Why do you think it's time to change the company law on scheme takeovers in Hong Kong?
Under the Hong Kong Takeovers Code, independent shareholders -- those unconnected with the offeror -- holding 75% of the shares represented at the meeting must vote in favour and the number of independent shares voted against must not exceed 10% of all independent shares. Hong Kong company law adds another test -- that the scheme must also be approved by a "majority in number" of those people voting.
Seems fair enough. What's the problem?
The first test sets a fairly common threshold for a decision requiring a meaningful majority. The second test --the 10% requirement -- is peculiar to Hong Kong. It's purpose is to allow a material minority of independent shareholders opposed to a scheme to block it. Whilst it is arguable whether this second test is required, the third test -- the "majority in number" test --is where we believe a change should be made, otherwise it could allow the wishes of the overwhelming majority of independent shareholders to be overturned by a handful of votes, especially here in Hong Kong.
Why is it such a risk here in Hong Kong?
So many Hong Kong shareholders hold their shares through CCASS --Hong Kong's Central Clearing and Settlement System. In a "majority in number" test, CCASS is recorded as just one shareholder, no matter how many people it is representing.
Has it ever caused an upset?
In 2006, a couple of votes came close. In the vote on China Resources Cement's scheme, 18 votes were cast in favour of the scheme and three against, although millions of votes were actually cast, many through CCASS. Over 99% of independent shareholders were in favour, but it would have taken only 15 shareholders, potentially holding only one board lot each and therefore representing a fraction of 1% of the independent shareholders, to have thrown out the scheme. We should make the change now to avoid the real risk of an unrepresentative and inequitable result.
What will it take to change it?
A simple amendment to the Companies Ordinance in Hong Kong, and in Bermuda and the Cayman Islands, where most Hong Kong listed companies are incorporated.
Would the Takeovers Code alone provide enough safeguards?
Yes, the 75% in value test, plus the 10% requirement are more than adequate for a scheme takeover vote. The first test requires a significant majority to be in favour, while the second gives power to a material minority of shareholders who may want to block a scheme.
