Consultation Paper No. 18 Takeover Rules (TKO)
THE DUBAI Financial Services AUTHORITY ("DFSA") CONSULTATION PAPER ADDRESSED TO PARTIES INTERESTED IN THE DEVELOPMENT OF Financial Services AND MARKETS Regulation WITHIN DUBAI'S FINANCIAL FREE ZONE (THE "DIFC")
This paper consults on the DFSA's proposed Takeover Rules (TKO) of the DFSA Rulebook. These Rules are attached as Annex A.
This paper also consults on associated changes to the Glossary module (GLO) of the DFSA Rulebook, as set out in Annex B.
The draft Rules are published for consultation purposes only. Please note that, although the draft Rules are in near final form, the DFSA reserves the right to amend the drafts at its sole discretion.
The Rules will be made under powers contained in the Regulatory Law 2004 and the Markets Law 2004.
Comments are invited on any aspect of the regime proposed in this paper, on both the principles and the detailed drafting. The DFSA would be particularly interested to have the views of firms considering using the proposed Rules and views on how this regime compares with those in other major centres. In the light of the comments received, the DFSA may determine to adopt in whole, or in part, the proposals outlined in these papers, or may amend the proposals.
Anyone wishing to submit comments should provide details of the organisation he or she represents. The names of commentators and the content of their submissions may be published on the DFSA website and in other documents to be published by the DFSA. If you wish your name to be withheld from publication, please indicate this when you make your submission.
Any comments should be addressed to:
Mr Nicholas Alves
DFSA PO Box 75850
or e-mailed to firstname.lastname@example.org
All comments should be provided in writing, on or before 25 September 2005
2. Background and context
The draft Rules in relation to takeovers and the associated changes to the Glossary (GLO) of the DFSA Rulebook need to be considered in the context of the following core Financial Services laws - the Regulatory Law 2004, and the Markets Law 2004 and the objectives set out therein.
Part 7 of the Markets Law provides for the making of the Takeover Rules prescribing the procedures for and obligations of persons in respect of a Takeover of a Reporting Entity.
The DFSA has not previously consulted upon these Rules.
3. The DFSA Rulebook
The core Financial Services laws provide the DFSA with a wide range of powers, including powers to make Rules and to issue Guidance. This Guidance is not binding on the DFSA, nor does it create a "safe harbour" protecting those who comply with it from action for breach of the underlying rule.
The Rules together make up a Rulebook containing a number of modules. The DFSA Rulebook may be viewed on the DFSA's website (www.dfsa.ae) along with all the DIFC Laws and Regulations.
The DFSA has power to waive or modify Rules, and is prepared to use this to adapt the Rules to specific circumstances which may arise.
4. Interpreting the Rulebook
Defined terms are identified throughout the Rulebook by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO). Please note that Annex B contains further definitions. Unless the context otherwise requires, where capitalisation of the initial letter is not used, an expression has its natural meaning.
Every provision in the Rulebook must be interpreted in the light of its purpose. The purpose of any provision is to be gathered first and foremost from the text of the provision in question and its context among other relevant provisions. A provision means every type of provision, including Rules and Guidance.
Where reference is made in the Rulebook to another provision of the Rulebook or other DIFC legislation, it is a reference to that provision as amended from time to time. If a provision in the Rulebook refers to a communication, notice, agreement, or other document 'in writing' then, unless the contrary intention appears, it means in legible form and capable of being reproduced on paper, irrespective of the medium used. Expressions Related to writing must be interpreted accordingly. Any reference to 'dollars' or '$' is a reference to United States Dollars unless the contrary intention appears. References to Articles made throughout the Rulebook are references to Articles in the Regulatory Law 2004 unless otherwise stated.
Unless the contrary intention appears:
Unless the contrary intention appears, a day or business day refers to:
5. Purpose and summary of the material provisions of the TKO Rules.
The purpose of the Rules set out in the TKO module is to provide the necessary operational detail in relation to the takeovers framework created by Part 7 of the Markets Law.
