Practice Note 7.3 Takeovers — Receipt of an Offer for Listed Shares
Issue date: 18 August 2004
Effective date: 19 August 2004
Practice Note 7.1
1.1. This practice note sets out how the listing rules on disclosure work when a company receives an offer for listed shares. It is issued to provide guidance on the continuing listing obligations of listed issuers in the event that they are informed of a proposed offer for their shares or are made an offer for listed shares held by them. The circumstances used to illustrate the principles are drawn from past cases.
2. The facts
2.1. A Potential Purchaser made an unconditional offer by letter to Company A to acquire Company B's shares held by Company A. Both Company A and Company B are listed on SGX-ST. If the offer was accepted, the Potential Purchaser would be required under The Singapore Code of Takeovers and Mergers ("Code") to make a mandatory offer for all the shares in Company B that were not held by it.
2.2. Company A and Company B received the offer letter shortly before 2 pm.
2.3. At 4.30 pm, Company B requested a trading halt pending an announcement.
2.4. At 7.30 pm, Company A announced that it had received the offer.
2.5. At 8.45 pm, Company B made an announcement attaching Company A's announcement.
3. The Issue
3.1. Listing Rule 703(1) states that an issuer must make immediate announcement of any information known to the issuer concerning it or any of its subsidiaries or associated companies which:
(a) is necessary to avoid the establishment of a false market in the issuer's securities, or
(b) would be likely to materially affect the price or value of its securities.
3.2. Should either company have:
(a) asked for a trading halt immediately on receipt of the offer letter, or
(b) made an immediate announcement of receipt of the offer letter?
4. Company A's Position
4.1. The company secretary received the offer letter when he was at a board meeting, and alerted the chairman when the meeting ended at 2.25pm. The company secretary proceeded to attend a scheduled meeting which commenced immediately. The chairman was not present in the latter meeting. At around 3pm, the company secretary discussed with the chairman whether a trading halt should be called. They concluded that the offer was not material in relation to Company A and as such, did not warrant disclosure during trading hours and correspondingly a trading halt. The chairman convened a board meeting. At 4pm, the board together with Company A's legal and financial advisers, met to discuss, among other issues relating to the offer, whether a trading halt should be called. In the meantime, Company A monitored its shares for signs of unusual trading activity.
4.2. The Company A board agreed that it was not necessary to call for a trading halt of Company A's shares.
4.3. Company A took the view that, as there was no material information which needed to be disclosed during trading hours and confidentiality was maintained, no immediate disclosure and accordingly no trading halt, was necessary.
4.4 Further, Company A felt that even if the offer was material information, the conditions for exemption from disclosure in Listing Rule 703(3), as set out below, were met
(a) Condition 1: This condition states that a reasonable person would not expect the information to be disclosed. Company A was of the view that a reasonable person would not expect the information to be disclosed. Premature disclosure could prejudice its ability to proceed in the best possible way.
(b) Condition 2: This condition states that the information is confidential. Company A took that view that the information on the offer was confidential.
(c) Condition 3: This condition requires one or more of the following to be applicable:—
(i) the information concerns an incomplete proposal or negotiation;
(ii) the information comprises matters of supposition or is insufficiently definite to warrant disclosure;
(iii) the information is generated for the internal management purposes of the entity;
(iv) the information is a trade secret.
Company A opined that the information concerned an incomplete proposal or negotiation. The offer was unsolicited and the board might wish to negotiate.
4.5. Company A also explained that it made an announcement on the offer at 7.30 pm as:
(a) under the Code, all announcements of takeover offers had to be accompanied by a directors' responsibility statement. This was prepared after the board meeting concluded at about 4.45 pm.
(b) based on market practice, announcements are released at the earliest "natural" trading break so as not to disrupt trading.
(c) Company A's shares were trading "cum-offer" in respect of another then on-going offer with the last day for trading "cum-offer" being the next day.
5. Company B's Position
5.1. The offer letter was addressed to Company A and copied to Company B's chairman and company secretary.
5.2. At 2.35 pm, Company B's company secretary tried unsuccessfully to contact Company A's company secretary. In the meantime, Company B monitored its shares for signs of unusual trading activity. At around 4.30 pm, Company B's chief executive officer received a call from Company A's company secretary, advising him to call for a trading halt. Company B immediately contacted SGX to request a trading halt.
5.3. Company B took the view that, as the target of a potential takeover offer, it had to comply with the Code. Rule 2 of the Code requires absolute secrecy before an announcement is made of a takeover offer or a potential takeover offer.
5.4. In making its decision, Company B drew a distinction between information involving the issuer as an active participant and as a passive participant. As the offer was made to Company A, whose decision would determine whether there would be a mandatory offer for Company B's shares, Company B needed to establish the facts with Company A before deciding its course of action.
6. Disclosure Obligations Under Listing Rule 703
6.1. Listing Rule 703(1) states that an issuer must make immediate announcement of any information known to the issuer concerning it or any of its subsidiaries or associated companies which:
(a) is necessary to avoid the establishment of a false market in the issuer's securities; or
(b) would be likely to materially affect the price or value of its securities.
