Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – M&A, Takeovers: Revisions To Practice Note 2.

24 April, 2015


Changes have been made to Practice Note 2 (“PN2“) to reflect relaxation of the Takeovers Executive’s (the “Executive“)approach on the application of Rule 10.4 of the Takeovers Code to a Code-related transaction which is also classified as a notifiable transaction under the Listing Rules.


The changes were discussed in Issue 32 of the SFC’s Takeovers Bulletin, published on 31 March 2015, and relate to revisions to the profit forecasts requirement in PN2, which deals with the treatment of certain financial projections in Code-related documents.


Rule 10 of the Takeovers Code governs the treatment of profit forecasts and other financial information in the context of an offer, or possible offer. These financial projections are normally regarded as profit forecasts under Rule 10 and therefore, must be “reported on” under Rule 10.4 of the Takeovers Code before publication of the announcement containing the forecast. According to PN2, the Executive will normally be prepared to relax the strict application of Rule 10 and permit publication of a forecast without it being reported on prior to its initial publication if (i) the disclosure is required in compliance with the laws and regulations of an overseas jurisdiction; or (ii) the disclosure is made in compliance with the Inside Information Provisions in Part XIVA of the SFO.


The SFC has encountered a number of transactions which were also classified as notifiable transactions under Rule 14.58 of the Listing Rules, which requires disclosure of the net asset value of, and net profits or losses attributable to, the assets acquired or disposed of for the two financial years immediately preceding the transaction (“Required Financial Information”) in the transaction announcement.


This gives rise to a conflict with Rule 10 of the Takeovers Code because Rule 14.58 of the Listing Rules does not require the Required Financial Information to be audited, but in a Code-related transaction, the Required Financial Information, if unaudited and disclosed in an announcement, would constitute a profit forecast and therefore need to be ‘reported on’ according to Rule 10.4. PN2 explains that “Reporting on” a profit forecast involves (i) the financial advisers reviewing and discussing the assumptions with their client in order to satisfy themselves that the forecast has been made with due care and consideration; and (ii) the auditors or accountants satisfying themselves that the forecast, so far as the accounting policies and calculations are concerned, has been properly compiled on the basis of the assumptions made. Written confirmation by the financial advisers and auditors/accountants is not required to be provided to the Executive as it is normally sufficient for the confirmation to be published in the document addressed to shareholders containing the profit forecast. This forms part of the report referred to in Rule 10.4 of the Takeovers Code.


Where there is such a conflict between the Takeovers Code and the Listing Rules and the parties issuing the forecast have genuine difficulty in meeting the Rule 10.4 reporting requirements, the SFC advises early consultation with the Executive. Normally, the SFC will consent to the publication of the Required Financial Information without full compliance with Rule 10 provided that:


(i) the relevant announcement contains an appropriate warning that the Required Financial Information does not meet the standard required by Rule 10 and that shareholders and potential investors should exercise caution in placing reliance on the Required Financial Information in assessing the merits and demerits of the Code-related transaction; and


(ii) the Required Financial Information will be reported on as soon as practicable thereafter and the relevant reports set out in the next document to be sent to shareholders. A supplemental document to shareholders may be required if an offer document, response document or whitewash circular has been issued.


It follows that a waiver from the Hong Kong Stock Exchange from Rule 14.58 of the Listing Rules should no longer be required in normal cases.


It is therefore very important that issuers and advisers check, at the outset of any proposed transaction, whether Rule 10 of the Takeovers Code applies to any financial information to be published so that the reporting requirements of that rule can be met without delay.


Hogan Lovells


For further information, please contact:


Jamie Barr, Partner, Hogan Lovells

[email protected]


Tim Fletcher, Partner, Hogan Lovells

[email protected]


Terence Lau, Partner, Hogan Lovells

[email protected]


Mark Parsons, Partner, Hogan Lovells

[email protected]


Nelson Tang, Partner, Hogan Lovells

[email protected]


Thomas Tarala, Partner, Hogan Lovells

[email protected]


Steven Tran, Partner, Hogan Lovells

[email protected]


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