers Code operates on a voluntary compliance basis, meaning that market participants voluntarily adhere to its provisions. Breaches of the Codes are typically addressed through civil remedies, such as injunctions or orders for specific performance, rather than criminal penalties. While the Securities and Futures Commission (SFC) oversees the administration of the Codes, enforcement primarily relies on civil mechanisms. Options a, b, and c are incorrect because they misrepresent the regulatory approach, suggesting mandatory compliance, government oversight, and criminal enforcement, which are not characteristic of the Codes’ non-statutory nature.

The Panel on Takeovers and Mergers serves as an advisory body responsible for interpreting and providing guidance on compliance with the Takeovers Code. While it plays a crucial role in maintaining consistency and fairness in takeover transactions, it does not possess direct enforcement powers. Enforcement of the Codes falls under the jurisdiction of the Securities and Futures Commission (SFC) and the courts. Options a, b, and d are incorrect because they attribute enforcement or directive powers to the Panel, which it does not possess.

“Whitewash” waiver provisions in the Takeovers Code allow bidders to make unconditional offers for target companies without triggering mandatory takeover requirements, provided certain conditions are met. This facilitates flexibility in takeover negotiations and encourages potential bidders to enter into discussions without immediately triggering obligations to acquire all shares. Options b, c, and d are incorrect because they misrepresent the purpose and effect of “whitewash” waivers, which primarily relate to bidder obligations rather than exemptions for shareholders or target company defenses.

The Executive Director of the Corporate Finance Division has the authority to conduct investigations into potential breaches of the Takeovers Code. This is in accordance with the Securities and Futures Ordinance (Cap. 571) and the Takeovers Code. The role involves ensuring compliance with the code and maintaining the integrity of the takeover process. Option (b) is incorrect because the Executive Director’s role is primarily regulatory, not mediatory. Option (c) is incorrect as the Executive Director does not have the authority to issue new shares. Option (d) is incorrect as all takeovers are subject to regulatory oversight to ensure fairness and compliance.

The Executive Director of the Corporate Finance Division has the authority to conduct investigations into potential breaches of regulations related to share buy-backs. This is to ensure compliance with the Securities and Futures Ordinance and other relevant regulations. Option (a) is incorrect because all share buy-backs are subject to regulatory oversight. Option (c) is incorrect as the Executive Director does not have the authority to issue new shares for buy-back purposes. Option (d) is incorrect because negotiations regarding buy-back terms typically occur between the company and its shareholders, not directly with the Executive Director.

According to the Takeovers Code, any person who intends to make a takeover bid for a public company must disclose their interest and intention to the Securities and Futures Commission (SFC) and the stock exchange. This is to ensure transparency and fairness in the market. Option (b) is incorrect because secretly accumulating shares could constitute market manipulation and breaches of the Takeovers Code. Option (c) is incorrect as insider trading is illegal and unethical. Option (d) is incorrect because soliciting votes without disclosing identity would violate transparency requirements.

The primary objective of the Securities and Futures Commission (SFC) in regulating takeovers and share buy-backs is to ensure fair and orderly markets. This includes maintaining market integrity, transparency, and investor protection. Option (a) is incorrect because while shareholder value may be affected by SFC regulations, it is not the primary objective. Option (c) is incorrect as facilitating corporate mergers is not the sole focus of SFC regulations. Option (d) is incorrect because the SFC primarily aims to protect the interests of all stakeholders, not just target company directors.

The Securities and Futures Commission (SFC) may intervene in a takeover bid if there are concerns about market manipulation or insider trading. This is to ensure the integrity and fairness of the takeover process and to protect investors’ interests. Option (b) is incorrect because regulatory intervention is not solely based on the target company’s request. Option (c) is incorrect as financial disclosure requirements are typically enforced by other regulatory bodies. Option (d) is incorrect because shareholder acceptance or rejection of a bid does not necessarily prompt SFC intervention unless there are regulatory violations.

According to the Securities and Futures Ordinance, a concert party relationship exists when persons “act together pursuant to an agreement or understanding (whether formal or informal).” When a group of shareholders collaborates to exercise their voting rights collectively to influence corporate decisions such as the outcome of a general meeting, it suggests a concert party relationship. This can potentially trigger mandatory takeover offer obligations under the Takeovers Code to ensure fair treatment of minority shareholders.

Option (b) Shareholders holding shares in the same company without any prior communication is incorrect because mere ownership of shares without coordination or collaboration does not establish a concert party relationship.