6.2. Paragraph 2 of Practice Note 7.1 states that, apart from quantitative factors, an issuer should consider qualitative and circumstantial factors when deciding whether it must disclose information under Listing Rule 703(1).
6.3 In a negotiation, both the potential purchaser and the potential seller have the right not to proceed with the deal. However, by extending the unconditional offer to Company A, the Potential Purchaser had locked itself into making a takeover offer for Company B's shares should Company A decide to accept the offer for its holding of Company B shares. Thus, the offer to Company A was firm, not an incomplete proposal or negotiation. Nevertheless, Company A might have wanted to initiate negotiation for a higher price. In which case, should there be any suspicion that information about the offer was no longer confidential or if in doubt, an immediate announcement should be made.
6.4. The share price of Company B moved significantly in market trading after the break for lunch, suggesting a leak of information on the offer, rendering the offer no longer confidential. Company A wondered if other factors might have accounted for the price rise, as there was upward movement in the Straits Times Index ("STI") that day. However, if it could not be reasonably determined that the upward movement in the STI was the only cause of the price increase, Company A should have erred on the side of caution and considered the information as no longer confidential. Further, in assessing the materiality of a transaction, its size and strategic significance should be taken into consideration The offer concerned the sale of an asset of some strategic significance worth more than $500 million.
6.5. What might Company A have done? Company A should have given immediate attention to the matter. Company A received notification of the offer before 2pm but the first discussion, between the chairman and the company secretary, took place only at around 3 pm. This was followed by a meeting of the Company A board at 4pm and a decision was only reached after 4pm, more than 2 hours after receipt of the offer letter. The listing rule requires a company to make immediate disclosure, which means that consideration of the matter must be a priority.
6.6 Further, it is important to note that a trading halt may be requested up to 3 days ahead of the release of information. The procedure was designed to help companies meet their listing rule obligations. Therefore:
(a) while material announcements may be withheld until after trading ends where the information is contained to the company, it should not be withheld until after trading ends as a matter of course and definitely not when there are other parties in possession of it, and
(b) if an issuer should, but is not able to, announce material information immediately, a trading halt should be called to ensure that trading will only take place in an informed market.
6.7. If Company A was not yet in a position to decide on the issues that the offer letter posed -materiality, confidentiality and its response to the offer, it might have requested a trading halt until such time it had considered the matter. Equally it might have considered a holding or clarificatory announcement.
6.8. What might Company B have done? Company B had an obligation under Listing Rule 703(1) to make an immediate announcement. The offer was material information to Company B. If Company B had to establish facts with Company A before deciding its course of action, it should have been insistent on doing so immediately. In the meantime, Company B might have called for a trading halt in its shares until such time it was able to establish the facts with Company A and release an announcement on the offer. If possible, as discussed below, any such trading halt should be co-ordinated with other listed entities.
6.9 Rule 2 of the Code requires secrecy before any announcement of a takeover offer or possible takeover offer. This is to minimize the risk of a leakage of information to selected parties. The Rule, however, does not prevent any party to the takeover offer from making an announcement of the takeover offer. In fact, Rule 3.4 of the Code states that a potential offeror should not attempt to prevent the board of an offeree company from making an announcement or requesting the Securities Exchange to grant a trading halt at any time the offeree board considers appropriate. This clearly indicates that Company B is not prohibited from making an announcement of the offer under the Code.
7. Potential Purchaser's Position
7.1. Under Rule 3.1 of the Code, before the board of an offeree is approached, the responsibility for making an announcement normally rests with the offeror, who should keep a close watch on the offeree's share price and volume. If there is undue movement in the offeree's share price or volume, and there are reasonable grounds for concluding that the offeror's actions (whether through inadequate security, purchase of the offeree's shares or otherwise) have directly contributed to the situation, the offeror must make an announcement. This rule suggests that the only party who should be aware of an offeror's intentions is the offeror itself.
7.2. In this case, the Potential Purchaser had informed Company B of the offer. Such action is not in conflict with the Code or the listing requirements. In the case where the Potential Purchaser had not forwarded the letter to Company B, the Potential Purchaser would then have had to keep a close watch on the offeree's share price and volume. Should there have been any significant unusual movement in the price or trading volume of Company B's shares, with reasonable grounds to attribute the movement directly to the offer made to Company A, the Potential Purchaser would have had to immediately inform Company B and Company A to request a trading halt, followed by an announcement of its offer to Company A.
8. General Principle
8.1. In a takeover it is important that the market is given material information in a timely and coordinated way. This condition is easily met when an offer is made after market hours. However if it is necessary to make the offer during market hours, suspension or trading halts should be coordinated among the listed participants.
8.2. The Exchange's disclosure rules and the Code's requirements are not in conflict. If an offeror or offeree has any doubt on how it should comply with the relevant requirements, it should consult SGX or SIC or both.