Rights issue underwritten by the 45% controlling shareholder
Skyline Properties has 600 million shares at HK$5.00, a market capitalisation of HK$3 billion. It needs HK$600 million to repay a maturing bond. It proposes a 1-for-4 rights issue at HK$4.00 per rights share, a 20% discount, raising HK$600 million before expenses. Grand Orient, the controlling shareholder, holds 45% and will take up its full entitlement and underwrite 60% of the remaining rights shares. If no other shareholder takes up any rights, Grand Orient would end up with about 51.6% of the enlarged share capital. The company wants to complete in eight weeks and avoid a general offer. The board also wants to know whether Grand Orient's underwriting is a connected transaction. The independent financial adviser has been asked to advise on the underwriting terms.
1. Does Grand Orient's participation and underwriting trigger a mandatory offer? Explain the relevant Takeovers Code thresholds and the effect of the rights issue.
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Grand Orient starts at 45%, inside the 30-50% band. Taking up its pro rata entitlement alone would keep it at 45% (67.5 million new shares on 750 million). But the underwriting adds 49.5 million shares, taking it to 387 million/750 million = 51.6%, an increase of 6.6 percentage points in 12 months. That is more than 2%, so a mandatory offer is triggered under Rule 26.1. The rights issue does not automatically exempt the acquisition. Grand Orient can apply for a whitewash waiver, which requires independent shareholders' approval and SFC Executive consent; if granted, it can hold 51.6% without an offer. Without it, it must make a general offer.
2. What Listing Rules approvals are needed for the underwriting by Grand Orient?
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Grand Orient is a controlling shareholder and therefore a connected person. Its underwriting of 60% of the shortfall is not a pro rata subscription and is a connected transaction. The company needs an announcement, a circular, an independent board committee, an IFA opinion and independent shareholders' approval. The rights issue itself may not need shareholder approval, but the connected underwriting does. The same general meeting can approve the whitewash waiver and the connected transaction, with Grand Orient abstaining. The IFA should advise whether the underwriting fee and terms are on normal commercial terms.
3. If the rights issue proceeds and no other shareholder takes up, calculate the resulting shareholding and explain the consequences for the public float.
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If no other shareholder takes up, the enlarged share capital is 750 million and Grand Orient holds 387 million, or 51.6%. The public float is 48.4%, which is above 25%, so the float is not the problem. The problem is the mandatory offer. If the whitewash is approved, the company can complete and Grand Orient can hold 51.6%; if not, Grand Orient must make an offer at least at HK$4.00, and no less than any higher price paid in the previous six months. The company should also check that the rights issue is not conditional on the whitewash in a way that makes the timetable impossible.