Option (c) Directors purchasing shares of their own company on the open market may be part of regular market activities and does not necessarily indicate a concert party relationship, especially if the purchases are made independently and without any agreement or understanding with other shareholders.

Option (a) Institutional investors independently deciding to sell their shares in a particular company also does not suggest a concert party relationship, as long as there is no coordination or agreement among them to act collectively in relation to their shareholding.

Directors have a fiduciary duty to act in the best interests of the company and its shareholders. While directors may delegate certain tasks or responsibilities, such as operational matters, they cannot delegate their duty to act in the best interests of the company and its shareholders. This duty remains with the directors at all times, even when tasks are delegated.

Option (a) Duty to act within the powers conferred by the company’s constitution is also important but is more related to compliance with the company’s internal rules and regulations rather than a fiduciary duty that cannot be diminished by delegation.

Option (c) Duty to avoid conflicts of interest is crucial for directors to maintain their impartiality and integrity in decision-making but can be managed through disclosure and recusal rather than direct delegation.

Option (d) Duty to exercise independent judgment is a fundamental aspect of directors’ duties, but delegation of tasks does not necessarily compromise their ability to exercise independent judgment in matters within their purview.

Mr. X, as a director, is considered an insider and has an obligation to refrain from trading in the shares of Company A based on material non-public information. Trading on such information would constitute insider trading, which is illegal and subject to severe penalties including fines and imprisonment. By refraining from trading until the information becomes public, Mr. X adheres to the principle of avoiding information asymmetry and ensures fair treatment of all investors.

Option (a) Immediately purchasing additional shares of Company A to benefit from the potential takeover bid would constitute insider trading and is illegal.

Option (b) Disclosing the information to select friends and family members to allow them to benefit from the potential takeover bid is also illegal and unethical, as it constitutes tipping, which is a form of insider trading.

Option (d) Selling his existing shares of Company A to avoid potential losses based on material non-public information would still constitute insider trading and is therefore illegal.

Timely disclosure of material information to all shareholders is essential in ensuring fairness and transparency in the takeover process. It helps in reducing information asymmetry by providing equal access to relevant information to all shareholders, thereby allowing them to make informed decisions regarding the takeover bid.

Option (a) Releasing misleading statements to confuse potential acquirers is unethical and can lead to legal consequences. It exacerbates information asymmetry rather than reducing it.

Option (c) Restricting access to financial reports only to institutional investors further exacerbates information asymmetry by favoring certain shareholders over others. It goes against the principles of fairness and equal treatment of shareholders.

Option (d) Delaying the announcement of a takeover bid to gain a competitive advantage is not conducive to reducing information asymmetry. Instead, it creates uncertainty and unfairness in the market, as certain investors may gain privileged information while others are left uninformed.

Ms. Y, as a director, has a fiduciary duty to act in the best interests of the company and its shareholders. Accepting a bribe from a potential acquirer would be a breach of this duty and could lead to legal consequences, including disqualification as a director and potential civil or criminal liabilities. By declining the offer and reporting the matter to the company’s board of directors and regulatory authorities, Ms. Y demonstrates integrity and fulfills her duty to uphold the interests of the company and its shareholders.

Option (a) Accepting the offer and providing support to the potential acquirer for personal gains is unethical and illegal, as it breaches Ms. Y’s fiduciary duty to the company and its shareholders.

Option (b) Immediately informing the company’s shareholders about the potential takeover bid and the offer she received may not be appropriate without first consulting the company’s board of directors and regulatory authorities. It could potentially disrupt the takeover process and may not be the most effective course of action.

Option (d) Negotiating for a higher amount from the potential acquirer before deciding on her course of action would further compromise Ms. Y’s integrity and could lead to additional legal and ethical dilemmas. It is not an acceptable course of action for a director in this situation.

When faced with an unsolicited takeover offer, a director should act in the best interests of the company and its shareholders. Seeking advice from independent financial advisors helps in assessing the fairness of the offer and determining whether it provides adequate value to shareholders. This ensures that the board of directors can make informed decisions regarding the offer and act in accordance with their fiduciary duties.

Option (b) Immediately accepting the offer without further assessment may not be in the best interests of the company and its shareholders. Directors have a duty to carefully evaluate takeover offers to ensure they maximize shareholder value.

Option (c) Rejecting the offer without further consideration may not be prudent without assessing its merits. Directors should carefully consider all options and seek professional advice before making decisions on behalf of the company.