The following paragraphs briefly explain the relevant provisions of the Markets Law, the drafting of the TKO module, and key provisions of that module. This includes detail of alternative approaches in relation to which comments are sought during this consultation period.
These brief explanations are in summary form and do not purport to completely or exhaustively recite the Law or Rules. It is strongly recommended that you read the text of the relevant Law or Rules in considering the issues raised and before submission of comments.
(a) Part 7 of the Markets Law
The Markets Law of 2004 makes provision for the Regulation of takeovers in the DIFC, including as to the responsibilities of Bidders and Targets and their advisers.
Part 7 (comprising Articles 33 to 35) of the Markets Law 2004 ensures, amongst other things, the provision of an orderly framework within which a Takeover of a Reporting Entity is to be conducted.
Article 34 requires the DFSA to make Takeover Rules prescribing the procedures for and obligations of persons in respect of a Takeover of a Reporting Entity. Article 35 requires such Rules to include a set of Takeover Principles.
It is worth noting that the Markets Law 2004 was amended on 19 April 2005. These amendments included extensive changes to Part 7 which relate to the DIFC Takeover regime, and in particular former Article 33 (now Article 34, under which these Rules will be made).
A number of Takeover regimes of a number of jurisdictions were considered in designing the proposed framework for the DIFC Takeover Rules.
The resultant draft Rules are primarily based on the UK City Code on Takeovers and Mergers ("City Code"), though adapted for a legislative environment. The City Code was first issued in 1985 and has been used as a foundation for, amongst others:
The DFSA also consulted Directive 2004/25/EC of the European Parliament and of the Council of 24 April 2004 on Takeover Bids ("EU Directive").
(c) Section 1.2 of the Rules - persons to whom the Rules apply
Article 34 of the Markets Law 2004 states that the Takeover Rules shall prescribe the procedures and obligations in respect of a Takeover "of a reporting entity". A "reporting entity" is defined in the Markets Law 2004, and includes (in summary, and subject to exceptions) a Person who has or had Securities admitted to an official list of Securities at any time, or has filed a Prospectus with the DFSA.
The DFSA is cognisant that a Reporting Entity may have become such a Reporting Entity in circumstances where it has issued Securities to the public that do not confer a voting right. For example, a company may have become a Reporting Entity solely as a result of filing a Prospectus for the issue of Debentures which do not confer a voting right, or which are not Convertible to Shares. Accordingly, rule 1.2.3 provides a "carve out" from the application of the Rules in relation to the Takeover of such a Reporting Entity.
In relation to a Takeover of a Person which is:
(d) Section 1.3 of the Rules - the Regulatory Appeals Committee
The DFSA is empowered to make decisions under the Rules in much the same manner as the Executive of the Takeovers Panel in the UK. This includes, for illustration, decisions to:
Any applicant for a decision, or a Bidder or Target whose interests may be materially affected by a decision, may appeal to the Regulatory Appeals Committee in relation to such a decision.
The powers and functions of the Regulatory Appeals Committee are detailed in Chapter 4 of Part 2 of the Regulatory Law 2004.
(e) Section 1.5 of the Rules - the Takeover principles
Prior to the amendments in April 2005, the Takeover Principles were located in Article 34 of the Markets Law 2004. The amendments removed those principles from the Law and Article 35 now requires the DFSA to prescribe Takeover Principles in the Rules.
The Takeover Principles are now located in Section 1.5 of the Rules. These have been revised in some respects, in particular to more closely align with the general principles of the City Code and of the Hong Kong Code.
Article 35(2) of the Markets Law 2004 requires a Person involved in a Takeover of a Reporting Entity to comply with and observe the spirit and the wording of the Takeover Principles.