Option (d) Sharing confidential information about the offer with select shareholders without proper authorization may breach confidentiality obligations and could potentially lead to legal and regulatory consequences. It is not an appropriate course of action for a director.

According to the Code on Takeovers and Mergers, Rule 21.1 prohibits the offeree company from taking certain actions during an offer period without shareholder approval. This includes significant changes in the company’s capital structure, such as issuing new shares, selling treasury shares, or redeeming shares, without shareholder consent.

Option (a) Issuing new shares to existing shareholders is incorrect because while issuing new shares may dilute the acquirer’s stake, it’s not necessarily prohibited during an offer period, especially if approved by shareholders.

Option (b) Repurchasing shares from the open market is incorrect because buybacks may be conducted during an offer period as long as they are not employed to frustrate the offer or are not conducted as part of defensive measures without shareholder approval.

Option (d) Conducting regular board meetings to discuss strategic initiatives is incorrect because regular board meetings can continue during an offer period. However, the board should exercise caution to ensure that any decisions made do not contravene the rules of the Code or unduly frustrate the offer.

According to Rule 29 of the Code on Takeovers and Mergers, during an offer period, both the offeror and the offeree company are required to make certain documents available for inspection by shareholders of the offeree company. This includes documents such as the offer document, any circulars sent to shareholders, and correspondence between the offeror and the offeree company.

Option (a) Minutes of board meetings discussing the offer is incorrect because while board minutes may be important for transparency, they are not typically required to be made available for shareholder inspection under the Code.

Option (b) Personal emails between the directors of the offeree company is incorrect because personal correspondence is not generally relevant to the shareholders’ evaluation of the offer and would likely not be required to be made available for inspection.

Option (c) Employee payroll records is incorrect because these records are not directly relevant to the takeover offer and would not typically need to be made available for inspection by shareholders under the Code.

Under the Code on Takeovers and Mergers, Rule 8.1 requires prompt disclosure of certain dealings. If the offeror increases their stake in the offeree company by purchasing additional shares and crosses certain thresholds (e.g., 1%, 5%, 10%, etc.), they are required to make an announcement regarding this increase.

Option (b) The offeree company’s board of directors holds a regular quarterly meeting is incorrect because regular board meetings do not typically trigger announcement obligations under the Code unless specific material information regarding the offer is discussed or decided upon.

Option (c) An employee of the offeree company resigns from their position is incorrect because the resignation of an employee, unless it directly affects the offer or constitutes material information, does not usually require an announcement under the Code.

Option (d) The offeree company wins a lawsuit against a competitor is incorrect because unless the lawsuit outcome has a material impact on the offeree company’s financial position or the offer itself, it does not generally necessitate an announcement under the Code.

According to Rule 21.1 of the Code on Takeovers and Mergers, the offeree company is prohibited from taking actions during an offer period that might frustrate the offer, such as implementing poison pill provisions without shareholder approval. Poison pill provisions are defensive measures designed to make the acquisition of the company less attractive or more difficult.

Option (b) Issuing a dividend to existing shareholders is incorrect because while it may affect the financials of the company and impact the offer, it’s not inherently considered frustrating unless it’s used as part of a defensive strategy without shareholder approval.

Option (c) Holding discussions with the offeror to negotiate better terms is incorrect because negotiations between the offeree company and the offeror are a normal part of the takeover process and not considered inherently frustrating unless they unduly delay or obstruct the offer.

Option (a) Increasing transparency by making all relevant documents publicly available is incorrect because transparency is generally encouraged during takeover offers, and making documents available for inspection by shareholders is a requirement under the Code. It wouldn’t be considered frustrating unless there’s evidence of selective disclosure or manipulation.

According to Rule 24 of the Code on Takeovers and Mergers, the offer document must contain certain prescribed information, including details of the financing arrangements for the offer. This ensures that shareholders of the offeree company have a clear understanding of how the offer will be financed.

Option (a) Personal financial statements of the offeror’s directors is incorrect because personal financial information of directors is typically not required to be included in the offer document unless it’s directly relevant to the offer.

Option (b) Details of the offeree company’s corporate social responsibility initiatives is incorrect because while corporate social responsibility may be important to some shareholders, it’s not typically required to be included in the offer document unless it directly impacts the offer or the company’s operations.

Option (c) The offeror’s plans for restructuring the offeree company’s workforce is incorrect because while restructuring plans may be relevant to shareholders, they are not generally required to be disclosed in the offer document unless they are material to the offer or required by law.