(f) Section 4.1 of the Rules - the Mandatory Bid rule
The Rules adopt a Mandatory Bid rule, in a manner generally consistent with the City Code and the EU Directive. A Mandatory Bid rule is designed to ensure that all shareholders may share in, and take the benefit of, the price which a Bidder is willing to pay in order to gain control. The rule requires a shareholder who obtains 30% or more of a reporting entity's voting rights to make a Bid (in cash or accompanied by a cash alternative) for all outstanding Shares. The price must not be lower than the highest price paid by the Bidder within the preceding 6 months. Accordingly, the rule prevents a Bidder from gaining control of a Reporting Entity and then squeezing out the remaining minority shareholders without ever having made an adequate Bid to acquire their Shares. (This is subject to an important creep exception, as discussed further below)
A threshold of acquisition of 30% of voting rights, beyond which an acquirer is obliged to Bid for all Shares of the Reporting Entity, is proposed as reasonable. This threshold is consistent with the UK, Hong Kong and a number of other City Code based jurisdictions (although note that the Malaysian Code sets the threshold at 33%). Some jurisdictions set a lower threshold (including Australia at 20%), although it seems apparent that these are jurisdictions that have not adopted a Mandatory Bid rule.
The City Code based jurisdictions adopt a Mandatory Bid rule which requires a Person to extend a Bid upon acquisition of 30% or more of voting rights, or upon further acquisition where the Person already holds not less than 30% but no more than 50% of voting rights. While rule 4.1.1 is consistent in requiring a Person to extend a Bid on acquisition of 30% or more of voting rights, the proposed model differs in that a Person who holds not less than 30% of voting rights (and accordingly may hold between 30% and 100% of voting rights) must extend a Bid on any acquisition of further voting rights. This model is designed to increase minority shareholder protection in the critical period where a controlling shareholder may consolidate its holdings in the Reporting Entity.
Most jurisdictions adopt minority protection provisions permitting a successful Bidder to compulsorily acquire the Shares of a minority (which is often set to reflect the remaining 10% or less of shareholders) and permitting such shareholders to require the Bidder to acquire their Shares. rule 4.1.3 excludes a majority shareholder who is subject to such a requirement, or wishes to exercise a right to compulsorily acquire Shares, from the obligation under rule 4.1.1 to extend a Bid on the acquisition of these additional Shares.
The Mandatory Bid rule in rule 4.1.1 is proposed to be subject to a creep exception, as contained in rule 4.1.2. The City Code does not incorporate a creep provision, while the Hong Kong Code retains a creep provision permitting a Person who holds not less than 30% but no more than 50% of voting rights to acquire 2% of additional voting rights in any 12 month period without triggering the obligation of extending a Bid. In other words, the Hong Kong Code has a creep provision which applies only after the completion of a Mandatory Bid. In contrast to both of those models, the Rules propose that an acquirer may pass both the Mandatory Bid threshold of 30%, and acquire additional Shares beyond that threshold, free of the obligation to make a Mandatory Bid provided that any such acquisitions have the effect of increasing the holding of voting rights by no more than 3% in any 12 month period. This is similar in effect to the model employed in Australia.
Comment is sought whether the proposed Mandatory Bid model is appropriate for the DIFC, and in particular as to:
(g) Chapter 11 of the Rules - the Bid timetable
The City Code imposes a strictly regulated timetable for takeovers, in contrast to, for example, the United States which has virtually no set timetable. A formal timetable ensures that the shareholders of a Target will receive adequate and timely information in order to make an informed decision. It also ensures that a Target is not subject to an indefinite Bid.
Under the draft Rules, a Bidder initially announces its firm intention to make a Bid. This announcement sets out all the terms and conditions of the Bid and may only be made when the Bidder believes that it can and will continue to be able to carry through with the Bid in its entirety.
The Bid is formally made when the Bid Document is posted to the target's shareholders. This marks the commencement of the formal timetable.
The Bid Document must be posted within 21 days of the announcement. In practice however, a Bid Document may be posted earlier to minimise a competing bidder's response time. A copy of the Bid Document must be filed with the DFSA at least 24 hours prior to posting.
The Rules require the Governing Body of the Target to obtain competent independent advice on any Bid and to communicate the substance of this advice to its shareholders.
The Bid remains open for acceptance for a minimum of 35 days after posting (this is referred to as the "first closing date").