Under Rule 2.2 of the Code on Takeovers and Mergers, an offeror is required to announce its firm intention to make an offer if it has made a definite proposal or has taken steps in contemplation of making an offer, such as a preliminary approach to the offeree company.

Option (a) After obtaining approval from the offeree company’s board of directors is incorrect because the offeror is required to announce its firm intention before obtaining board approval, as the announcement triggers the formal offer process.

Option (b) Once the offeror has acquired 5% of the offeree company’s shares is incorrect because while acquiring a certain percentage of shares may trigger disclosure requirements, it does not necessarily require an announcement of firm intention to make an offer.

Option (d) Before discussions with the offeree company’s shareholders is incorrect because discussions with shareholders typically occur after the firm intention to make an offer has been announced, not before.

According to the Securities and Futures Ordinance, an Independent Financial Adviser (IFA) is obligated to provide impartial advice to clients. This means that Ms. Z must assess Mr. Y’s financial situation, investment objectives, and risk tolerance to offer suitable recommendations. Providing comprehensive information about the risks and rewards of investing in emerging markets aligns with the duty of an IFA to ensure clients make informed decisions. Option b is correct because it reflects the obligation of an IFA to offer impartial advice tailored to the client’s needs.

Option a is incorrect because restricting Mr. Y to low-risk securities without considering his objectives would not fulfill the duty of an IFA to provide suitable advice.

Option c is incorrect as it suggests pushing Mr. Y towards high-risk investments without proper assessment, which could expose him to unsuitable risk levels.

Option d is incorrect as it implies a conflict of interest, where the advisor prioritizes promoting the firm’s products over the client’s best interests, which goes against the regulatory requirements for IFAs.

According to the regulatory framework, including the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC), financial advisors must maintain independence and act in their clients’ best interests. In this scenario, since Mr. X already holds a significant number of shares in the company, there may be a potential conflict of interest for the advisor. Therefore, it is crucial for the advisor to disclose any such conflicts and provide impartial advice, ensuring that Mr. X’s best interests are prioritized. Option a is correct as it reflects the obligation of the advisor to maintain independence and transparency.

Option b is incorrect because encouraging Mr. X to proceed without addressing potential conflicts of interest would not fulfill the duty of the advisor to act independently.

Option c is incorrect as it suggests providing advice based on general risk considerations rather than Mr. X’s specific circumstances and objectives.

Option d is incorrect because prioritizing the interests of the company’s shareholders over Mr. X’s individual investment objectives would violate the advisor’s duty to act in the client’s best interests.

As per regulatory requirements, including the Code of Conduct for Persons Licensed by or Registered with the SFC, financial advisors must act in the best interests of their clients and provide independent advice. In this scenario, Mrs. A seeks advice on restructuring her investment portfolio for retirement, emphasizing stability and income generation. The primary focus of the advisor should be to assess Mrs. A’s specific financial circumstances, risk tolerance, and retirement goals to offer suitable recommendations aligned with her objectives. Option d is correct as it reflects the obligation of the advisor to provide personalized and independent advice tailored to the client’s needs.

Option a is incorrect because prioritizing firm profitability over Mrs. A’s best interests would violate the duty of the advisor to act independently and in the client’s best interests.

Option c is incorrect as it suggests focusing solely on potential capital appreciation without considering Mrs. A’s preference for stable income during retirement.

Option b is incorrect because persuading Mrs. A to allocate a significant portion of her portfolio to speculative investments disregards her risk tolerance and retirement objectives, which contradicts the duty of the advisor to provide suitable advice.

According to regulatory standards, including the Code of Conduct for Persons Licensed by or Registered with the SFC, financial advisors are required to act independently and provide suitable recommendations based on clients’ needs and objectives. In this scenario, Mr. B seeks a conservative investment approach aligned with his risk aversion and retirement goals. The best demonstration of independence for the financial advisor would be to recommend a diversified portfolio that balances risk and return, considering Mr. B’s preferences. Option a is correct as it reflects the obligation of the advisor to provide impartial and personalized advice.

Option b is incorrect because solely promoting high-risk investments without considering Mr. B’s risk aversion would not fulfill the duty of the advisor to act independently and in the client’s best interests.

Option c is incorrect as it suggests encouraging Mr. B to invest in speculative ventures, which contradicts his preference for a conservative approach and exposes him to unsuitable risk levels.

Option d is incorrect because prioritizing the firm’s proprietary products over other suitable options would indicate a conflict of interest and fail to meet the requirement of independence in advising clients.