Within 21 days after posting of the Bid, the Governing Body of the Target must provide a Target Circular to its shareholders giving its views on the Bid. A copy of the Target Circular document must be filed with the DFSA at least 24 hours prior to posting. Note that the City Code stipulates the period of 14 days for the posting of its equivalent to a Target Circular. The difference of one additional week is proposed to counteract the difficulty that a surprised Target may face in finding competent Takeover advice at short notice, as any such adviser will need to become acquainted with the DIFC legal system.
The Governing Body of the Target may announce new Material Information after 46 days from the posting of the Bid Document, but only after prior consultation with the DFSA.
Acceptances of a Bid which has not become unconditional as to acceptances may be withdrawn 14 days after the first closing date. This is likely to be 49 days after posting. A Bid is unconditional as to acceptances when the Shares in the Target held by the Bidder and the acceptances received from the Target shareholders together amount to 50%. The Bidder may declare the Bid to be unconditional as to acceptances whenever the 50% threshold is reached.
Any revision (an increase or change) of the Bid must normally be made not later than 53 days after posting. A Bid must normally be kept open for acceptance for a further minimum period of 14 days after it has become unconditional for acceptances. A Bid that has not become unconditional as to acceptances must lapse and cannot be extended or remain open beyond the 67th day after it was posted. After a Bid becomes or is declared unconditional as to acceptances, a further 21 days is allowed within which all or any remaining conditions must be fulfilled or waived, otherwise the Bid will lapse.
Where a Bid lapses, the Bidder will not be permitted to make another Bid for 12 months.
This timetable is illustrated in the following table.
|Day||Event under the Rules||Relevant Rule|
|-21||Announcement of a Bid||TKO 11.1.1(a)|
|-1||Copy of Bid Document to be filed with DFSA||TKO 11.1.1(b)|
|0||Posting of Bid Document||–|
|20||Copy of Target Circular to be filed with DFSA||TKO 11.1.2(b)|
|21||Target to post its Target Circular in response to the Bid||TKO 11.1.2(a)|
|35||Minimum period that a Bid is to be kept open.||TKO 11.2.1|
|46||Last date for material new information (trading results, profit forecasts, etc) to be released by the Target without requiring prior consultation with DFSA||TKO 11.2.8|
|49||Target shareholders can withdraw their acceptances if the Offer is not conditional as to acceptances (assuming day 35 is the first closing date)||TKO 11.6.1|
|53||Last date for posting any revised Bid from the Bidder||TKO 11.4.1|
|67||Last date for Bid to be declared unconditional as to acceptances||TKO 11.2.5|
|81||Bid normally to remain open for a minimum of 14 days after it is declared unconditional as to acceptances||TKO 11.2.3|
|88||Last date for all conditions to be satisfied (21 days after the Offer is unconditional as to acceptances)||TKO 11.2.7|
|102||Last time for payment of consideration (14 days after the Offer is wholly unconditional)||TKO 11.3.1|
(g) Chapter 16 of the Rules - waivers or modifications
A number of jurisdictions, including that of the City Code, adopt a codified regime which does not itself have the force of law. Many of its requirements are qualified with exceptions, such as "except with the consent of the regulator".
In developing the Rules, any code provisions being used as precedent have been appropriately recast as Rules and Guidance. Accordingly, obligations under a code have been recast as a mandatory rule. . Accordingly, should a Person seek dispensation from a provision of the Rules, they should apply for a waiver or modification under Chapter 16 of the Rules.
(h) The Rules do not include a substantial shareholder disclosure regime
The proposed Rules do not include a substantial shareholder disclosure regime. Article 34 of the Markets Law 2004 states that the Takeover Rules will prescribe procedures and obligations "in respect of a Takeover of a reporting entity", and this does not extend to capture substantial shareholder disclosure which applies irrespective of existence of a Takeover. Disclosure of substantial shareholdings is considered more properly to be the subject of the existing Markets Law Part 6 disclosure provisions, in particular the "connected persons" regime in Article 25.